FWD #255 • 689 words
Finally, a Way to Make Your Rent Work Harder Than You Do
Researchers at UCLA’s Lewis Center (a font from which many, many good things flow) recently described a novel wealth-building financial structure for renters. This concept, called Shared Prosperity Rental (SPR), exists in other iterations through pilots from Enterprise Community Partners Renter Wealth Creation Fund and Colorado Housing Accelerator Initiative Tenant Equity Vehicle. It’s a practical approach to wealth-building in a market that is increasingly renter-dominated.
Aimed specifically at middle-income households in market-rate rentals, this model seeks to finance housing in a way that is so attractive to owners they can afford to share some of that benefit with tenants in the form of dividends (like a shareholder). Researchers looked at a number financial scenarios and determined that the model is successful in a wide variety of scenarios and conditions. In their most optimistic analysis, SPR could allow a tenant living in their apartment for 10 years to earn back 89% of the rent they paid. What is this magic!? We’ll break it down here.
What is SPR?
SPR first starts with a hitherto nonexistent, federally backed loan product—stick with me now! Let’s say we can get the federal government, similar to what they’ve done in the past with deeply subsidized loans for homeowners, to provide apartment building owners low cost debt. (Beyond the bevy of past and current options from FHA, USDA, and the GSEs.)
As the debt is paid down and the value of the property increases, the building is refinanced and that cashout refi is required to be split with the tenant. The landlord is incentivized to do this because the loan they get is such a great product. As the researchers write, “Tenants share in the profits as their building’s loan balance is paid off and the property’s value appreciates…. Building owners earn competitive profits.”
The Lewis Center report draws an explicit parallel to the FHA single-family loan — the federally backed mortgage product that democratized homeownership for millions of Americans after World War II. SPR proposes an analogous instrument for renters: a loan that allows building owners to borrow up to 90% of a property’s value (compared to the 70% typical of private multifamily lending) at a lower interest rate, in exchange for sharing the financial upside with tenants.
“The federal government supports a vast market for high-leverage loans — but only for homeowners,” the report notes. “With so many people unable to buy, we argue that the public sector should support a similar market to help renters build wealth and financial security.”
Better Debt Products and An Open Landlord Are Key
In order for SPR to work, a property owner or developer must keep principal invested in the project in perpetuity. Sponsors refinance their permanent loan roughly every seven years, providing the recurring income needed to pay themselves and investors and to distribute dividends to tenants. This loan is at favorable terms, a high LTV, low interest and others. Likely such loans would be either issued or guaranteed by government at some level.
This structure results in the cash used to create these tenant financial rewards. “By reducing the share of project costs funded by equity (and increasing debt), project sponsors can increase leverage. As a result, the same revenues yield a higher rate of return for SPR projects than traditional rental projects with conventional financing, leaving funds available to be distributed to tenants.”
A Model Is Tested
Enterprise Community Partner’s Renter Wealth Creation Fund is a type of SPR and is the most ambitious to date. Enterprise is in the process of raising $250 million to fund income-restricted affordable rentals. In this new housing, tenants will get cash dividends and a share of the profits when the project is sold. Investors earn a return of 4%, This model would provide 2–5% cash back on rent.
As Priscilla Almodovar, former CEO of Enterprise Community Partners, and now CEO of Fannie Mae, put it: “We’ve set this up so that over 10 years it simulates what the median homeowner might have experienced.” If Fannie Mae is paying attention — and it now has a reason to — that federal infrastructure may not be as far away as it seems.