Washington DC has historically been a lucrative market for multifamily landlords, especially those who could effectively navigate DC’s Housing Voucher Program. But whereas sweeping changes to the program have placed many seasoned operators on high alert, potentially undermining the values of their portfolios, Ali Semir sees substantial opportunity amidst the turmoil.
The founder and Principal of Mosaic Affordable Housing, Ali launched the company in 2017 to acquire and develop naturally occurring affordable housing properties in Richmond, VA. What started as a single 18-unit property has grown into a portfolio encompassing 337 units, totaling $55 million in value and growing. His firm utilizes a variety of affordable housing programs, including housing vouchers and low-income housing tax credits, to structure his transactions.
For years, Ali has observed operators increase the value of their properties by replacing one affordability regime with a more lucrative one. Opportunities like these have been possible due to a byzantine network of local and federal guidelines and funding sources. The DC Housing Voucher Program, for instance, is funded federally by HUD (Department of Housing and Urban Development) but administered locally by DCHA (DC Housing Authority). DCHA previously set the local market rental rates used to calculate subsidies available to landlords who house low-income voucher tenants. Quite predictably, when voucher rents are higher than those for rent controlled units, many landlords will attempt to kick out existing tenants and replace them with voucher tenants. Similarly, when market rents for one unit classification are higher than another (3-bedroom versus 2-bedrooms for instance), landlords will often attempt to convert larger units into units with as many bedrooms possible. Several variations of these strategies have proliferated to optimize a property’s rental income. A recent Greater Greater Washington article on the topic offers exceptional insight.
But the same rules that create fortunes can quickly undermine them. An audit conducted by HUD concluded that DCHA failed to conduct unit level rent reasonableness assessments for years, a test to ensure units with rent subsidies aren’t more expensive than units without subsidies. The implication of the study is serious. If the DCHA overpaid landlords (a Washington Post article concluded that DCHA likely paid landlords millions more than it should have), then landlords are vulnerable to reduced subsidies in the future, or worse, could be subject to clawbacks on monies received.
Facing significant headwinds and uncertainty, Ali is already observing operators opting to sell their properties rather than let the dust of rent reasonableness fully settle. Many of these operators are older and approaching retirement, may be incapable or unwilling to make much needed capital improvements, and own the properties at a significantly lower basis than today’s values (even with rates as high as they are). For them, cutting their losses while they’re still ahead can seem to be the most prudent path. But Ali went on to explain not all motivated sellers are baby boomers. “You have operators that paid historic prices over the last five years, based on their plan to convert to voucher rents. The viability of that strategy is being tested, so many are opting to reposition their portfolios elsewhere, with a particular focus on Northern and Central Virginia.”
He views the current volatility as an opportunity to buy assets at a more attractive basis than would have been possible the past several years. No stranger to multifamily underwriting, he previously served stints at firms including Capital One Multifamily Finance, Lument Real Estate Capital, Walker & Dunlop, and Freddie Mac, underwriting over $2 billion of Fannie and Freddie loans. “The guidelines around affordability are always evolving, and that’s where I think we have a differentiated skillset, quickly understanding how those changes translate in the property-level underwriting. We’ve worked hard to ensure our business model is not predicated on one rule or guideline, so we’re always looking at holistic solutions to ensure we can both buy intelligently and help ensure the availability of affordable stock in the DC area.”
Stay connected with Ali and his innovative approaches to affordable housing: Ali Semir’s LinkedIn