Episode 108: Building Wealth by Renting with Shane Phillips and Bob Simpson

Shane Phillips 00:00:10
Hello! This is the UCLA Housing Voice podcast, and I'm your host, Shane Phillips. For those of you who listen right as new episodes come out, a quick apology that we took a brief, unannounced hiatus over the past month. The podcast is a ton of fun and something we really value and take seriously at the Lewis Center, but it's also a lot of work and sometimes other responsibilities and deadlines have to come first. That said, we should be back to our regular biweekly schedule for the foreseeable future. I also know that a lot of you have been waiting for us to start the Stuck book club, which we are way behind on. I don't want to say that it's definitely happening this month because you never know, but that's the goal. We are also going to be wrapping up our Incentives Series soon with just a few more episodes, though not just yet. Today, we're actually talking about a Lewis Center research project that I started way back in 2022 and published right at the end of 2025. It is way out in left field compared to the work I usually do. And that's part of what's made it such a fun learning experience and a topic I am certain will interest many of our listeners, building wealth for renters via a proposed housing model that I've been referring to as shared prosperity rental housing. For this episode, I'm going to be part host, part guest with Paavo joining for the Lewis Center host perspective and another guest, Bob Simpson, bringing decades of experience at Fannie Mae to help us ground the conversation in the practical realities of housing, finance, and investment. I hope you like it and stay tuned for our next episode where we'll be speaking with someone who's actually running one of these shared prosperity rental models in the real world. Housing Voice podcast is a production of the UCLA Lewis Center for Regional Policy Studies with production support from Claudia Bustamante, Brett Berndt, and Tiffany Lieu. You can reach me at [email protected] or on Bluesky and LinkedIn, and you can follow the show and share your thoughts on this episode and future episodes on our substack, uclahousingvoice.substack.com. With that, let's get to our conversation with me, Paavo, and Bob.

Shane Phillips 00:02:48
All right, Paavo is taking on the role of the host today just as soon as I introduce a few things, including our other guest. Hey, Paavo.

Paavo Monkkonen 00:02:57
Hey, Shane. I'm excited to turn the tables on you and talk about your ideas on how to unbundle some of the housing policy bias towards homeownership in the United States.

Shane Phillips 00:03:07
Yes. Yes, indeed. And our guest who is also sort of acting as a host slash questioner is Bob Simpson, founder of Simpson Impact Strategies and president and CEO of the Multifamily Impact Council, a nonprofit whose mission I'll let him explain in just a moment. He comes to these roles after a 20 year career at the Federal National Mortgage Association, better known as Fannie Mae, and that experience certainly bears on today's conversation. Bob, thanks for joining us and welcome to the Housing Voice podcast.

Bob Simpson 00:03:37
Thank you, guys. Appreciate being here and looking forward to a great conversation.

Shane Phillips 00:03:41
Before we get into your background or the report here today, Bob, we always start off by asking our guests to tell us about a place they live or have lived and want to give us a tour around. So where are you taking us?

Bob Simpson 00:03:53
Sure. So I live in Sioux Falls, South Dakota. I've lived here for about 20 years, but I grew up in a very small town called Winter, South Dakota. on the western side of our state.

Shane Phillips 00:04:07
Winner or winter?

Bob Simpson 00:04:09
Winner, as in not loser.

Paavo Monkkonen 00:04:12
Very nice. Great name. Aspirational town.

Bob Simpson 00:04:14
It was, it's a, you know, I grew up on a ranch. And so it was, if you can imagine, you know, watching dances with wolves, it was, that was very much filled in that filmed in the same location, part of the country. And to this day, it is, it is you know, regardless of where I live, that's always where I'm from. And so it's a beautiful place, you see a lot of sky, and a lot of just beautiful things out there, very few people. So it's always nice. I always love visiting the West Coast. I love going to Los Angeles. My favorite part of Los Angeles is being able to hike outside of Los Angeles, because then I can feel like I've got all the benefits of great food trucks, but still no people. It's the best for me.

Shane Phillips 00:05:00
Yeah. I do feel like winter from what I know of South Dakota seems like a more appropriate name for a city there or a town there.

Bob Simpson 00:05:08
That's true. But you know, the Chamber of Commerce, you know, the slogan writes itself when you're from a town called winter.

Shane Phillips 00:05:15
All right. So this episode is a bit different than our usual conversations. But if you've listened to Episode 79, where I talked about my paper on inclusionary zoning, then it will not be unfamiliar. We're going to be covering another report that I published at the end of 2025 titled Building Renter Wealth and Evaluation of Shared Prosperity Rental Housing and Feasibility. This project took me three years to finish and was funded by the Chan Zuckerberg Initiative. So I do want to give them big thanks for their support, both in funding and in helping me connect to a bunch of folks who helped inform this work. The other major partners on this were Ian Carlton and Jacob Strawn from Mapcraft, a super talented team of real estate consultants who you should definitely hire if you need help evaluating financial feasibility or the potential impacts of different housing policies. Paavo, I think if I'm not mistaken, you and Ian did your doctoral program at Berkeley around the same time?

Paavo Monkkonen 00:06:11
Yes, we did. Yeah, I think I might have even been his TA, but I've known him for a while. He's great. And actually, we worked on a Lewis Center publication. about six years ago. That's right. One to four market feasibility of four plexus in California single family neighborhoods. Check it out. It's it's I think the first place this zoning funnel diagram was employed where, you know, you have to think about what zoning allows, what's market feasible, what actually gets built in terms of how zoning reform might shape actual housing production. So.

Shane Phillips 00:06:41
We were just in Sacramento presenting at UCLA Sacramento briefing thing that's done every year. And the housing funnel came up in that panel, actually, and not by me. OK, well, permeated. And actually, now that I think of it, the inclusionary zoning paper that we did that previous episode on was also based on work that Mapcraft had done to create this housing policy simulator for the city of Los Angeles.

Paavo Monkkonen 00:07:07
No, I think, I mean, He's done a good job of bringing the market feasibility stuff into the conversation, which is important.

Shane Phillips 00:07:13
All right. So that is the topic of today's conversation. And before we get into it, I want to turn back to Bob for a few minutes. I was connected to him several years ago, but the first time we actually exchanged emails was when I asked him to review a summary of this report before it was finished, which he graciously did. I should note that the final full report weighs in at a beefy 169 pages. So even the summary is a bit of a commitment. We talked for an hour over zoom back several months ago, and his feedback was just very thoughtful and helpful, critical, but constructive, exactly what you're looking for in a review, especially from someone with his unique experience and perspective. So when we were planning out this episode, I thought it would be great if he could play a similar role here. This was very much a housing finance research project. And in my experience, housing finance is a challenging area to comment on and make recommendations for without practical experience in the field. And even with all the effort that went into this report, I am certain that I've not only made some mistakes, but also overlooked some opportunities. So the goal today is not just to share what I found and make a case for this shared prosperity rental program. also to poke and prod it a bit and expose some of its weaknesses and vulnerabilities and hopefully come up with ideas for fixing them if we can. This is a concept that is already being tested out in very early pilot programs so my hope for the report and for this conversation is that we can both give them some ideas that they might not have thought of and bring more attention to the work that they're doing. So Now you guys have some marching orders. Bob, I'm going to hand it over to you just to share a bit about your background and the work you're now doing through Simpson Impact Strategies and the Multifamily Impact Council. My assumption when I heard about the council was that it's a group that lobbies on behalf of apartment and condo builders, kind of like the National Multifamily Housing Council. You can understand the confusion, but I understand now that you guys are doing something quite a bit different and more specific than that. So tell us what you're up to.

Bob Simpson 00:09:18
Yeah, first of all, thanks for that amazing introduction. And anytime I have the opportunity to pick apart the work that someone else is doing, I am always on board for it. So thank you for that.

Shane Phillips 00:09:32
It's much more fun than being on the receiving end.

Bob Simpson 00:09:34
Yes, so much more fun. So and and it might be the only thing that I actually might be not terrible at. So, yeah. So the Multifamily Impact Council is, like you said, a membership nonprofit organization. We're made up of You know, around a hundred organizations, mostly industry leaders or aspiring industry leaders in the impact investing space, nonprofit, for-profit, lenders, investors, service providers. And our goal is to help make it easier for capital, private capital and public capital to invest in affordable multifamily housing across the United States. And we do that in a very specific way. Number one is that we realized that one of the best ways to get capital to scale is to be able to develop some industry standards that allows investors and lenders and state governments and property owners to all speak the same language. So we developed industry standards through our multifamily impact framework, which we completed about two years ago and we update every year. It's available for free on our website and It's really a way to kind of help build common standards that organizations can use as they create their impact investing strategies and also create their financing programs. So that's number one. The second thing is we really focus on... Before you get to number two, could you just quickly tell us what impact investing is?

Shane Phillips 00:10:58
Like, how do you define that? Who is an impact investor?

Bob Simpson 00:11:01
Yeah, so that's a great question. I think that's something that the affordable housing industry always stumbles on definitions, right? The way we define an impact investment is very, very simple. And that is when you make an impact investment, can you answer these three questions, right? Does it improve the life of the person who lives in the property? Does it strengthen the community in which the building is located, whether it's from a climate perspective or a neighborhood perspective or an economic perspective? And does it create a financial rate of return that allows the investor to meet their fiduciary responsibilities. Does it improve lives? Does it build a stronger community? Does it make money for the investors so that they can then put more money into these properties? That's how we define an impact investment. It just so happens that the multifamily space is a really good way in which you can do all three of those at the same time. And so that's how we built our framework is around that concept. And the framework allows us to communicate those principles that allow you to do that in a way that talks about impact, but also connects it to net operating income, connects it to net cashflow so that we can really find where that Venn diagram, you know, intersects between impact and financial returns. And so far it's been very successful. Over 600 organizations have downloaded the framework for their use. We continue to see continued uptick in the number of folks who are using it, and we think that's great. The two things that we do to kind of supplement the framework, the first is we are always focused on helping to quantify the financial value of those impact initiatives. So we work a lot to support research, case studies, that allow us to really dive into what specific impact practices are happening at the property, and how does it drive NOI? How does it create more renter stability? And how are those things aligned? So we're looking forward to being able to start releasing those to the public this year. We're just wrapping some up. And then the other is making sure that we can share best practices. and provide guidance and assistance to organizations, whether or not they're members or not, to help them really figure out how they can use the framework to help improve their work going forward. And so that's what we do. We think it's very important that we can make this scale. And we think the best way to make it scale is to create sort of a common platform around which people can talk together and come at it with the same perspective that like we want to improve lives. We think the best way to do that is to creating a healthy, safe and affordable place to live. When you're owning a property that's income producing and its valuation is based on how many people pay rent on time. there's a shared incentive to make sure that the best possible financial performance comes when you have the most possible number of renters who are financially stable. And when you have a property that is energy and water efficient, all of those things work in concert with each other. And so it's our job to help explain that. And that's what we try to do through the framework. And the framework is also free. And that's something that we feel very passionately about. It's free. It's open source. Anyone can use it. And if anyone has any questions, they can always call us.

Shane Phillips 00:14:23
Thank you for that intro. And I think we are going to come back repeatedly to this idea of the importance of feasibility for for scale in particular, to really grow a program, whether it's, you know, something you're working on or this proposal we're going to talk about today.

Paavo Monkkonen 00:14:38
All right, Shane, let's turn the tables to you. And we'll start with an easy question to get into shared prosperity rental housing. So can you just tell us what it is and what the problem it is trying to solve?

Shane Phillips 00:14:49
Yeah, so Shared Prosperity Rental Housing, we can call it SPR at times here, is just my made up name for a housing model that would make it possible for residential developers and landlords to share profits with their tenants. So in my vision for this, from the tenant's perspective, there wouldn't really be anything different about it compared to renting in a typical apartment, just in the day to day, except that you also get back a portion of your rent if the owners turn a profit. This idea goes back for me, at least, to something I wrote on my blog way back in 2021, which I later also wrote about in The Atlantic, and we'll link to those articles in the show notes. To put the concept in the simplest terms I can come up with, the thinking was that if homeowners can spend money on shelter and keep a lot of that spending in the form of home equity, then it just seemed to me that renters, who are also essentially the sole source of revenue for apartments, should have some way of doing something similar. There are obviously a billion caveats to that statement, but it just seemed possible to me in some fundamental way that I wanted to explore further. And that seemed to resonate with a lot of other people when I wrote about it, too. Of course, the reality is that homeowners and renters are in very different positions, actually. For our purposes, I think the biggest distinction is that homeowners invest equity in the form of a down payment, and they bear the risk of losing that investment if things go badly. In rental housing, that role is not played by the tenant, but by investors who don't live in the homes themselves. The insight that changed this from a sort of idle thought into a real research project for me is that actually homeowners don't always invest equity to buy a home or they don't invest much. Most people are familiar with the VA loan, which is a mortgage available to military veterans that lets them purchase a home with zero down, no down payment. The other big one that's available to just about every US homebuyer is the FHA loan. which you can get with as little as 3.5% down. That's how I bought my house in 2017, and it would have been impossible for me to do so in LA without it. We can get more into the nuances of that later if we want, but I'll just jump ahead and make the point that we've used the powers of the federal government to make these kinds of loans widely available to homebuyers, because as a society, we hold homeownership in very high regard. We think most people should be homeowners and most people want to be homeowners. So we implicitly and sometimes explicitly subsidize the mortgage market so that people can buy homes with a down payment of anywhere from zero to 20%, whereas someone who wants to build or buy multifamily housing and rent it out has to pay the equivalent of about a 40% down payment, give or take. There are entirely valid and justifiable reasons for that, which I'm sure we'll talk about But the fact that they have to put up so much of their money upfront instead of borrowing more like a home buyer drives really all the financial calculations and feasibility estimates that are downstream of that. It means that projects have to earn higher overall profits to achieve a competitive risk adjusted return, which at the system level makes it unprofitable to build a lot of the housing that we need. And, you know, that's to say nothing of actually have anything left over to split with tenants. So the question at the heart of this project for me was, what if we had a loan product that let apartment owners borrow more and invest less in exchange for sharing their profits with tenants? And, you know, it turns out that if something like that were available and a lot of other things go right along the way, there could be a lot left over for sharing.

Paavo Monkkonen 00:18:33
You mentioned the FHA and the VA loans that people may or may not be familiar with, but people of my kind of in their 40 s and older will remember a period of time when the private market was offering people loans with very, very low down payments. And we'll get into some of the risks related with this highly leveraged loans later. So just the reactions on that might be a concern for some people listening to this. Bob, did you want to jump in with something?

Bob Simpson 00:18:57
Yeah, I think one of the questions I had when you're talking about the problem that you're trying to solve, one of the things that I keep coming back to is what is the main problem that you're trying to solve for? Is this are you looking to solve for the affordable housing crisis or are you looking to help moderate income renter households build wealth? What's the primary problem that you're looking to solve with this program?

Paavo Monkkonen 00:19:26
Maybe I can just build on that because I think we should discuss, you know, why this model is necessary. We talk about homeownership in the United States as something very valuable beyond the financial aspect of it. We talk about the equity building a lot. You know, most Americans wealth is in their home, which gives them financial security later in life and inheritance, et cetera. But, you know, there is this cultural sense in the US that homeownership promotes neighborliness and civic participation through residential stability and kind of having a stake in the neighborhood. You know, for a long time, people turned to some old and I think mostly discredited research showing that homeowners vote more and belong to more clubs. This is funny because as with many topics, like it's still a common understanding, I think, in the US, even though social sciences have demonstrated these studies were mostly correlation and not causation. But, you know, I think just to build on Bob's question, you know, if homeownership itself is idealized in the US, most people want to become homeowners. Why would we create a program that encourages renting rather than just pushing people into homeownership more?

Shane Phillips 00:20:30
Yeah. Yeah. It's a great question. And I'll answer Bob's first because I think it's a much quicker thing to respond to. And things I have to say later will probably also add to it. But to answer your question, Bob, for me, this is mostly about wealth building, but not just about building wealth, but making renting a more attractive option as an alternative to homeownership. That was really where this started for me was this feeling that there are actually many benefits to renting, but the way that we've structured the financing programs in this country, the tax programs and incentives in this country, and, you know, just socially and otherwise. everything is pushing you toward homeownership. And that's actually not in a lot of people's interest. And my feeling was, we're not going to convince people to not become homeowners, if renting continues to be so much worse in terms of the wealth potential that it offers. So that was my motivation. Obviously, I'm, you know, very interested in affordability more broadly. But I think this ties into that as well. I think A problem, especially in places like Los Angeles, is new housing is expensive to build. And so it's mostly going to be relatively high income people who see that as for them, even though, you know, obviously there are filtering effects and other things that benefits many other people. But we have that. And then on the other end, we have, you know, if you're very low income, you may be at least be eligible for some kind of subsidies, some kind of assistance. But then there's this broad middle of, you know, 60, 70% of the population who makes too much for subsidies. too little to afford new housing, and they just feel like there's there's nothing for them. And I feel like this, among many other things, could be something for them to kind of grow support for more housing and more kinds of housing in the places that need it most. So that's kind of where I'm coming from for this. Pablo's question is much bigger, and it's one that I know he could answer as well as me. I'm going to give a few answers to this, but I want to hear what you guys have to say as well. The first thing I'll say, which I feel like you have to say anytime you're making any kind of critique of homeownership, is that homeownership really does have a lot of benefits both for individuals and I think for society overall. We tend to overlook the financial downsides and risks of homeownership other than, you know, maybe economists, and we tend to overstate its financial benefits. but it really does work out pretty well for many or most people. The median homeowner has something like 40 times the wealth of the median renter. And even though a lot, probably most of that is really just selection effects and not what you'd get if you just randomly selected people into homeownership or renting, I still don't think there's any question that ownership is part of the story, part of the reason that gap exists. As a homeowner myself, I can say that despite the costs and inconveniences, It can also be really rewarding. You can do what you want with your property, NIMBY neighbors aside, which among other things gives you much more control over how long you can stay in your home. I don't know the stats on this. I haven't looked them up, but I very strongly suspect that you are much more likely to be evicted as a renter than foreclosed upon as a homeowner. And short of foreclosure, there are very few ways you can really be ousted from where you live if you own your home. It's important for me to say early on here that I'm really not making an argument that homeownership is bad. I'm just saying what others have been saying since at least the 1950 s, which is that it's not the right choice for every person at every point in their life. For a lot of people, it is not even a realistic option financially. And I think placing such a strong emphasis on homeownership leads us to worry too little about the options available to those people. We've developed into a nation where homeownership is almost a prerequisite for financial security, it feels like. But despite that, we've never exceeded a 70% homeownership rate, despite tens and hundreds of billions of dollars being spent subsidizing homeownership every year. The gap in the homeownership rate between black households and white households has been 30 percentage points for over half a century. It just has not changed. So there are tens of millions of renting households at any given time. And our answer to their concerns about financial insecurity is basically, hey, just keep saving and hopefully you can buy in the future. Good luck. And at best, maybe move somewhere less expensive that will hurt your career prospects or put distance between you and your loved ones. And, you know, when the wealth consequences of renting and owning a home are so vastly different, It might not even be a bad idea to make that decision in every case, but I don't think you should have to make that choice. It's bad for the individual, and I think it's bad for all of us collectively.

Bob Simpson 00:25:25
I think that's a really good point, Shane. I think sometimes we forget there are some hidden benefits to homeownership that we often don't think about and how that compares to rental. Obviously, it's a good way to build wealth, right? It's very illiquid, right? It's a very illiquid form of wealth. but it's a very good way to build wealth. And yeah, you can do whatever you want with your property. That's great, but it's oftentimes hard to sell and it's also hard to buy. And so we should be looking to find ways to promote a more mobile population. It's great for the country. It's great for economic growth. It stimulates new conversations, new ideas, and you should be able to move across the country for your job without having to worry about how am I going to sell my house and how am I going to buy a new house? That's a good thing. That's the thing we should be focused on. At the same time, one of the benefits of homeownership that we often don't think about as it pertains to renting is it is the most inflation protected bill that you will ever have, right? When inflation was incredibly low,

Shane Phillips 00:26:29
Assuming you have a fixed rate mortgage, right?

Bob Simpson 00:26:31
Absolutely. Right. Which most people do. Your fixed rate mortgage never changes. Our mortgage payment is the same when inflation is at 7% as it is when it's at 2%. And that's not true with rent, right? So it is an incredible way. And I think people forget about the fact that throughout the course of inflationary cycles in the United States, 50% of households their number one expense never changes. And that's a huge buffer to the economy. The other piece, and I think that's a positive, and it's something you can never, it's really hard to recreate in the rental world outside of restricted housing, where you're really just capping the increase, is the benefit from a tax perspective, right? You're able to write off your interest. The mortgage interest tax deduction is a huge benefit for folks. And so there's other things beyond just the wealth creation that make homeownership really important. I think the challenge that we have, and this is what drew me to your model, is how do you build more residual income for folks so that you are creating more economic stability for a broader section of your population? And it feels like That's one of the challenges we have in the rental housing world, is how do we find ways to invest in the folks who are living in the properties so that they're more financially stable, recognizing that there will come a time when, as household creation occurs, that they're going to move into a house. maybe they don't own the house. But there's a reason why there's more one and two bedroom rental units than there are three and four bedroom rental units, right? It's because when you get into household creation, you're more likely to move into a house. And so that's where I think the challenge is, is that not only are they not the same in terms of their impact on people, they're not the same asset class. And so it's really hard to make a comparison and say, well, how do we make one more like the other without taking into consideration all of these other things?

Shane Phillips 00:28:39
Yeah, I 100% agree with that. And as I said, I really don't think the goal here is saying people shouldn't buy. And actually, I'll make a few other quick points, because at least one of them does relate to that directly. And I think how this is sort of sold. So one is just that I think so far, I've mostly framed this as, you know, homeownership is just the wrong choice for a lot of people. But the fact is that renting can also be really great, depending on your circumstances. We've all lived in a shitty apartment and had a bad landlord, but those experiences are more of the exception than the rule. And if you're in a position where you could buy a home but choose to rent, I think those experiences are going to be especially rare in that class of rentals. It's relatively cheap and easy to move as a renter with a lot of people being able to move with as little as a month's notice and something like three months of rent due at move-in. If something breaks, fixing it is someone else's responsibility. and it's someone who is much more likely to actually know what they're doing. The second thing that relates to what you were talking about, Bob, is that it'd be very easy to pitch a renter wealth building program like this as pro-ownership, if you were so inclined. Even people with amazing career prospects usually do not have the money to buy a home right out of college, just as an example. If they could live in shared prosperity rental housing or something like it early in their career, then that'd just give them an extra boost to save up for their down payment for whenever they did decide to buy. There's a lot more I could say about concentrated housing wealth and how concentrated housing wealth actually is in the United States, how driving everyone toward homeownership probably contributes to housing scarcity and rising prices, how researchers like Brian McCabe, which I think is one of the folks you were referencing, Paavo, have shown that a lot of the civic engagement gap and those kinds of things between renters and owners is not really about whether or not you own, but just how long you've lived in the same place. But I'll stop there. Maybe, Paavo, there's some things you want to add to this.

Paavo Monkkonen 00:30:39
Yeah. Well, I did just want to note, I think Bob's point was very good. And he was sort of nudging you into an answer to his earlier question, which is kind of what is the problem you're trying to solve with the shared prosperity rental housing? And it's almost not a housing problem. It's more the financial stability of renters in the long run. So that's that's a really good point.

Speaker (SPEAKER_03) 00:30:58
And I hadn't actually thought about it like that until now.

Shane Phillips 00:31:01
I will add to this, maybe getting ahead of things a little bit because it gets into program design. But it is true that at least as I've envisioned this program, which is not necessarily how it would be implemented. One advantage is that if your rents are going up, that is good for the profit of the building. And so it actually, you know, kind of redounds back to you at some level. And so relative to traditional renting, where rent going up is just purely a cost to you, there's no upside. It's not the same as having the same payment indefinitely, especially when that payment is declining in real terms with inflation. But it is, again, something that is improving renting relative to the way that people experience it right now.

Paavo Monkkonen 00:31:48
Right. Yeah, I mean, I won't go off on homeownership too long. I just wanted to make two points that like, You know, there is this forced savings mechanism that we see as equity building, but it doesn't have to be like that. There are many countries in the world where most people are renters and they can build wealth in other ways. We just have created this system. You know, we have a very biased housing policy towards homeownership, favoring homeownership. And I think it's it's a challenge to separate kind of maybe the intrinsic benefits of homeownership that you you guys have mentioned of like, you know, being able to fix up your house and have stability and all these other things with the policy structures that benefited, like Bob mentioned, with the tax benefits. We could put it in the notes. There's a study I remember comparing EU countries and showing that countries with more renting have less housing deprivation. I mean, it's actually like the more developed countries have more renting. And so it's always been funny to me that the US has this homeownership thing as like a policy, like having a high homeownership rate as a policy goal is bizarre because Very poor countries have high homeownership rates. It's not a characteristic of the more advanced economies. But that's America. We're a weird country. And let's get into this model more, rather than our thoughts on homeownership. So tell us, Shane, how does shared prosperity rental housing work in practice?

Shane Phillips 00:33:09
So I'm going to use an example here and try to keep the explanation as simple as possible, not as simple as I would like. But because of this simplicity, anyone who works in housing finance, please do not come after me when you hear this, because I know it's missing some important nuances. But I think this is directionally correct. And Bob, you can tell me if there's anything that's truly wrong, or if I'm skipping over something that's critical enough to make a really big difference. Let's imagine a multifamily development that costs $10,000,000 to build. For a typical project, the investors are going to put in 40% of the cost as equity and borrow the remaining 60%. The equity investment comes in earlier, so there's a higher risk of it being lost if the project falls apart, and it's also paid back only after the lender recoups everything that they lent with interest, so that's another risk. Higher risk means investors demand a higher return on investment than the lender for their interest if they're going to participate in the deal. Otherwise, they might as well just put their money in the stock market or lend it out like a bank themselves. So let's say the investors require a 15% return and the lender charges 9% interest on the construction loan. We'll also assume the project is finished and sold in three years after the equity investment comes in and two years after the construction loan is issued. Again, this is not precise by any means. Under these circumstances, the developer needs to sell the project for about 13,200,000 to pay everyone back, including the interest to the bank and the investor's profit. So that's 3,200,000 more than it costs to build, about 2,100,000 of which goes to the equity investors, aside from their initial 4,000,000 investment, which they also get back. Now we take that same project, but lower the equity share to 10% and increase the debt share to 90%. In this scenario, we can pay everyone back if we sell the project for at least $12,200,000, which is a million dollars less than that 60% loan to cost project. So a key point here is that although we have only lowered the amount paid to either interest or profit by a third from 3,200,000 to 2,200,000, we've cut the amount of profit owed to the equity investors by 75%. from 2,100,000 to just over 500,000. And the reason is just that they put in 75% less equity in the early days of the project,1,000,000 instead of four. Since all we've changed about this deal is how much money is coming from each party, if the project would have been feasible with traditional financing, then it's still gonna be worth at least $13,200,000, not the 12.2 that we need to hit our profit target, So now we've got a project where the lender and investor have earned the same returns as they would have under the traditional model, but we've also got a million dollars left over. And in theory, a lot of that can go to the tenants. Although you'd probably want some of that additional money to go to the investors to make sure this model is actually more appealing than the traditional rental housing model, which is important if you want this kind of program to actually scale up and serve a lot of renters. But that's the heart of the idea from the perspective of the project sponsor. This is the person who's building the project or buying an existing building to operate under this shared prosperity model.

Paavo Monkkonen 00:36:26
Right. So those were pretty clear numbers to me, but maybe I can just try to rephrase it. And maybe Bob, you can do the same thing. I mean, basically. By having more of the project financed by a loan, the interest rate is lower than what an equity investor would demand. So you can sell the project for less or there's less profit to be extracted and more of the money that would have been paid out as profit can go to tenants or somewhere else. And the idea is that the government would be providing that loan. I was just curious, Bob, maybe you have thoughts or Shane, like why doesn't this happen already on the private side?

Speaker (SPEAKER_03) 00:36:59
the government would be providing or insuring the loan, the same kind of things they do for FHA loans and so forth.

Shane Phillips 00:37:07
But yeah, this is honestly a much better question for Bob than me.

Bob Simpson 00:37:11
Well, I think there's two things to consider. And it's actually one of the, throughout your proposal, Shin, this is the one I keep going back to is my stumbling block, right? Is the idea that you're able to get lower cost debt in return for higher leverage. So let me just walk you through this. Number one is from an equity perspective, higher leverage boosts your profit, right? If you think about return on equity, it depends on like your asset return. So the cost of debt, the amount of leverage, right? So the more that you are able to lever up your property, that just increases, you know, the return you're going to get on your equity.

Shane Phillips 00:37:50
Right.

Bob Simpson 00:37:50
So that's a good thing. Yeah. Theoretically, this is a good way to attract more investment capital because you're going to juice your returns with higher leverage. The challenge with that, and this is where multifamily is a very different asset class than single family, is that you dramatically increase your risk, right? So a single family properties valuation is based on market comps. It's based on, you know, what the house across the street sold for. It's interest rate dependent. multifamily property, your valuation is based on income.

Shane Phillips 00:38:24
Yeah, yeah. I always say that single family home prices are based on hopes and dreams, basically. Yeah, that's very little relationship to what you can rent it out for.

Bob Simpson 00:38:33
Yeah. And so I think that's one of the challenges. And so the reason why, you know, traditional 60 to 75% leverage has always worked in the conventional market multifamily space, is that The higher you go up with loan to value, your loss severity during times of credit downturns, multiplies exponentially. That's a big challenge. There is a higher risk for not just the equity investors, but also for the lender. Ultimately, the risk is held by the bondholder. The lender just originates the loan. They're selling that loan into the market as a mortgage-backed security. And so not only is there more risk because you have less protection when the valuation of that property goes down, you have less equity protection for your risk. So if you're a bondholder and you have a multifamily property and there's 30% equity in front of you, that means your, your comfort cushion is 30%. Now it's 10%.

Shane Phillips 00:39:35
Like if prices fall, if rents fall and the value of this falls by 20%, you're still in the clear.

Bob Simpson 00:39:42
Yeah. But now all of a sudden you're not because you're increasing the risk significantly across the market. And that's why you don't see any of these without a government guarantee, right? That's why the private market doesn't do it.

Shane Phillips 00:39:55
Something that Richard Green brought up when I talked to him on Lusk Perspectives a few months ago is exactly this, how this high leverage approach, in addition to boosting profits, you know, if things go well, It also means that if things go wrong, the sponsor or investors lose a much larger share of their investment. I think he put it something like this, but just to illustrate, if they have to sell for 5% less than what the project costs to build, and it's financed 90% loan to cost, then they've just lost half their equity investment. The same loss on a 60% loan to cost loan is just one eighth of their equity. we may get into how on the other side of the ledger, there is some advantage to the sponsor being in the first tranche of profits and some other things. But I do think this is an interesting and important thing. I guess the question I would pose to you is, I'm sure you're at least somewhat familiar with the HUD Section 221 D 4 Multifamily Construction and Rehabilitation Loan Program. Of course, I can only say that to someone who's worked at Fannie Mae for 20 years. And I can only name that off the top of my head because I reviewed it about 20 minutes ago. But this is a loan that is insured by, I think, HUD, certainly by the federal government. And I think it's issued by private banks, but it is 87 to 90 percent loan to cost. It has a debt service coverage ratio as low as one point one one, which is quite a bit lower than the optimal, most ambitious assumptions we made in our model. The loan term can be as long as 43 years and we just stuck with 30 in our model. Lots of similarities, if not, you know, going further than my proposal. It's also pretty flexible in how it can be used. It's available to public sector, private for profit, nonprofit co-ops. It could be for market rate, mixed income, a hundred percent affordable projects. I think the main problems with it seem to be it takes forever to get your loan approved and it comes with a prevailing wage mandate and there is a mortgage insurance premium. that effectively raises your interest rate. So these are all costs, of course, but the program does exist. I think they loaned out like $2,500,000,000 in 2024. So why do you think that program is able to exist? What makes it something that anyone is willing to participate in?

Bob Simpson 00:42:15
Yeah, there's a couple of things. Number one, the 40-year amortization makes a lot of deals penciled out. All of the things you mentioned make it really great. One of the things that makes it feasible and something that is investable to the bond community is the fact that there is a, you know, the prepayment penalty period is a declining, it's got what's called a declining prepay option, right? So what it does is it protects the MBS investor from payoffs.

Shane Phillips 00:42:45
Like if interest rates change.

Bob Simpson 00:42:47
Early prepays are very important when you're buying a mortgage backed security and being able to predict Your prepayment speeds on an MBS is really important when you're trying to determine what price you should pay. And so that's a critical thing. And so having that very clear and transparent declining prepay option is really important. And for the 221 D 4 program, I believe it's a step down prepay for about 10 years. And that gives the bond community a lot of comfort. I think the other thing is it's fully backed by GDMAC, right? So this is a 100% government guarantee. So you're effectively buying government paper, which makes it a lot easier as well. And I think that's the key issue when you think about a 90% LTV program for this program that you're talking about, is just to be very explicit that you don't automatically magically make price go away.

Shane Phillips 00:43:40
No, no, without somehow increasing risk.

Bob Simpson 00:43:44
Right. And so someone is going to bear that burden. And I think it's you have to be very explicit to say in this scenario, if you want the market and a bondholder or a bond investor to buy this bond, the only way they're going to buy this bond is if it is fully backed by the federal government, or a counterparty that they believe can offer the same, you know, high credit rating behind it. And I think that's, that's the thing is it works in that scenario, but it's a zero sum game in that instance.

Shane Phillips 00:44:15
And this is also something that we do with the FHA loan and other homebuyer mortgage programs, right? And I think that's And tell me if that's mistaken, but that's really the heart of my argument is I'm not assuming that private lenders are just going to offer this. I think it is something that has to really have a strong federal government guarantee support buying these mortgages, whatever it needs to be. And my thinking is that, you know, there is a risk to that with homebuyers as well. And it's one in that case that we accept as a way of promoting homeownership, because that's something we value. And I just think the argument for doing the same in service of lifting up renters who make much less money, who are much less wealthy, is at least as strong. But I think nonetheless, it is just a different thing for homeowners versus multifamily buildings. Although you could also make an argument that the average borrower of a multifamily loan, whether construction or acquisition, is going to be a lot more sophisticated than the average homebuyer taking out a loan.

Paavo Monkkonen 00:45:18
I have a higher risk profile probably too. I mean, I think that's that's the danger. But I think the point I mean, the big picture point that the government guarantees mortgages and takes on risk on behalf of owner occupiers of single family homes, and they should do the same thing for occupants of multifamily housing, I think is a good idea. I just think the risk issue is quite different for the two groups. Yes, I agree. Bob, did you want to add anything there or should we move to tenants? I guess we'll come back to financing.

Bob Simpson 00:45:45
No, I think we've – I think that's really good. I think – I'm really interested in understanding how the program works as it relates to the actual rent, the benefits to the renter and how that accrues over time and how they're able – what's the mechanism that allows them to capture that to make that wealth liquid for them.

Paavo Monkkonen 00:46:06
Yeah, I agree. So let's turn, Shane, to the tenants. Why would I want to rent in a shared prosperity rental building? Would I understand what that is? How would it work for me as a tenant?

Shane Phillips 00:46:17
Yeah. So like I said, the idea here is that from the tenant's perspective, the day-to-day experience of renting in SBR housing should be indistinguishable from renting in a regular apartment building. You would apply, you'd sign the lease, you pay the deposit, you move in. You pay your rent every month, move out when you want, and hopefully get back some of your deposit. There's just the extra bit here that if your building is like kind of typically successful in terms of return on investment for the sponsor, then you as the tenant also share in those gains. As for how that actually works, obviously a lot of ways you could structure this, but we keep it pretty simple in the report. Basically every year you live in the building, you get what we call a rental reward, and each year the tenant's profits are distributed according to each person's share of those rental rewards. So if there's a 100 unit building that opened 5 years ago and I've lived there since day 1, then I will have 5 of 500 outstanding rental rewards, 1% If there's $500,000 in profits distributed to tenants in year five, I would get 5,000 that year or 1,000 per rental reward. There are a ton of policy decisions to be made around rental rewards. There's things like how quickly they accumulate. You know, it's probably not going to be just like every unit gets one equally if they're different sizes and rents and so forth. There's going to be whether there's any kind of vesting period, like maybe you have to live there a couple of years at least before you accumulate any. There's when they expire, if they expire, I think they have to lots of things like that. And I have a whole 20 page appendix discussing a lot of them. I'm not sure we're going to have time for many of them in this conversation, but we'll see where we go.

Paavo Monkkonen 00:48:02
Yeah, I think it's useful to frame it in a simple way like that. But as I've read in your report, it gets much more complicated. I wonder kind of what you thought about the inequality between tenants in terms of how much they get back and kind of when you live there. matters and is there kind of a way to simplify it? I mean, maybe explain more about how you did it. And then we could maybe think of ways to simplify it, because I just think from the perspective of a tenant, if you said, oh, every year you get five percent of your rent back or some, you know, something very clear rather than here's this complicated system of rewards, depending on when you live there and the profits, et cetera, of the of the building.

Shane Phillips 00:48:38
Yeah. Yeah. And actually, I'm just going to jump ahead to something I was going to say much later, because I think this is really important. I think that insight that just having a clear, predictable benefit to tenants from the start is probably gonna be really important, even if it's relatively small. We'll probably get into this more later, but in our evaluation, in the markets and scenarios where we found this model to be potentially feasible and competitive with traditional rental housing investment, the amount that a tenant could be getting back from their rent, including the sort of profit distributions adds up to anywhere from 25% of their rent to like approaching 100% in seemingly realistic terms in inflation adjusted terms. There's a lot of things that go into that, but that's the only thing that is being offered there. And there's no predictability whatsoever in the way we've structured it in a way that allows you to just calculate the whole amount. But I want to talk about two programs that are actually already doing this that might help illustrate this a little bit better. Colorado actually just kicked off in the last week or two, a program that they're actually calling Renter Rewards. So it's very similar to the idea here. TM. Yes. So this came about through a 2022 voter approved initiative, Proposition 123. This was actually right around the time when I was first writing about this. Right now, the idea as I understand it on their website is the tenants get 2% cash back. Plus that money is doubled to 4% if they keep it in a savings match account and they share in future equity distributions, which, you know, is much harder to predict. I think enterprise community partners has another program that's been operating for at least a year or two now. And I think they have at least seven buildings that they've acquired and it functions pretty similarly. It's called the renter wealth creation fund. But instead of using public funds like the Prop 123 program in Colorado, they're relying on impact investors, Bob's World, who are willing to accept a below market rate of return. And I think their program in terms of how it operates is very similar. I think it's about 5% return as the goal. And then I think the idea is they sell the buildings maybe 10 years down the road and kind of exit and the tenants get a portion of that. The program I have envisioned here is more of a kind of permanent thing where you're not ever selling the building. But otherwise, the idea is similar. I want to point out a few things here, though, about these programs, because I think they're interesting. One is that both are partnering with this company, this private company, Stake, that specializes in these kind of cashback rental programs. I just think it's probably smart to be leveraging existing technology, existing software like this, rather than trying to build out something entirely new for each of these programs. And it's nice that there already is something like this in place. Two is that both of these, coming back to what we were saying earlier, both of these do equity distributions based on a project's overall profit, and they do this cash back that's unrelated to the project performance. And I do think that's really smart. Even if it's just 2%, 5%, You know, for one thing, that's still a meaningful amount of money to people. And for another, it's an immediate benefit and incentive to participate. I wish I had given this aspect more attention in the report, because I think it's going to be important to show immediate benefits and not just promise people a possible big payoff 10 or 15 years down the road. If nothing else, it's a way of delivering on your small promises early. to show that you're serious about delivering on the big promise when you're able to. And I think just to be clear, these promises would all be contracts and not just like handshake deals that a developer could just choose not to honor. So yeah, I think having something like that would be valuable. I think relative to the total amount of benefits, a 5% per month cash back for paying your rent on time would be a relatively small share of what you'd be getting back. But if anything, that's a reason that you really should do it because it is important to show people from the get go that this is something that they're going to benefit from and want to participate in.

Bob Simpson 00:52:56
Shane, what got you thinking about a more permanent option versus assuming a 10-year sale like the Enterprise program? What was your rationale behind that?

Shane Phillips 00:53:09
Basically, I just don't love the idea of all the effort going into creating this shared equity program for this building, and then you sell and then it's back on the private market again. We don't contemplate this in the report, but I could imagine that someone buys or builds an apartment building through this program, operates it as shared prosperity rental housing, and then just sells it to someone else who's going to do the same thing. I think that could actually work, potentially. That's essentially the model we have now with traditional rental housing where they're exchanged pretty frequently. So I don't think there's any particular reason you couldn't do that. It's just, I think it was in some ways driven by the, the modeling exercise itself, where we're able to show kind of the long-term benefit. Whereas if you're just assuming it disappears in 10 years, it's very dependent on timing and other things like that. I think that's another aspect of this. is if you have that longer-term horizon, then the different swings in the market, the fact of like, oh, we had to sell at a bad time, and so no one gets anything, it was a failure as a project, are just maybe less of a problem. Not no problem, but less one.

Bob Simpson 00:54:24
So do you have to wait longer than 10 years before you get your payout?

Shane Phillips 00:54:29
So the way that we have this, again, the way that we have this model put together is Once a building is acquired or bought, it does take about 10 or 15 years before the investor is paid off their kind of initial investment, the first tranche of profits before they start being split between the investor and the tenants. That is only, you know, those first 10 or 15 years. And for the rest of the life of the project, then it is distributing. And this is another thing where getting into the weeds here, I consider how you might have the rental rewards that people accrue in those first 10 or 15 years are kind of frozen and don't start a countdown for expiration until later and you kind of spread things out. So those early tenants are also able to benefit even if their payments are kind of delayed relative to someone who moves in in year 20 or 30 or 50. But yeah, I think that was another reason actually for the longer term horizon is you're able to show that full scope of benefits. You could absolutely have a model I can imagine where someone just sells it, they cash out and then, you know, some portion of that one-time payment then just goes out to all the tenants. I'm just thinking about if it's not another shared prosperity rental kind of program that purchases the building, now you're no longer in that program and the rent you're paying in that building is no longer, is never going to accumulate anything for you.

Paavo Monkkonen 00:55:55
So just to clarify, like after 15 years, let's say the building is earning a profit. Anyone that has lived there in the previous 15 years gets some rewards depending on how long they've lived there.

Shane Phillips 00:56:05
Yeah, depending how long you've lived there, depending on if there's a vesting period, like maybe if you only live there one year, you just don't accumulate anything. For one, like there's additional costs for that level of turnover. for two, it's just adds administrative complexity to keep track of all these different rewards. I think you might want a program, I actually suggest the program should probably tie the expiration of these rewards when they finally stop paying to the length of your tenure. So if you live there for five years, they would expire more quickly than if you lived there for 10 years, for example. So not only would you have more rewards for living there longer, but they would actually last a little longer as well.

Bob Simpson 00:56:43
So in the conventional market rate space, and it feels like this model is built a little bit more around the middle income part of the market, right? So less than that, the low income tax credit space, your typical length of stay is about two to three years for a renter. If you're in a strong market where there's, you know, some of the bigger markets like New York or LA or San Jose, maybe it's three to four years. When does the value of this program, become meaningful to renters? Does it require a length of stay that's longer than two or three years?

Shane Phillips 00:57:18
I do not think there is a time under which it's not meaningful. Certainly, the longer you're living in it, the more valuable it is, especially when you consider, you know, you're accumulating these rewards, this essentially stake in the building. And if you move out and move into a kind of normal rental again, you stop accruing that. And as I said, if you have the expiration of these tied to how long you live there, that's also going to give you more benefit for staying longer. But really it is something that as long as you're accumulating at least one of these rewards, this stake, then you're going to benefit pretty meaningfully. I should say, I'm going to do something I should have done a while ago that if Ian Carlton is listening to this, he is feeling like I should have done at the start, but We talked a lot about being clear about the limitations of this study, about the fact that this is a modeling exercise. This is an effort to show what is possible for something that doesn't exist right now. And so I should read this disclaimer straight from the report, because I think it is important to say, quote, this pro forma modeling exercise was intended to illustrate how an SPR program could be designed to build tenant wealth. And the results should be understood as highly speculative. While pro formas are used by real estate project sponsors, lenders, and investors to prove that an investment is relatively resilient in the unknown future, Mapcraft used pro formas in a relatively simplified manner to eliminate infeasible SPR business proposals and determine if any SPR approaches might be worthy of further investigation." So just to put that more directly, I guess, Shared prosperity rental housing does not exist yet, and neither does this specialized loan product or a business model that takes advantage of it. So we are making a lot of assumptions about things coming together to make this housing model viable. The evaluation itself is certainly more than a back of the envelope, but it is much less than what you would take to a bank to get a loan for construction or for acquisition. But with all that said, I think our findings are encouraging enough to justify trying this out in the real world, as folks are already doing and seeing what works, what sticks, where you really run into challenges. And, you know, the other thing I'll add is that just as a point of comparison, condo ownership was not a thing in the United States until the 1960 s. And I think if you were to pitch the idea of the condo ownership structure, and non-accredited investors buying homes in that kind of structure. If you pitched that in the 40 s or 50 s, it may have sounded as crazy as this does now, but with federal legislation, with state legislation, with the support of the Federal Housing Administration, with the sign-off of the Securities Exchange Commission, all these things were necessary to make condo ownership possible. but I would say they were worthwhile and I'm glad that we did them. And I have no illusions that this proposal is going to meaningfully exist at a really large scale in the next five years, but 15, 20 years, like I really could see it. And I think it's the kind of thing we should really be thinking about.

Bob Simpson 01:00:38
That is such a helpful thing to say. It got me thinking around what is the absolute, what's the best asset class for a program like this, right? And what you really want to make sure you're trying to do is the length of stay is important and it's important for a couple of reasons. As a property owner, the idea of owning a property for 15 years with a, let's say a hundred tenants and the average stay is three years. That's a lot of administration, right? I have to keep track of a lot of things. I have to keep a lot of separate accounts. My, operational risk is really, really high, right? So I have to get that right.

Shane Phillips 01:01:17
I did want to say, I forgot to mention, I do think there's a very strong argument that if this program existed and were structured roughly as I've proposed, there'd be a lot of incentive for people to stay longer than the average renter tenure.

Bob Simpson 01:01:32
Well, and that's the point, right? And that's the important point. So you want to be able to match the asset with the population that is more likely to stay longer. Look, if it's a young person and their partner and they're renting a one or two bedroom apartment, when they have their first child, they are going to be motivated to move by their family situation much more than their rent or reward. And so, if you think about it in terms of asset classes that make the most sense, it would be rental properties that are much more likely to be suitable for someone who's in the process of creating a household, right?

Shane Phillips 01:02:10
Are we gonna talk about single-family built-to-rent? Single-family built-to-rent makes a lot of sense in this space.

Bob Simpson 01:02:16
I think single-family built-to-rent makes a lot of sense. I think single-family rental makes a lot of sense in this space because what you're doing, if you look at the length of stay for the single-family rental market, it is significantly longer than the multifamily space. And also, you're actually housing folks who have already started a family. And so you could also make the case that at that point in your life, building wealth is actually more important, right? Because you're saving for your kid's education. You're really focused on your retirement. You're less mobile. You're not going to just pack up and leave tomorrow, which you might do if you're living in a market rate apartment downtown as a single professional, right? And so I think matching it up with the appropriate asset class makes a lot of sense. Not only that, it just reduces the operational and administrative burden on the landlord. If I know this person, I want them to stay for a long time, it allows them to at some point build it into like a rent to own model, right? They could end up buying that house, right? Perfect.

Shane Phillips 01:03:20
I talk about this in one chapter of the report, this idea of like, of alternative models. And one of them was this build to rent to own, you know, parentheses to own as well to kind of transition through that whole cycle.

Bob Simpson 01:03:33
Yeah. And it makes the financing work a lot easier as well, just in terms of how a lot of the build to rent financing structures are a little bit different from the conventional multifamily space. And it allows you to kind of address some of those risk issues, I think. Yeah.

Shane Phillips 01:03:47
One other thing I did want to mention, and I don't recall if I really talked about this in the report, but I certainly say in the report that the 90% loan to value financing that we're proposing here is limited to the permanent loan. It's not something you would be getting for the construction phase of a project. And so that's a real drawback for the construction project, because you still have to get that like 40% equity for building the thing. And so in some sense, I'm kind of surprised that any of the development models were viable is a little bit different than your point, Bob, but I think it's related. Just I do think comparing using this program to build multifamily housing versus to acquire multifamily housing, I think it's a lot more attractive, probably at least initially for acquisition. Also, just because presumably the risks are going to be quite a bit lower. There's just fewer unknowns when you're buying an existing building versus constructing something new.

Paavo Monkkonen 01:04:44
So Shane, I was hoping you could give your thoughts on something that I found peculiar kind of about this, this model where it's, it's a profit sharing idea. But the profit is probably generated from my payments and rent. So like my rents are going up maybe. And that means the building is making a profit, which I'll get some back. But some of that I already paid. So I think that's one aspect of this that's kind of different from like owning a single family home, for example, where the profits are coming from someone else that's going to buy it. And then I was wondering whether you thought you could talk about kind of the risk or the danger that If there's only 10% of the apartments out there have this, people start to know about it. Will rents just go up to capitalize the potential benefits of getting payments back later? Then you're maybe passing even some of the risk to tenants if the building doesn't work out. I'm paying a higher rent for the potential and then I don't get it. Then that combining with the sub-market thing where it's like, is that going to happen? poorer neighborhoods, maybe the richer neighborhoods, you know, and so how how you thought about those issues kind of going forward with if it expanded.

Shane Phillips 01:05:49
That was a really serious and I think unresolved consideration, that second issue. And I will talk about it, but I want to answer the first question first. So you're asking just about isn't it kind of weird that, you know, the profits are driven by your rent going up, but you're paying the rent and like it seems kind of cyclical in a way. And I guess you could see it that way, but I think what you have to do is just compare this to a traditional rental housing model where exactly the same thing is happening, but you're not getting any of the profit. Like that's, that's the alternative here. And I think compared against that, it looks very nice. You know, like any amount of money coming back versus it just all going out the window is something I think just about everyone would be happy to sign up for. This question about, you know, why wouldn't tenants pay more? Cause they're going to expect to get something back. And then just, you know, more broadly, what happens if the project isn't profitable? I really put these two questions together. So the reality is that some projects will fail. They will not produce profits for tenants. And that makes it even more important that they not pay above market rents relative to, you know, a similarly situated traditional rental to live in this SBR housing. And as I said, I think this is actually one of the most challenging issues and the one I'm, I don't have a real full solution to. I have ideas. Certainly. My first intuition was that, and this is complicated, you could use some kind of rent indexing program to ensure that rents match similar market rate properties. It's complicated, but Germany does it. Netherlands does it. It's not unheard of. Well, we do have small area fair market rents set by the federal government. I think it would have to be even more, you know, specific than that. Right. But, you know, in any case, I think the SPR program would need to be structured so that tenants bear no risk for liability for failed projects like The worst that should happen is you've paid the same rent as you would have paid for a traditional rental, and you get nothing more out of it. But you certainly should not owe anything more. If the project defaults, that's not going to fall upon the renters. It has to be in the agreements up front that that is solely the responsibility of the owner.

Bob Simpson 01:08:03
Let me just play devil's advocate for just a second. The renter is getting paid, is able to create wealth based on their rent payment. So they're essentially investing their time and their rent payment in the multifamily property and they're adding value because they're staying longer and the property owner doesn't have to remarket the unit and they have lower turnover costs. Why should the renter get paid for assuming no risk and the investor get paid less for assuming the same amount of risk? If I'm an investor, why would I do that?

Shane Phillips 01:08:38
Well, I guess I might turn it around. For one, I don't think the comparison between the tenant and the investor matters. I think what the investor is interested in is where is the best place to invest my money. And investing as a renter is not an option. It's a question of, do I invest in this SPR project or do I invest in some traditional rental housing project or something completely different? And so I don't think, you know, they can feel annoyed about the renters getting pretty sizable return but ultimately they're gonna go where the profit is, the best investment is, and I think that's what matters. Sorry, what was the second part?

Bob Simpson 01:09:19
No, no, that's good. I think the question is, so I actually think that the investor is completely aligned with the renter because the ability for the investor to get their return is dependent on the renter being able to pay rent on time and to manage the property in a way that reduces your expenses. So I think the question I would have is all those things being equal, if you're adding on the additional complexity of managing a program, I would want to be able to know how meaningful is it? So what does that pencil out for me? If I'm a investor and the average length of stay in this property is two years, do I want to give up X, or is it worth it to be able to, how long of a length of stay does that matter for me? And how does it protect me on the back end? And how does it ensure that the renter is sufficiently motivated to stay longer? And how much longer do they need to stay before it makes financial sense as an investment? I think that's maybe the next step and that's where it gets back to figuring out, okay, in what asset class can you move the needle the most? But I think that the investor is completely vested in the stability and the financial stability of the renter because that's how their investment pays off. If the property goes bad, let's say a storm hits the property, right? or something bad happens or the market around it, all the jobs go. The renter in return for not having built up equity and not having built wealth, they can move to another unit. The equity investor is losing their money, right? And I think that's not insignificant. And I think one of the challenges we always have when we create policy is being able to quote Star Trek here, to go into Spock mode. and just think about it from a purely analytical perspective as an investor, that's something that you don't have to think about as a renter. And so I think that being able to take that perspective is really important. And I think that's where understanding the right asset class, when you're making that pitch to the investor is also important.

Shane Phillips 01:11:30
Yeah, yeah, I absolutely agree that and we really tried to, in every possible way, consider this from the perspective of the sponsor of the investor. Because, as I said, I don't even think like enterprise community partners, for example, who is doing a program like this using impact investment, imagines that they're going to end up serving millions of people in this kind of housing based on an impact investing, they have to get your average run of the mill investor and pension fund and whatever involved. And so they have to make it something they want to participate in. You were coming back to length of tenure and whether that makes things worthwhile. I think there would almost certainly be a advantage to the SPR housing in terms of the people would stay longer on average, but that's not really part of the model. We don't make any assumptions about that. And ultimately it is the financing model that is creating the value for the investor. And just to throw out like a kind of minor, but interesting idea that I've been thinking about, and I think discuss a little bit in the report, is the way the modeling works is we're just assuming like one building, one owner, but I'd be very interested in whether this is a private for profit, limited profit, nonprofit, public, whatever, more of a kind of portfolio approach, where a single entity owns many buildings, maybe in one metro area, maybe across metro areas. And the performance of any one project is not actually what's determining what the tenants receive. It's actually the pooled performance of all the buildings together, such that, you know, just the bad luck of a location or a disaster or whatever is washed out by, in other cases, buildings overperforming. Because at the end of the day, this is mostly has little to do with the decisions of the investors or the landlord or the builders or the tenants. It's just, you know, some economies get stronger, others get weaker. And so if you can kind of average that out and make sure everyone is benefiting moderately rather than some people a lot, some people not at all, I think that's a really great direction to move in. I think that adds even more complexity in some ways, but I think there's also economies of scale from it too.

Bob Simpson 01:13:44
I think there's another piece too, is that there's similar structures, right? So then you start describing something that looks a lot closer to like a limited equity co-op structure. And those have worked phenomenally well in the Northeast. I think there's another structure when you think about resident-owned manufactured housing communities, where, you know, you have the residents own their manufactured home. but they also have a shared ownership in the community as a whole. And so I think that structure to me, that's where I think there's so much value in the work that you're doing. And I keep going back to the idea that what's the asset class where this makes the most sense from a renter perspective that's significantly different than what an investor would look at today on the multifamily market, right? Because if there's a small difference in what you can get with a 90% loan versus a 70% loan, you're probably going to still do the 70% loan because you know, it's going to work. Right. So there's, that's a hurdle, but being able to look at the right asset class and think about it in a way where, you know, you are aligning that neighborhood and that broader value with someone who is more likely to stay there for a longer period of time. I don't think artificially having someone stay four years versus three years is probably going to be that meaningful as it is that if you have someone who is committed to this neighborhood and they want to stay here for 10 years, if only they could buy a house, but they love the house they're renting, why not just rent there for a longer period of time and be able to find ways to build equity so that at some point they could? or maybe never, right?

Shane Phillips 01:15:17
So I think that's the value.

Bob Simpson 01:15:18
And that's where I like the idea of making it closer to like a limited equity co-op, a resident owned community. And I do think that's where you get into the apartment units or the single family rentals that have more bedrooms.

Shane Phillips 01:15:31
And I think that's also where you, you would want to start at the very least. I think maybe in the future, this can grow into something where it's just, you know, the, the incentives are in place for basically every kind of housing. But there's going to be places that it makes more sense. And I think those would be a great place to start. And again, kind of prove out the model. You know, you want to test it in the places where it's most likely to be successful, right? The easiest places rather than the hardest, because that's how you scale these things up as you show that it can succeed in the favorable circumstances. And then you start to grow it out from there.

Paavo Monkkonen 01:16:06
Well, clearly this is a very stimulating idea, Shane. Thanks so much for getting us to look into this. And I encourage everyone to at least read the executive summary, if not all 160 pages of the report.

Shane Phillips 01:16:17
Unfortunately, the executive summary is still 18 pages or so, but it's much shorter.

Paavo Monkkonen 01:16:23
Housing Voice listeners love an 18 page executive summary. At least look at the two page key takeaways. But yeah, I mean, I think just exploring more ways that, you know, the federal government can use the power of its ability to guarantee loans to benefit people that they haven't traditionally paid as much attention to is really important.

Bob Simpson 01:16:43
I just want to thank you guys for having me on. Anytime I can play the cranky old man and say, yeah, but what about this? It just warms my heart. But I think I think you're doing some amazing work. And I think there's a lot of promise in this idea that it's been a really great conversation. Nothing more important than making sure that folks who are renting houses today are able to build more financial security for the future. I think it's one of the best ways in which we can really grow the economy and just create better communities. I think it's I'm really happy that you guys are focusing on this.

Shane Phillips 01:17:16
Well, thank you, Bob. And, you know, cranky or not, I do really appreciate having you here, because, like I said, being pushed on these specific things, I do not think this is a perfect idea. I think there's things that need to improve. There's things that need to be tested. And so really working through those a little bit and hopefully, you know, so other people could listen and maybe come up with their own solutions and think about some pitfalls to avoid as they're considering these kinds of programs or pilot programs. That was my entire goal. And so I didn't want this just to be, wow, what a great plan you've got. Let's just celebrate it. I think we need to really think about how it could work and how it would work in practice.

Bob Simpson 01:17:54
We need more conversations like this.

Shane Phillips 01:17:55
I think that's my takeaway.

Paavo Monkkonen 01:17:57
Experimentation to improve policy. Let's do it.

Shane Phillips 01:18:00
All right. Thank you very much, both of you guys. Appreciate it. Awesome. You can find our show notes and a transcript of the episode on our website, lewis.ucla.edu. Talk with us and other listeners at uclahousingvoice.substack.com. The UCLA Lewis Center is on the socials. I'm on Bluesky at @shanedphillips and Paavo's there at @elpaavo. Thanks for listening. We'll see you next time.