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No. 73 Winter 2010

PUBLISHED BY THE

A C O MMU NI TY DEVELOP MENT P U BLI CAT ION

CASCADE

COMMUNITY AFFAIRS
DEPARTMENT OF THE
FEDERAL RESERVE BANK
OF PHILADELPHIA

INSIDE:
2 — Message from the
Community Affairs Officer
4 — Tenants in Foreclosed
Properties Have New Rights
6 — Energy Renovations Help
Preserve Rental Housing
8 — Do Land-Use Regulations
Constrain Rental Housing
Development in Suburban
Areas?
10 — Strategies to Encourage
Quality Rentals
12 — Smart Rehab for Rentals
13 — Preserving the Small
Rental Housing Sector

Pennsylvania’s Lowest-Income Renters
Have the Greatest Needs
Nearly 85 percent of Pennsylvania’s extremely
low-income (ELI) renter households spend more
than 30 percent of their income on housing and 69
percent spend more than 50 percent.1 Not surprisingly, ELI renter households also have severe
shortages of affordable and available rental housing in Pennsylvania. In addition, housing conditions and shortages have grown worse for this
group during the first half of this decade.
These findings and many more are reported in a
recent study conducted by the Community Affairs
Department of the Federal Reserve Bank of Philadelphia. The study Affordability and Availability of
Rental Housing in Pennsylvania was written by Erin
Mierzwa, community development specialist in
the Community Affairs Department, and Kathryn
P. Nelson, an affordable housing consultant, along
with Harriet Newburger, also in Community
Affairs. The research was initiated to assess the
housing needs of Pennsylvania’s lower-income
renter households and to better understand how
their needs vary across the state.
This study is particularly relevant due to the current state of the housing industry nationwide. The
number of renters has increased in recent years,
and this increase has added to the pressures that
already exist in the affordable rental housing
market.

...continued on page 3

Data are from the 2005 and 2006 American Community
Survey, as calculated by the Federal Reserve Bank of
Philadelphia. ELI renters are those with incomes less than or
equal to 30 percent of the area median income. Households
that pay more than 30 percent of household income on rent
and utilities have cost burdens, and households that pay more
than 50 percent of household income on rent and utilities
have severe cost burdens.
1

www.philadelphiafed.org

CASCADE

No. 73
Winter 2010

CASCADE is published three times a year by
the Federal Reserve Bank of Philadelphia’s
Community Affairs Department and is available
at www.philadelphiafed.org.
Material may be reprinted or abstracted
provided CASCADE is credited. The views
expressed in CASCADE are not necessarily those
of the Federal Reserve Bank of Philadelphia or
the Federal Reserve System.
Send comments, address changes, and
subscription requests to Keith L. Rolland at 215574-6569 or keith.rolland@phil.frb.org.
COMMUNITY AFFAIRS DEPARTMENT
Kenyatta Burney
Senior Staff Assistant
215-574-6037
kenyatta.burney@phil.frb.org
Jeri Cohen-Bauman
Lead Administrative Assistant
215-574-6458
jeri.cohen-bauman@phil.frb.org
Andrew T. Hill, Ph.D.
Economic Education Advisor
215-574-4392
andrew.hill@phil.frb.org
Amy B. Lempert
Community Development Advisor and Manager
215-574-6570
amy.lempert@phil.frb.org
Erin Mierzwa
Community Development Specialist
215-574-6641
erin.mierzwa@phil.frb.org
Dede Myers
Vice President and Community Affairs Officer
215-574-6482
dede.myers@phil.frb.org
Harriet Newburger, Ph.D.
Community Development Research Advisor
215-574-3819
harriet.newburger@phil.frb.org
Keith L. Rolland
Community Development Advisor
215-574-6569
keith.rolland@phil.frb.org
Marvin M. Smith, Ph.D.
Community Development Research Advisor
215-574-6393
marty.smith@phil.frb.org
Brian Tyson
Research Assistant
215-574-3492
brian.tyson@phil.frb.org
John J. Wackes
Community Development Specialist
215-574-3810
john.j.wackes@phil.frb.org
Todd Zartman
Economic Education Specialist
215-574-6457
todd.zartman@phil.frb.org

Message from the
Community Affairs Officer
In former Federal Reserve Governor
Edward Gramlich’s book, Subprime
Mortgages: America’s Latest Boom and
Bust, he argued that housing policy
starts with rental housing. He felt the
subprime mortgage crisis grew in part
because rental housing had taken second place to homeownership. Today,
as millions of homeowners become
renters after foreclosure, Gramlich’s
words resonate.
In this issue of Cascade, we feature
various articles about rental housing. Because the median income of
renter households in Pennsylvania and
nationwide is about half that of homeowners, this is an important topic for
low- and moderate-income people and
communities. One article focuses on a
Fed study that explores the availability
and affordability of rental housing in
Pennsylvania. In this study, authors
Erin Mierzwa and Kathy Nelson, with
help from Harriet Newburger, quantified the number of lower-income
residents that need affordable rental
housing in each region of the commonwealth and assessed how the number
has changed over time. The complete
report is available on our website
at http://www.philadelphiafed.org/
community-development/
publications/special-reports/.
The foreclosure crisis has also generated several stories about rental
concerns, including renters’ rights and
the effects of having foreclosed properties in communities. Danna Fischer,
legislative director and counsel of the
National Low Income Housing Coalition, has written a great description
of the new federal law that protects

renters who are living in properties in
foreclosure. And Karen Black reports
on how different communities are
dealing with the increasing number
of purchases of foreclosed homes by
investor owners.
Although there are some negative
aspects to communities with absentee
landlords, it is important to note that
owners of small properties (one- to
four-family units) provide a large
percentage of all rental housing. How
to support smaller multifamily rental
housing properties and their owners
and tenants was the subject of a Federal Reserve conference in Washington, DC, earlier this year. This type of
housing is also the beneficiary of new
funding mainly through weatherization funds provided by the American
Recovery and Reinvestment Act of
2009.
The National Housing Trust describes
its efforts to ensure that federal weatherization funds are used to improve
the energy efficiency of subsidized
multifamily housing. A similar
program offered by the Pennsylvania Housing Finance Agency is also
described.
The need for more affordable rental
housing will not end, but we hope
these articles will provide you with
information to make a change in your
communities. More affordable rental
housing with lower energy costs is a
combination we can all support.

Pennsylvania’s Lowest-Income Renters Have the Greatest Needs
... continued from page 1

In a recent report, the Joint Center
for Housing Studies of Harvard
University noted that “after averaging just 0.7 percent annual growth
from 2003 to 2006, the number of
renter households jumped by 2.8
percent, or nearly 1 million, in 2007.
The growing number of renters must
now compete for the limited supply
of affordable housing, adding to the
long-standing pressures in markets
across the country.”2 The situation is
exacerbated by the mortgage foreclosure crisis, which, in addition to
forcing many previous homeowners
to become renters, also has implications for current renters.

Context for the Study
To provide some background, the
study explores rental housing characteristics in Pennsylvania and several surrounding states.3 In 2000, there
were 11.8 million Pennsylvanians
living in 4.8 million households. Of
all households statewide, 1.4 million,
or approximately 29 percent, were
renter households. There is a great
income disparity between owners
and renters throughout the state.
While this finding follows national
trends, it further emphasizes the
challenges that are faced by renters
as well as state and local policymakers in Pennsylvania.

Key Study Findings
The study Affordability and Availability of Rental Housing in Pennsylvania uses
two primary data sources to assess the housing needs of Pennsylvania’s
lower-income renter households: special tabulations from the 2000 census
that are called Comprehensive Housing Affordability Strategy (CHAS) data
and similar tabulations from the 2005 and 2006 American Community Survey (ACS). The study distinguishes renters in three lower-income ranges:
•

Extremely low-income (ELI) — less than or equal to 30 percent of HUDadjusted area median family income (HAMFI)

•

Very low-income (VLI) — between 30.1 and 50 percent of HAMFI

•

Low-income (LI) — between 50.1 and 80 percent of HAMFI

Following are key highlights of the study:
•

In 2000, more than 70 percent of ELI renter households in Pennsylvania
faced some type of housing problem: either a cost burden or a housing
unit problem (e.g., lack of plumbing or kitchen facilities or overcrowding). Renter households more frequently had cost burdens than housing
unit problems. Those with a higher household income had fewer housing problems.

•

In 2000, ELI renter households were most likely to have severe cost
burdens as well as shortages of affordable and available housing per
100 households in three different areas of the state. These areas included
the Northeast (where Monroe County faced a particularly great challenge), Centre County (home to Pennsylvania State University), and the
suburban counties of Philadelphia, particularly Chester, Delaware, and
Montgomery counties.

•

In absolute terms, the seven counties with the greatest shortages of affordable and available housing units for ELI renter households in 2000
were Allegheny, Bucks, Delaware, Lancaster, Lehigh, Montgomery, and
Philadelphia counties. Sixty percent of the state’s overall shortage of
rental housing units for ELI households was attributable to these seven
counties, and 42 percent of the state’s rental housing shortage came from
only two counties: Allegheny and Philadelphia.

•

Housing conditions and shortages became worse for ELI renters from
2000 to 2005–06. During this time, the total shortage of affordable and
available housing for ELI renters rose from approximately 170,000 to
220,000 rental housing units. In addition, at mid-decade, two out of
every three ELI renters had severe cost burdens.

In comparison to neighboring states
and to other areas of the country,
Pennsylvania has some particularly
...continued on page 14

Joint Center for Housing Studies of Harvard
University, “America’s Rental Housing: The
Key to Balanced National Policy,” (2008), p. 2.
2

Data in this section are from the 2000
Decennial Census at http://factfinder.census.
gov/home/saff/main.html.
3

Tenants in Foreclosed Properties Have New Rights

By Danna Fischer, Legislative Director and Counsel, National Low Income Housing Coalition, Washington, DC
The National Low Income Housing Coalition (NLIHC) estimates
that renters represent as many as 40
percent of the families who will lose
their homes in the foreclosure crisis.1
Tenants often have no idea that their
homes are in foreclosure and, until
recently, had no rights in most states
and could be evicted on short notice
— in as little as three days in some
places.2 On May 20, 2009, President
Obama signed into law the Protecting
Tenants at Foreclosure Act (PTFA).
Under the act, tenants in foreclosed
properties throughout the country
have at least 90 days after foreclosure
to find another place to live.

term.3 If the property is purchased
by someone who will occupy the
property, then that purchaser can
terminate the lease on 90 days’ notice. Tenants with Section 8 housing
choice voucher assistance have additional protections that allow them
to retain their Section 8 lease and
require the successor in interest to
assume the housing assistance payment contract associated with that
lease. These provisions will expire at
the end of 2012.

There are several key ideas and
terms that are important to understanding the PTFA. First, the PTFA
applies to all foreclosures on all
The new law requires the immediate
residential properties; traditional
successor in interest at foreclosure
one-unit single-family homes are
to provide bona fide tenants with 90
covered, as are multi-unit properties.
The law applies in
cases of both judicial and nonjudicial
Tenants often have no idea that their
foreclosures, and it
homes are in foreclosure and, until
applies even if the
foreclosure process
recently, had no rights in most states
in a given state
and could be evicted on short notice —
requires that known
in as little as three days in some places.
tenants be named in
the foreclosure, as in
Pennsylvania, or be
days’ notice before requiring them
notified of the foreclosure filing, as
to vacate the property and allows
in Delaware.
tenants with leases to occupy the
property until the end of the lease
Second, tenants with lease rights of

any kind, including month-to-month
leases or leases terminable at will,
are protected as long as the tenancy
was in effect as of the date of transfer
of the title at foreclosure.
Third, the 90-day notice to vacate
can only be given by the successor in
interest at foreclosure. The “successor in interest” is whoever acquires
the title to the property at the end of
the foreclosure process. It could be
the financial institution that held the
mortgage, or it could be an individual who purchased the property
at foreclosure. The 90-day notice to
vacate can only be given after the
foreclosure is complete, and the
title has transferred. Notices of the
pending foreclosure, while desirable,
do not serve as the 90-day notice
required by the PTFA.
Fourth, the relationship between the
PTFA and applicable state and local
law is important. The PTFA specifically indicates that it does not affect
“any state or local law that provides
longer time periods or other additional protections for tenants.”
Consequently, in states such as New
Jersey where there are strong tenant
protections and tenancies survive
foreclosure, the PTFA may provide
few additional protections.4 In other
states, the relationship between the

Danilo Pelletiere, NLIHC, “Renters in Foreclosure: Defining the Problem, Identifying Solutions,” January 2009, available at https://www2398.
ssldomain.com/nlihc/doc/renters-in-foreclosure.pdf.

2
National Law Center on Homelessness and Poverty and the NLIHC, “Without Just Cause: A 50-State Review of the (Lack of) Rights of Tenants in
Foreclosure,” February 25, 2009, available at http://nlchp.org/content/pubs/Without_Just_Cause1.pdf.
3
A bona fide lease or tenancy is one in which the tenant is not the mortgagor or a member of the mortgagor’s family, the lease or tenancy is the result
of an arm’s length transaction, and the lease or tenancy requires rent that is not substantially lower than fair market rent or is reduced or subsidized
due to a federal, state, or local subsidy. Note: Failure to pay rent or abide by other terms of the lease or law could be considered an independent
ground for eviction against which the PTFA does not provide protection.

The New Jersey Department of the Public Advocate has posted information on tenants’ rights in foreclosure at http://www.state.nj.us/
publicadvocate/public/issues/tenants_during_foreclosure.html.

PTFA and state and local law may
be more complicated; therefore, state
law should be examined to maximize
the protections available to tenants.
State and local law may also help
fill some of the gaps in the federal
law, such as the form (e.g., written
or oral) and delivery mechanism for
the 90-day notice (e.g., in person, by
mail, or by another method).
Implementing the PTFA provisions can be challenging. The law
was effective upon enactment, and
no federal agency is charged with
interpreting the law or with writing
regulations to enforce it. Because the
law is self-implementing, individual
tenants — if challenged — need to
be able to assert their rights. The
NLIHC has developed a toolkit for
renters in foreclosed properties.5 The
toolkit contains sample letters, copies of the PTFA, and other materials
designed to assist tenants and their
advocates in implementing the law
and protecting tenants’ rights.
Relying on individual tenants to assert their rights is a time-consuming
process. A better approach is for the
entities and institutions involved in
the foreclosure process — financial

institutions, lawyers, judges, and real
estate professionals — to recognize
and abide by the law. Advocates
at the local level should make area
courts and attorneys aware of the
law through letters and other contacts.

keys” programs that provide monetary assistance to occupants of foreclosed properties if the occupants
agree to leave in a specified period of
time, usually 30 days or less.8
While both the month-to-month
lease programs and “cash for keys”

All federally insured
or chartered financial
institutions have been
All federally insured or chartered
informed of the law and
financial institutions have been
instructed to comply
6
with it. If a financial
informed of the law and instructed
institution does not
to comply with it.
comply with the law, it is
important that advocates
identify the foreclosing
program are options that tenants
institution and hold it accountable
should consider, these options are in
for the outcome. Federal financial
addition to, and not a substitute for,
institution regulators have informathe rights provided under the PTFA.
tion on their websites that will help
Tenants should seek the advice of
identify the relevant regulator for
counsel before accepting options that
a foreclosing institution and help
conflict with their rights under the
tenants and advocates lodge a comPTFA.
plaint against the institution.7
Prior to creation of the PTFA, some
financial institutions and Freddie
Mac and Fannie Mae independently
developed programs to assist renters
in foreclosed properties to remain
in their homes and offered “cash for

For information, contact Danna Fischer
at danna@nlihc.org; www.nlihc.org.

The toolkit can be found at http://www.nlihc.org/template/page.cfm?id=227.

6
For regulatory agency guidance, see the Federal Deposit Insurance Corporation (FDIC) at http://www.fdic.gov/news/news/financial/2009/fil09056.
html; the Federal Reserve Board of Governors at http://www.federalreserve.gov/boarddocs/caletters/2009/0905/caltr0905.htm; the National Credit
Union Administration (NCUA) at www.ncua.gov/resources/regulatoryalerts/files/2009/09-ra-08.pdf; the Office of the Comptroller of the Currency
(OCC) at http://www.occ.gov/ftp/bulletin/2009-28.html; and the Office of Thrift Supervision (OTS) at http://files.ots.treas.gov/25319.pdf.
7
For information on the regulatory agency complaint process, see the FDIC at https://www2.fdic.gov/starsmail/index.asp; the Federal Reserve Board
of Governors at http://www.federalreserveconsumerhelp.gov/; the NCUA at http://www.ncua.gov/ (search by consumer complaints); the OCC at
http://www.helpwithmybank.gov/complaints/index.html; and the OTS at http://www.ots.treas.gov/?p=ConsumerComplaintsInquiries.
8
In November 2009, Fannie Mae introduced its Deed-for-Lease Program (D4L), which allows qualifying borrowers of properties transferred through
deed-in-lieu of foreclosure (DIL) to remain in their homes by executing a lease of up to 12 months in conjunction with a DIL. Investment properties that
are tenant-occupied may also be considered as long as the borrower is cooperative in providing information from the tenant to facilitate the D4L. For
details, see https://www.efanniemae.com/sf/servicing/d4l/.

Energy Renovations Help Preserve Rental Housing

By Michael Bodaken, President, and Todd Nedwick, Assistant Director, National Preservation Initiative,
National Housing Trust, Washington, DC
Stable rental housing will become
ever more important as the current
home foreclosure crisis unfolds.
Rental housing is a critical part of
any community’s healthy housing
mix because it ensures diversity,
opportunity, and a labor force for
essential community services.
Unfortunately, many affordable
apartments are at risk of being lost
from the affordable housing stock.
Many older properties are in need of
repair; however, owners do not have
the operating revenue to make muchneeded improvements. This cash
flow crunch is exacerbated by rising
energy costs. Many older properties,
which were built before current energy standards for new construction

financing, and real estate development. NHT was formed in 1986 in
response to the potential loss of
thousands of affordable apartments
due to expiring federal subsidies or
physical deterioration. The work is
guided by a 16-member board of
directors that consists of representatives of all major interests in affordable housing preservation.1

a nonprofit housing developer that
collaborates with local partners and
investors to raise capital to buy and
renovate affordable apartments that
are at risk of being converted to
market rate or that are deteriorating.
NHT/Enterprise has preserved and
improved nearly 5,000 affordable
apartments, including 188 apartments in Pennsylvania.

NHT has a long history of working
with federal and state policymakers
to create resources and capacities to
preserve subsidized and privately
owned affordable rental housing.
NHT currently works closely with
federal and state policymakers to
ensure that federal Weatherization
Assistance Program (WAP) funds are
available for subsidized
multifamily housing.

Meanwhile, the National Housing
Trust Community Development
Fund (NHTCDF), a community
development financial institution
(CDFI) operating since 1997, provides predevelopment and interim
development loans of $50,000 to
$500,000 for 24 to 36 months at below-market interest rates. NHTCDF
also offers a “green” loan product to
help developers incorporate practical, environmentally friendly design
elements when rehabilitating affordable housing.

Many older properties are in
need of repair; however, owners
do not have the operating
revenue to make much-needed
improvements.
were adopted, are energy inefficient.
Increasing operating expenses combined with limited revenues make it
very difficult for owners to maintain
their rental properties.

Efforts to Make Older Rental
Housing More Energy Efficient
The National Housing Trust (NHT)
strives to safeguard affordable apartments through policy advocacy,

The American Recovery and Reinvestment
Act (ARRA) included a
dramatic increase in WAP
funding for energy efficiency improvements in
housing occupied by lowincome households.2 Traditionally, WAP funding
has been mostly targeted to residents
of single-family housing. The dramatic increase in funding presents a
unique opportunity to support state
efforts to increase energy efficiency
and conservation in existing multifamily housing.

An NHT affiliate, the National Housing Trust/Enterprise Preservation
Corporation (NHT/Enterprise), is

NHTCDF has made 55 loans totaling
more than $10 million in 14 states
and the District of Columbia, helping preserve more than 5,500 affordable apartments and leverage more
than $460 million in private investment. Two of the loans total nearly
$900,000 and will be used to preserve
affordable housing in Elizabeth, NJ,
and Wilmington, DE.
NHTCDF has never suffered a loan
loss. Among other investors in
NHTCDF are the Bank of America in
Charlotte, NC, and SunTrust Bank in
Atlanta, GA.

The board includes Brian A. Hudson, Sr., executive director of the Pennsylvania Housing Finance Agency.

Funding for the WAP increased from approximately $250 million annually to nearly $5 billion to be spent over three years.

The Skyview Park Apartments in Scranton, PA, have been renovated with capital improvements that reduced energy use and conserved water.

Case Study:
Skyview Park Apartments
NHT/Enterprise, in partnership
with Evergreen Partners, a for-profit
real estate development company
based in Portland, ME, acquired
Skyview Park Apartments in Scranton, PA, and completed more than $8
million in renovations.
Built in the early 1970s, the facility
was constructed with financing from
two federal housing programs —
Section 236 and project-based Section
8 programs. By 2006, Skyview Park’s
affordability restrictions were set to
expire. Although almost fully occupied, the apartments were in dire
need of rehabilitation.
In July 2009, NHT/Enterprise reopened the property, which is home
to 188 low- and moderate-income
families and senior citizens. Before
and since the renovations, residents
have not had to pay more than 30
percent of their income toward rent
under the Section 8 program.

Skyview Park’s renovation project
sought to reduce energy use and
conserve water by installing Energy
Star–approved appliances and heating and air conditioning systems,
energy-efficient lighting, low-flow
toilets and faucets, and programmable thermostats. These improvements have already resulted in cost
savings for tenants and more stable
rental housing through lower operating expenses. A comparison of utility
costs during comparable six-month
periods before and after the renovation shows a 24 percent reduction in
expenses.
The support of many partners
made the preservation of Skyview
Park Apartments possible. The U.S.
Department of Housing and Urban
Development (HUD) approved a
20-year Section 8 contract. The Pennsylvania Housing Finance Agency
provided acquisition and rehabilitation financing through an allocation
of scarce low-income housing tax
credits and a soft loan through its

PennHOMES Program. Critical gap
capital was also provided by the City
of Scranton, Lackawanna County,
and the Pennsylvania Housing and
Redevelopment Assistance Program.
In addition, the Harry and Jeanette
Weinberg Foundation helped construct a community center.

Conclusion
Skyview Park demonstrates that
affordable multifamily housing can
be preserved and made more energy
efficient, sustainable, and sanitary
for low-income families while reducing energy expenses. NHT looks
forward to future opportunities to
preserve and improve affordable
rental housing in Pennsylvania, New
Jersey, and Delaware.
For information, contact Michael
Bodaken at 202-333-8931, ext. 111 or
mbodaken@nhtinc.org or Todd Nedwick
at 202-333-8931, ext. 128 or tnedwick@
nhtinc.org; www.nhtinc.org.

Do Land-Use Regulations Constrain
Rental Housing Development in Suburban Areas?
The recent meltdown in the housing
market not only has a deleterious impact on scores of homeowners who
lose their homes through foreclosure,
but it also has an adverse effect on
numerous renters who are displaced
when their building becomes a casualty of foreclosure. Many renters are
low- and moderate-income families
with limited options for alternative
housing within their price range. The
housing crisis has exacerbated the
existing concern about the adequate
availability of affordable rental units.
In addition to the stock of multifamily housing in urban localities, rental
units in suburban areas might possibly provide an additional source
of housing for those renters who are
forced to relocate. Moreover, access

Marvin M. Smith, Ph.D.,
Community Development Research Advisor

to the suburbs might provide the
doorway to improved employment
prospects, high-quality schools, and
better public amenities. However,
a concern has been raised that local
zoning and other forms of land-use
regulations are being used to curtail
the supply and increase the cost of
rental housing in suburban areas. In
a recent paper, Jenny Schuetz of City
College of New York investigated
this issue by focusing on several cities in Massachusetts.1 The following
is a summary of her findings.
Previous Studies
Schuetz pointed out that the literature is replete with theoretical and
empirical studies “on the effects of
zoning and land-use regulation on
land values, housing prices, and
housing supply” that cross several
disciplines (economics, public policy,
and urban planning). When it comes
to rental housing, the literature suggests that land-use regulations “contribute to lower levels of construction, higher rents, and a decrease in
the supply of low-cost, low-quality
rental housing that constitutes the
unsubsidized portion of the affordable housing stock.” However, the
author hastened to note that most of
the theoretical literature treats regulation as monolithic and does not
distinguish between rental and own-

er-occupied markets. In addition, the
empirical research “has paid little
attention to the difference between
formal ‘on-the-books’ regulations
and informal policies or variations in
implementation of regulations.”
Methodology
Schuetz examined the impact of
zoning and land-use regulations on
the rental market by studying the
local zoning and other forms of local
land-use regulations in 187 cities and
towns in Massachusetts as of 2004.
Since zoning ordinances seldom
make a distinction between owneroccupied and rental housing, the
author used zoning that was specific
to multifamily structures as a proxy
for regulation of rental housing.2
The author noted that there are numerous ways to regulate rental housing, but the most common means
used in Massachusetts are restrictions on the amount of land zoned
for multifamily housing, procedural
barriers to development (i.e., requiring a special permit), dimensional
requirements (i.e., minimal lot size),
and resident age restrictions (i.e.,
minimum age requirement — usually 55 — which restricts multifamily
housing to retirement community
development). Moreover, the state
has an affordable housing law that

1
Jenny Schuetz, “No Renters in My Suburban Backyard: Land Use Regulation and Rental Housing,” Journal of Policy Analysis and Management, 28:2
(2006), pp. 296–320.
2

Zoning ordinances traditionally “regulate development by use and structure type rather than tenure.”

allows builders to supersede local zoning, but it is rarely used for
rental/multifamily housing.
Schuetz indicated that the development of most multifamily housing
in Massachusetts requires a special
permit. However, single-family
structures are generally allowed “as
of right.” According to the author,
local government agencies and residents have considerable discretion
in issuing the required permits for
multifamily housing. Schuetz further
explained that the special permitgranting process can vary across
communities and may include any of
the following:
•

The process may be relatively
straightforward.

•

The process essentially results in
a negotiation between the local
government and the developer
over infrastructure upgrades or
design concessions in exchange
for granting the permit.

•

The complexity of the process
may discourage developers from
even applying for permits.

Since local jurisdictions have varying tools to regulate rental housing, the author was faced with the
challenge of measuring regulation
in a consistent and objective manner
across jurisdictions so as to permit
a systematic analysis of its effects.
To solve this dilemma, the author
“developed measures that reflect the
three dominant tools affecting rental

housing: the amount of land zoned
to allow multifamily housing, the
procedural requirement of special
permits, and the minimum lot size.”
Thus, for each jurisdiction used in
the analysis, Schuetz constructed a
measure of zoning that depended on
the regulation tool most relied upon
in the area. Then the author estimated a two-stage regression.
In the first stage of the regression analysis, Schuetz estimated three separate
equations that predicted the number
of lots zoned for multifamily housing
(1) “by right,” (2) by special permit,
and (3) by either process as a function
of historical municipal characteristics.3 In the second stage, the author
estimated “housing market outcomes
(number of permits, rents, and prices)
as a function of the predicted values of
regulation obtained from stage one, as
well as standard controls for housing
demand and supply.”4
Results
The author’s analysis revealed that
the “relationship between multifamily zoning and rental market outcomes is suggestive that regulations
constrain the development of new
rental housing, although the effect of
zoning on rents is less clear.” There
was a differential impact on the development of new multifamily construction when communities allowed
more potential multifamily lots by
special permit versus allowing lots
“by right.” In the former case, more
new multifamily housing was constructed, whereas in the latter case
there was a less significant effect on

new construction. The author noted
that the result pertaining to lots by
right is probably because the land
zoned for multifamily construction
is already developed to capacity.
However, “the results on rents are
more mixed; it appears that allowing more multifamily lots by right is
associated with decreased rents, but
the size of the effect is very small,
and there is no significant relationship between rents and multifamily
zoning by special permit.”5
According to the author, these
results do not bode well for the “likelihood that traditional demand-side
or supply-side subsidies will allow
lower-income households in the Boston area to relocate to more affluent
suburbs.” Consequently, low-income
households with Section 8 vouchers
(a demand-side program) will be
hard pressed to find low-cost housing to rent in the suburbs. Similarly,
while production subsidies (supplyside) might lower a developer’s cost,
the barriers to multifamily housing
will render them ineffective.6
New Developments
According to Schuetz, however,
there is reason for hope given Massachusetts’ adoption of two new laws:
Chapters 40R and 40S. These laws offer an alternative to the supply-side
versus demand-side conundrum.
They “offer local governments a variety of incentives from the statewide
Smart Growth Housing Trust Fund,
if the localities increase the density
allowed by zoning in designated
‘smart growth districts.’”

The characteristics used in the estimations are the housing density in 1940, a dummy variable for city council form of government, educational
attainment, existing stock of multifamily housing in 1970, and a dummy variable for Worcester (since it has a “population approximately four times
larger than the next largest community and allows roughly six times as many potential multifamily lots as the number allowed by the next in line”).

See the study for a list of the various controls for housing demand and supply.

5
The author notes that this is probably due to technical problems encountered when estimating the rental regressions. See the study for a discussion
of these complications.
6

This is particularly true since “most subsidies do not allow developers to override zoning restrictions on density and structure type.”

Strategies to Encourage Quality Rentals
By Karen L. Black, Principal, May 8 Consulting, Media, PA
Editor’s note: Based on research conducted by Karen Black and staff members of PolicyLink in Oakland, CA,
for the Northwest Area Foundation in
St. Paul, MN, this article explores the
impact of high rates of investor ownership on low- and moderate-income
neighborhoods in Minneapolis–St. Paul.
The report will be available in early 2010
at www.may8consulting.com and www.
policylink.org.
In the past five years, investors have
purchased unprecedented numbers
of foreclosed and vacant properties
in neighborhoods across the country. Most of these properties will be
used as rental properties until the
real estate market recovers. Over the
past five years, real estate investors
bought more than one of every five
homes for sale, and nearly 60 percent
of these buyers bought single-family
homes for the purpose of providing
rental income.1

ing, or holding the property without
further investment until market
prices rise dramatically. Municipalities are concerned that poorly maintained properties and the addition of
a significant number of rental units
will destabilize owner-occupied
neighborhoods.

•
Municipalities can use three key
strategies to encourage responsible
ownership of distressed properties: (1) encourage homeowners or
responsible investor owners to buy
distressed properties; (2) strategically gain control of foreclosed properties when feasible; and (3) hold
foreclosed property owners accountable for property conditions.

Strategy 1: Encourage homeowners
or responsible investor owners to
buy distressed properties.
Interested homeowners are reporting that they are unable to compete
for distressed properties that investors can
purchase in cash and
Over the past five years, real estate
in bulk. In addition,
investors bought more than one of
homebuyers with
good credit are havevery five homes for sale, and nearly
ing trouble obtaining a
60 percent of these buyers bought
mortgage due to strict
single-family homes for the purpose
underwriting standards for purchasing
of providing rental income.
a foreclosed property
sold in “as is” condition.2 To overcome
some of these challenges, interested homebuyers can
While some investors are maintainlearn more about government incening and improving these properties
tives. Government incentives can
to ensure long-term property aphelp interested local buyers to better
preciation and rental income, other
compete with larger investor buyers
investors are making only cosmetic
in the following ways:
repairs and then are reselling, rent-

•

Help qualified homeowners to
obtain mortgage financing. For
example, the State of Arizona
provides zero percent interest,
forgivable loans to help buyers
with incomes of 120 percent or
less of the median income to
purchase foreclosed homes.
Offer a grant or tax credit to encourage homeowners to occupy
the properties. In 2009, Georgia
offered a three-year $1,800 tax
credit for homebuyers who purchased a single-family home.
Offer loans or grants to trusted
developers to acquire and
rehabilitate homes for low- and
moderate-income homebuyers
or renters. Sacramento, CA, offers
no-interest loans and a $30,000
grant to developers who buy
and rehabilitate vacant homes
and then resell them to low- or
moderate-income families.
Work with nonprofits to transform foreclosed properties into
affordable housing. A Sarasota,
FL, program, funded by HUD’s
Neighborhood Stabilization Program, gives nonprofits $10,000
for every foreclosed home acquired, fixed, and sold or rented
to income-eligible families.
Encourage nonprofits to offer
lease–purchase agreements but
regulate their terms to protect
the buyers.

Strategy 2: Strategically gain control of foreclosed properties when
feasible.
Municipalities, in conjunction with
local governmental authorities, community land trusts, and community
development corporations, can put

Source: 2009 National Association of Realtors Investment and Vacation Home Buyers Survey; based on 1,924 responses.

See the 2009 Survey of California Home Buyers, California Association of Realtors press release, July 7, 2009, available at http://www.car.org/
newsstand/newsreleases/.

foreclosed properties in responsible
hands by taking the following steps:
•

•

Purchase and rehabilitate
individual properties and
resell them to homeowners. In
2009, Los Angeles established
a nonprofit holding company,
Restore Neighborhoods LA, to
swiftly acquire, rehabilitate, and
sell properties; the company focused on single-family and small
multifamily bank-owned properties with extensive rehabilitation
needs.
Negotiate with lenders to
obtain the first option to buy
foreclosed properties. The National Community Stabilization
Trust launched the “First Look”
Program to coordinate the transfer of real estate owned properties from financial institutions,
such as Citi and Fannie Mae, to
local housing organizations and
governments for an adjusted
purchase price.
Establish or use an existing
land bank to hold and maintain
properties until responsible
buyers can be identified. In May
2009, Cuyahoga County, OH,
started a land bank to manage
35,000 unoccupied properties in
Cleveland and the surrounding
suburbs. Cleveland’s existing
land bank is restricted to holding
land without structures.
Establish or use an existing
community land trust (CLT)
to ensure that homes remain
affordable for multiple generations. In July 2008, the Rhode
Island Community Housing
Land Trust and two community development corporation
partners began to purchase and
rehabilitate foreclosed properties in the city of Providence and
place the properties into a CLT.
Encourage mortgage lenders
and servicers to donate foreclosed properties that lack
sufficient value to be profitable.

In Cleveland and Chicago, Bank
of America is evaluating properties for demolition and donation
of the lots to the respective cities
in exchange for waiver of any
outstanding fees.
Strategy 3: Hold owners accountable for property conditions.
Municipalities can take the following steps to prevent properties from
being neglected:
•

•

Pursue vigilant proactive enforcement of the local property
maintenance code. In St. Louis,
MO, the Problem Properties Unit
visits 4,000 distressed properties each month based on citizen
complaints and then bills the
owner $97 for each visit. When
owners are unresponsive to citations, the city fixes the violations
and bills the owner.
Require owners to register
properties and set a rehabilitation timeline. The City of Chicago requires all vacant property
owners to register within 30
days of the vacancy and provide
the name of an authorized local
agent. Minneapolis, MN, law requires an owner to pay a $2,000
deposit on a vacant property and
obtain a rehabilitation permit
within 60 days of purchasing a
vacant property.
Encourage states and municipalities to pass laws that
impose fines and criminal
penalties for repeated property
maintenance code offenses and
work closely with prosecutors,
municipal attorneys, and judges
on enforcement. Pennsylvania
made it a misdemeanor to fail to
correct repeated property maintenance code violations.
Require sellers and buyers, as a
condition of sale, to guarantee
that vacant city buildings will
be brought up to code and occupied. The City of Saint Paul,
MN, imposes requirements for

•

the sale of registered vacant
buildings. Owners of vacant
properties that are declared a
nuisance must make improvements before they can sell the
property. Owners of vacant
properties that are secured but
deemed uninhabitable must submit a code compliance inspection report, an estimate from a
licensed building contractor for
the code compliance repairs, a
signed statement by the buyer
giving a date or timeline for the
completion of all code compliance work, and proof of financial capability to complete the
required work.
Establish or use a housing
court to hold unresponsive
absentee owners accountable.
Cleveland’s Housing Court fines
absentee owners $1,000 a day if
they fail to appear.
Raise vacant property owners’
property tax. Louisville, KY,
requires owners to pay triple the
amount of their normal property
tax bill if buildings have been
unoccupied for at least one year
and are unsanitary, not properly
boarded up, or unfit for human
habitation.

Conclusion
Some investors are buying distressed
properties at historically low prices
largely for cash, are renting rather
than immediately selling the properties, and are evaluating whether
to perform needed rehabilitation to
bring the properties up to code. Municipalities can take steps to protect
their neighborhoods from the negative impact of negligent owners and
provide incentives to attract responsible investors and renters to re-use
vacant and foreclosed properties as
low-cost housing.
For information, contact Karen L. Black
at 610-891-8260 or kblack@may8consulting.com.
11

Smart Rehab for Rentals

By Keith L. Rolland, Community Development Advisor
The Pennsylvania Housing Finance
Agency (PHFA) has launched a new
program — Preservation Through
Smart Rehab (Smart Rehab) — to
provide rental property owners with
funding to reduce utility costs and
adopt energy conservation measures.
PHFA explained that ongoing
maintenance of rental housing is
strained by the rising costs of property operation (e.g., utilities, insurance, taxes, and other fixed costs),
while tenant rents and incomes are
stagnant and declining. In addition,
utility deregulation in Pennsylvania
in 2010 is expected to increase utility
costs by 30 to 50 percent.
Smart Rehab provides grants, loans,
or a combination of both, depending on the project’s financial needs
and different criteria of the program’s funding sources. The sources

include the American Recovery and
Reinvestment Act (ARRA) of 2009,1
PHFA’s PennHOMES Program,
USDA Rural Development, and the
MacArthur Foundation.
Eligible properties have 50 percent
or more of the units occupied by
people who have incomes equal
to or less than 60 percent of area
median income.2 The other requirements are that rehabilitation needs
cannot exceed the amount of funding available through the program
and that rehabilitation costs cannot
exceed $500,000 per project. Rehabilitation should have a payback of
10 years or less.
Participating owners must obtain a
comprehensive energy audit conducted by a PHFA-approved energy
auditor. PHFA and the owner determine the scope of the work and develop plans and specifications with

the auditor. PHFA provides project
oversight during construction, is the
disbursing agent for project funding,
and monitors energy consumption
and costs after improvements are
made.
A predevelopment fund is available
for projects owned by nonprofits.
The fund provides loans of up to
$20,000 for six to 12 months at 4 to
5 percent interest to secure architectural and engineering services
for project design and specifications
based on recommendations of the
energy auditor.
Brian Shull, senior development
officer at PHFA, said that since the
program started in February 2009,
115 applications involving 8,300
units had been filed and that energy audits had been started on 77
developments involving 5,700 units.
He said the program has the potential “to have
a significant
impact across
the state.”
For information,
contact Brian
Shull, senior
development officer at PHFA at
717-780-3909 or
bshull@phfa.org;
www.phfa.org.

Pennsylvania is receiving $252.8 million in ARRA-related Weatherization Assistance Program funds. The funds are distributed to PHFA and other
agencies through the Pennsylvania Department of Community and Economic Development.

Occupancy must be maintained on this basis during the 10-year term of program funding.

Preserving the Small Rental Housing Sector

By Matt Lambert, Senior Community Affairs Analyst, Federal Reserve Board of Governors, Washington, DC
Editor’s note: The Federal Reserve Board
of Governors held a series of meetings
this year with industry experts and
other stakeholders to focus attention on
the challenges faced by renters. One of
these forums highlighted the importance
of small multifamily rental properties
(two to 50 units) and outlined options to
preserve and improve this vital sector.
Small multifamily rental properties
are a crucial and often overlooked
part of America’s rental housing. These properties, made up of
duplexes, triplexes, and other small
buildings, are home to more than
two-thirds of all renters. About 70
percent of lower-income renters live
in small multifamily rental properties, which are primarily privately
owned and are concentrated in the
northeastern part of the nation.1
Small rentals are often family owned
and are largely self-managed. Management and maintenance functions
are often performed on a part-time
basis by landlords who live in the
buildings.
Challenges Faced by the Small
Rental Property Sector
The small rental property sector faces a number of challenges, many of
which are being exacerbated by the
current housing crisis. The largest
of these challenges consists of major
inventory losses due to deterioration
and lack of replacement. More than
half of small rental buildings are
over 30 years old, and much of the
inventory is in need of substantial

repair. Small
rental properties have
much higher
inventoryloss rates
than other
types of real
estate. Many
units are
located in
distressed
areas with
high rates of
foreclosure
and abandonment.
Foreclosure
of small rental properties negatively
affects the tenants in the building as
well as the owner. New rental properties are not being built.
Production of new small rental
properties has declined significantly
over the past few decades.2 Much of
the housing production market has
focused on new single-family houses
or larger multifamily rental buildings. Public programs favor larger
rental projects, and local land-use
ordinances often prohibit this type
of construction. With these and other
barriers, it is easier to build singlefamily or large apartment building
housing. Therefore, small rental
properties do not get replaced.
Many individual owners do not have
the resources to preserve and improve small rental properties. These

properties generally generate less
operating income than other types
of rental housing. In addition, rent is
often not sufficient to cover the costs
of upkeep, especially given the deferred maintenance costs and energy
inefficiencies often associated with
this older stock. Owners are often
burdened with heavy debt loads and
high property taxes.3 Added to these
issues are local regulatory requirements that significantly add to the
cost of rehabilitation, often making it
an unattractive option for owners.
Another difficulty in preserving
small rental units is the limited
number of financing tools available
for this sector. The cost of obtaining
capital for construction or repair is
often significantly higher than for
larger buildings. This discrepancy is
due to differences in scale, uncertain-

1
William Apgar and Shekar Narasimhan, “Enhancing Access to Capital for Smaller Unsubsidized Multifamily Rental Properties,” Joint Center for
Housing Studies, March 2007.
2

Alan Mallach, “Small Rental Properties: A Case of Malign Neglect,” presentation to the Federal Reserve Board of Governors, April 28, 2009.

ty about management, unclear resale
values, and deteriorating property
conditions.

Options for Preserving Older
Multifamily Rental Properties
Some options exist for retaining this
housing stock. One idea is the provision of training programs for landlords to help educate owners about
responsible and efficient management practices and resources. Another idea is to encourage the repair
of properties by reforming local rehabilitation ordinances. A third idea,
which would benefit localities, is the
creation of a central local database
that provides details about property
conditions. Such a database would
enable localities to target limited resources for maximizing preservation
of small rental properties.
Investment incentives are needed to

stimulate the construction and preservation of small rental properties.
Fostering new investment would
likely require public subsidies.
Undoing local regulatory barriers
for this type of construction would
also be necessary in many locations
where Not in My Backyard (NIMBY)
rules have thwarted efforts to preserve and increase rental supply.
A real estate investment trust (REIT)
may help expand access to capital for
the small rental sector.4 In this model, owners would be able to trade
their individual properties for shares
in the REIT. Aggregation into a pool
structure would create sufficient
scale to lower costs, improve property management, and access federal
resources. Perhaps most important,
this structure would lower the cost
of capital (to the levels received by
larger apartment owners) so that the

REIT would have access to better
terms on debt. The REIT would also
create an equity source that could be
used to foster construction of new
rental units.

Conclusion
Rental housing is more vital than
ever given that the housing crisis
has exacerbated what had been an
already large affordability gap. Demand for rental housing will increase
in coming years. The population is
projected to surge 33 percent by 2030.
As a result, there will be increasing
pressure to accommodate this population growth in a fiscally and environmentally sustainable manner.5
Small rental properties will serve
an increasingly vital role in providing affordable market rate housing.
Using available policy options could
help this at-risk housing sector.

Shekar Narasimhan, “Panel: The Critical Role of Smaller Rental Properties,” presentation to the Federal Reserve Board of Governors, April 28, 2009.

Doug Bibby, “A New Housing Policy: Making the Case for Rental Housing,” presentation to the Federal Reserve Board of Governors, April 28, 2009.

Pennsylvania’s Lowest-Income Renters Have the Greatest Needs
... continued from page 3

challenging housing characteristics.
Most notably, the state has:
1.

An older rental housing stock
— Over two-fifths of the rental
housing units were built before
1950.

An older renter population
— One-fifth of renter heads of
household are age 65 or older.

Small rental structures — Over
60 percent of renter-occupied
units are in one- to four-unit
structures.

Implications for Policy
The study offers a valuable methodology for quantifying rental housing needs from current data. State
and local policymakers can use the
data provided in this study to help
develop local rental housing strategies. A key finding of this study is
that rental housing markets within
Pennsylvania differ markedly in the
extent of the shortage of units that
are affordable and available to ELI
and very low-income renters, as well
as in vacancy rates and population
growth trends. This finding reinforces the importance of choosing

strategies that are sensitive to local
housing market conditions.
As highlighted in the study, shortages of affordable and available
housing units do not always imply
that additional units must be built
because, in many cases, providing
rental assistance could enable renters
to rent another unit affordably or to
better afford their current unit. In
some parts of Pennsylvania, the use
of vouchers or other rent subsidies
may be sufficient to address most
affordable rental housing needs. In
other areas of Pennsylvania, expand-

ing the affordable rental housing
supply may be warranted.

Severe Cost Burden Incidence for ELI Renter Households
a
by Consolidated PUMAs in 2005-06

This study concludes by offering the
following questions to help state and
local policymakers develop effective
local housing strategies:

ERIE

CRAWFORD/WARREN

PIKE/SUSQUEHANNA/WAYNE

BRADFORD/SULLIVAN/TIOGA

CAMERON/ELK/MCKEAN/POTTER

LACKAWANNA/WYOMING

CLARION/FOREST/VENANGO
LYCOMING

•

MERCER

To what extent do units that are
determined to be affordable and
available actually meet the needs
of the local lower-income renters
who require affordable housing?

COLUMBIA/LUZERNE

BUTLER
BEAVER/
LAWRENCE

•

How will policymakers address
the rental housing needs that
have resulted from the mortgage
foreclosure crisis?

Regardless of the ultimate decisions
that are made to address rental
housing needs for the lowest-income
renter households, this study provides policymakers with solid data
about the affordability and availability of rental housing throughout
Pennsylvania. To see the report, go
to http://www.philadelphiafed.
org/community-development/
publications/special-reports/.

ARMSTRONG/INDIANA

CARBON/
LEHIGH

MONTOUR/
NORTHUMBERLAND
SCHUYLKILL

CLINTON/JUNIATA/MIFFLIN/
SNYDER/UNION

NORTHAMPTON

DAUPHIN
BLAIR

LEBANON

WESTMORELAND

BERKS

BUCKS
MONTGOMERY

CUMBERLAND/PERRY

GREENE/
WASHINGTON

BEDFORD/FULTON/HUNTINGDON

FAYETTE

LANCASTER

CAMBRIA/SOMERSET
ADAMS/FRANKLIN

YORK

CHESTER

PHILADELPHIA
DELAWARE

Severe Cost Burden Percentages

Are the units that meet basic
quality standards and are currently affordable and available
to lower-income renters likely to
remain so in the future? This is a
two-part issue: These units must
be preserved both physically and
as affordable housing.
When a local housing strategy
includes an increase in rental
housing supply, is local planning capacity sufficient to take
advantage of these opportunities
and meet the challenges?

CENTRE

ALLEGHENY

What is the quality of the rental
housing stock that is affordable
and available to lower-income
households?

•

MONROE

CLEARFIELD/JEFFERSON

41% - 50%

71% - 80%

51% - 60%

81% - 90%

61% - 70%

91% - 100%

PUMAs (public use microdata areas) are the smallest geographical areas identified in
the American Community Survey microdata. They are special nonoverlapping areas that
partition a state, each with a population of at least 100,000. State governments drew the PUMA
boundaries at the time of the 2000 census.
a

No consolidated PUMAs fall in the range of 61-70 affordable and available units per 100 ELI
renter households in 2005-06.
b

Source: Federal Reserve Bank of Philadelphia. The calculations are based on 2005 and 2006
American Community Survey data.

CASCADE

PRESORTED STANDARD

Federal Reserve Bank of Philadelphia
100 N. 6th Street
Philadelphia, PA 19106-1574

U.S. POSTAGE PAID
Philadelphia, PA
PERMIT No. 529

ADDRESS SERVICE REQUESTED

RETHINK.
RECOVER.
REBUILD.
REINVENTING OLDER COMMUNITIES

SAVE THE DATE
May 12-14, 2010
Hyatt Regency Philadelphia at Penn’s Landing
Philadelphia, PA

Join us as we consider reinventing our communities in the wake of the subprime
foreclosure crisis and the economic stimulus funding provided by the federal
government. This biennial conference brings together leading practitioners,
academic researchers, and policymakers.

Artist: D.S. Gordon; Commissioned by the City of Philadelphia Mural Arts Program.
For more information, visit http://www.philadelphiafed.org/community-development/
events/reinventing-2010/.

Full text of Cascade (Federal Reserve Bank of Philadelphia) : Cascade, No. 73

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