Last week the Salem Lafayette houses in Bergen Lafayette got a new owner, Camber Property Group. Self described as “an emerging leader in New York City mixed income and workforce housing development,” I seized on the opportunity to interview its Principal, Rick Gropper and find out what all the fuss was about. Affordable housing is as hot a topic as there is in Jersey City.
Some will remember that in September the project was the site of a police-involved shooting. The sprawling apartment complex is located at 21, 25, 27, 31 and 33 Monticello Avenue; 4 and 8 Madison Avenue; and 834 and 838 Grand Street.
Here’s the interview.
AM: Can you tell us a little bit about your company and your background?
Gropper: Sure. Camber Property Group was founded in 2016, primarily to focus on affordable housing. My background, and my partner Andrew Moelis’s background, is in affordable housing in New York City. That’s kind of like the starting point. And one thing that we’ve done for our whole career is look for innovative solutions to problems. And one problem that we’re trying to solve is how to preserve and create new affordable housing for people who need it the most. That’s kind of the stepping-stone on which we founded the company and have grown it. So, how can we do affordable housing better? How can we think about developing communities that people feel a part of and feel proud of to call their home? Over the past four, almost five, years we’ve bought almost 6,000 units of affordable housing and developed housing throughout the city. And in each of those communities, we’ve kind of applied that approach to the development, the construction, the ownership, and are thrilled to bring that to New Jersey. I actually, I grew up in New Jersey.
AM: So, when you say the city, you’ve done most of your work in New York City, is that correct?
Gropper: Yes. Of the nearly 6,000 units that we’ve built and acquired the vast majority are in New York City. A small portion are on Long Island.
AM: And tell me what brought you and your partner, Andrew, to this business? What was your background? What was Andrew’s background?
Gropper: My background is in sociology and economics. And from there I went to grad school for real estate development. Andrew’s background is similar. And I think both of us were drawn to the field because we’re able to bring skills to bear, to solve a common problem that improves the common good, that creates a common good, which is affordable housing for people who need it the most. And I think our backgrounds and the age of our company is such that we can bring our energy and creative approach and an innovative approach to the development and acquisition of affordable housing.
AM: Let me ask you about that. What makes you a different kind of owner of Section 8 housing from the prior owner or from your typical owner?
Gropper: The prior owner of Salem, Lafayette Apartments did a great job in owning the asset. And they really have over the past 20 years done an extraordinary job of maintaining it as one parent. Camber brings an innovative approach, and that means combining financial engineering and financial solutions with design and ownership solutions to engineer a capital stack that introduces private equity in this acquisition.
We introduced private equity with conventional debt, and that’s something that’s relatively new to affordable housing. So, we have long-term investors in this transaction. So, our plan is to own it for the long term and to add technology to the building so we can manage it. We can assure that it’s as environmentally sustainable as possible using the latest technologies, sensors, computer programs for the heating system, LED light fixtures and reduce the carbon footprint of these buildings and do that in a way that really improves the value of the asset and impacts the quality of life for the residents.
AM: And can you tell us how a typical renter at Salem Lafayette would see a difference once you take over?
Gropper: When we take over, we’re planning to roll out online bill payment and online work order processing. And our management company will track the work orders to make sure that the building staff is on top of all of the physical conditions, that that repairs are completed in a timely fashion, and that the residents are satisfied with the work that has been completed. We’re also going to be undertaking a capital improvement program at all of the buildings to improve energy efficiency. So, we’ll install LED light fixtures and low flow plumbing fixtures where they don’t exist already. And we’ll be adding laundry rooms as well as improving the common areas of the buildings.
AM: Can you be more specific?
Gropper: Sure. When we acquire new buildings, we look to install common amenities in under-utilized spaces of the buildings. So, we’re planning to create a new community room at one of the buildings. We’re also planning to repurpose outdoor spaces where it’s possible to create new courtyards for residents to enjoy.
AM: You mentioned ownership structure. For those of us not familiar with how Section 8 housing is usually owned, how is bringing in private equity different from the normal ownership structure?
Gropper: So, Section 8 housing has been traditionally created using debt. In addition to that, there are some transactions that combine debt with tax credit equity. And one of the things that we’ve done over the past years has been introduce private capital into the ownership of Section 8 buildings. So, with Section 8, HUD pays a market rent. The tenants pay 30% of their income towards rent, and from an investor’s perspective it’s a very safe, de-risked cash flow. From a tenant’s perspective and an owner’s perspective, it’s great because it provides security. So if a tenant were to lose their job, HUD picks up that share of the rent. If a tenant’s income is $0 because they lost their job, HUD pays the whole rent. So, it’s a great safety net for the residents. And it ensures that no resident is paying more than 30% of his or her income towards rent. From an owner’s perspective it is a very safe investment, and that has attracted investors to Section 8 housing. In contrast, traditional Section 8 housing is created using public funds or quasi-public funds.
AM: So we think of private equity as wanting to get a large return on their investment. What do you say to people who would hear that private equity is involved and say well, they’re going to be milking this for all they can to get outsized returns?
Gropper: Over the past 10 or so, years, there’s been a shift within real estate and private equity towards impact investing where institutional investors are interested in putting their money into affordable housing, where they’re getting a risk-adjusted return. Knowing that affordable housing is a relatively safe investment, that it sustains downturns. And at the same time, they’re contributing to a social good. So, they are allowing people like us to buy affordable housing, to improve it, to responsibly own it, and also to make a reasonable risk-adjusted return on their investment. So, from that perspective, it’s a win-win because you have institutional-grade investors who have a significant amount of capital to put into these assets, and we’re able to buy, to preserve, to create, units of affordable housing throughout the area and package those together.
AM: What would you tell investors that their risk-adjusted return might be if you can share that on something like this.
Gropper: On an investment like this, in our case we have long term capital that is realistic on what their return requirements are. Investors are willing to put money in for the long term knowing that it’s a very safe investment. So, they are doing better than stocks and bonds. But they also don’t have that same risk as a market-rate apartment in New York City especially in light of the COVID pandemic.
AM: So, it might be higher than what they could expect from the stock market, which has traditional yielded 7 to 8%. They might be able to do a little better than that, but they wouldn’t be making the returns that they might make on an investment in luxury rental units somewhere. Is that fair to say?
Gropper: I think you can look at affordable housing using a baseball analogy. You’re generally hitting singles and doubles and doing that in a way that contributes to the social fabric, the social good.
AM: Is this considered an ESG (environmental, social and governance) investment for them?
Gropper: Exactly. Investment in affordable housing broadly falls into the ESG category.
AM: Now let’s talk about Jersey City specifically. What interested you in or brought you to Jersey City?
Gropper: So, Jersey City has been interesting to us for a good number of years. It’s got many of the same characteristics as New York City. It’s got vibrant culture, arts, entertainment, shopping food, while also, having outdoor space and being able to access the other parts of New Jersey that are so great. And as I mentioned before, I grew up in New Jersey. So, it is nice to be able to do business in my home state.
AM: And how were you put in touch with this particular project?
Gropper: We were made aware of this opportunity through a relationship that we have. The owner of the property was looking to exit this investment and move on to other transactions.
AM: Tell me, what is the profile of your average tenant at Salem Lafayette? Is there any sort of typical tenant there?
Gropper: We haven’t had an opportunity yet to meet many residents of the buildings because we just closed on the transaction. We look forward to meeting everyone. The tenant base includes families and some individuals. But it’s mainly people who have lived in the buildings for a long time. And that is typical of the buildings that we buy in this space. You generally see minimal turnover from year to year, especially in buildings that are managed well and owned.
AM: What are the eligibility requirements for this Section 8 housing?
Gropper: For Section 8 housing residents have to income qualify. They have to earn under 50% of the area median income to move into the building. There’s a waiting list and the rent is set as a percentage of their household income. So, the rent that the tenants pay is no more than 30% of their household income, and HUD pays the difference. So, in the event that something unfortunate happens, it could be a resident who loses their employment, then that rent that the tenant pays is adjusted accordingly. So, if the tenant gets a pay increase, the rent will be adjusted. Conversely if the tenant either loses their job, or for whatever reason doesn’t make that same amount of money, then the following year there will be a downward adjustment in the tenant’s share of the rent. So, Section 8 is really a great asset to every community and it is even more important given the economic uncertainty following COVID.
AM: Now, you mentioned that there’s a waiting list. In your view as an owner and manager of Section 8 housing, do you see a way to build more of this type of housing?
Gropper: Section 8 housing is a very important resource for the entire country. Tenants sometimes have their own Section 8 voucher that they bring to a building. There are also, buildings such as this one that has a Section 8 contract attached to it. And we are looking to build more housing using that Section 8 resource. It’s especially important to build more Section 8 senior housing since seniors are on a fixed income. This population is underserved in the affordable housing world. So, the more senior affordable housing that we can create, the more opportunity for people who are of lower means, people who are retired and can age in place and afford to pay the rent.
AM: Is there an opportunity in Jersey City for you as a new investor to build more?
Gropper: There’s absolutely an opportunity. And some of our colleagues are here and have broken ground I believe on a few affordable housing projects that were RFP’d (request for proposal) by the city. So, I think there’s definitely an opportunity. The market in Jersey City has been very strong over the past years. And I think that there’s a need to provide affordable housing to protect the residents who have lived in Jersey City for decades and also to welcome new residents to Jersey City that are in need of housing at a reasonable rent.
AM: I think in some people’s minds there will be some skepticism as to how much you, as a company that’s seeking to make a return for its investors can actually invest in the property, and how much in the way of services you can provide, if you’re at the same time, trying to make a healthy profit for your investors. What do you say to that?
Gropper: I think with long-term capital that is realistic about the return that it expects for this type of a safe investment, you can both get to a reasonable risk-adjusted return and do right for the community, and for the residents of these buildings. I think we’ve shown that over the past years that we’re responsible and resident-focused owners and developers of affordable housing, that we make real contributions to the communities in which we serve and to the residents of the buildings that we own, and that we operate the properties in a way that improves the quality of life of the residents, but also allows us to continue buying buildings and doing what we do best.
AM: What are your priorities when you close on this transaction or when you actually assume control?
Gropper: So, we closed on the transaction on Friday, just a few days ago. Our priorities when we come into any new building is to meet the residents, to understand the priorities of the people who have been living in the buildings for decades, and over time to make improvements to the common areas of the buildings and to the apartments and to address any deferred maintenance — to bring to the residents our philosophy of being responsible operators and hands-on owners of affordable housing.
AM: I assume there’s a regulator that sort of looks over your shoulder to make sure that the property is being well maintained and that you’re living up to certain agreements that you have with the federal government. Would that be right?
Gropper: Yes. So, the Section 8 contract is provided by HUD, which stands for Housing and Urban Development, a federal agency. There is a lot of regulation that’s associated with affordable housing, and there are different types of regulation. In this case with HUD, we have ongoing reporting requirements. So, we provide financial information to HUD about our income, our expenses, and ongoing capital needs of the project. Then there are also, physical condition inspection requirements where HUD, every few years, evaluates each Section 8 property on a myriad of characteristics and scores each property. And in order to continue to own and operate Section 8 housing, you have to meet both a bookkeeping standard and a physical standard.
AM: And how have your buildings in New York City done when reviewed by HUD or by whatever the authority was that was regulating you?
Gropper: Our buildings in New York City have all fared very well when reviewed by HUD and also when reviewed by the local agencies with jurisdiction over the properties. And we’ve taken over some very distressed properties from long-term owners and have really turned those around. One in New York City that we closed on in December 2018 was the acquisition of 720 apartments from the New York City Housing Authority in what’s known as a “Rental Assistance Demonstration” or “RAD” transaction. And we’re now at the tail end of that renovation and have really, I think, made a very dramatic and transformative impact on the properties where we invested about $80 million in the renovation of these buildings. We replaced kitchens and bathrooms and façades, mechanical systems, electrical infrastructure. And I think we’ve done this type of work throughout New York City, where I think we now have a track record of coming into distressed opportunities and really turning the buildings around and doing right by the residents of the buildings and the communities in which we work.
AM: Wow. Well, that’s everything I always wanted to know about Section 8 housing. That’s a great primer. Is there anything you want to add that I didn’t touch on?
Gropper: Just that we’re thrilled to be in Jersey City and look forward to being good neighbors and good owner owners of this important complex.