Ep. 109: The Renter Wealth Creation Fund with Chris Herrmann

Enterprise Community Partners has been running a renter wealth-building program since 2022. How’s it going? And what comes next?

Show notes:

• Enterprise Community Partners’ Renter Wealth Creation Fund website.
• The Renter Wealth Creation Fund term sheet.
• UCLA Housing Voice episode 108: Building Wealth by Renting with Shane Phillips and Bob Simpson.
• Phillips, S. (2025). Building Renter Wealth: An Evaluation of Shared Prosperity Rental (SPR) Housing Program Design and Feasibility. UCLA Lewis Center for Regional Policy Studies.
• Executive summary for the SPR report.

Transcript

Shane Phillips 00:00:05
Hello, this is the UCLA Housing Voice podcast, and I'm your host, Shane Phillips. 

As promised, we are back with another conversation on renter wealth building, an idea with the goals of closing the wealth gap between renters and homeowners and transforming renting into something that builds economic security. In this episode, we are moving from the abstract concepts and evaluations in my report on Shared Prosperity Rental Housing, which we covered last time, to a real-world program that's been running since 2022. That program is the Renter Wealth Creation Fund, which is operated by one of the largest community development organizations in the nation, Enterprise Community Partners, and which is led by our guest, Chris Herrmann. 

The Renter Wealth Creation Fund offers tenants in participating buildings a combination of monthly cash back, resident services, and profit sharing based on property value appreciation. So far, they have raised more than $100,000,000 in equity and acquired more than 1,200 units in communities ranging from Inglewood, California to Columbus, Ohio to Newark, New Jersey. One of the things that makes their model particularly interesting is its focus on preserving deed-restricted affordable housing for households under 80% of local median income. I talk with Chris about how the fund came into being, lessons learned, and surprises they've encountered along the way, and what comes next, including some of Enterprise's ideas about how renter wealth building programs can expand beyond the realm of public subsidies and socially motivated impact investors to ultimately become something that can attract investors seeking market competitive profits in order to grow to serve millions of renters rather than thousands. 

As luck would have it, I will be flying to Washington, D.C. on the very day this episode comes out to attend the kickoff of the National Renter Wealth Coalition, a two-year initiative being led by the Lafayette Square Institute. More to come on that, but I am excited to be in the room as the energy and acceptance behind this idea keeps growing, and as the conversation shifts from questions about if renter wealth building programs are realistic and worth pursuing, to conversations about how we make sure they can succeed and scale. 

The 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 shanephillips@ucla.edu or on Bluesky and LinkedIn, and you can follow our substack at uclahousingvoice.substack.com to share your thoughts on our episodes as they're published. And as always, be sure to tell your friends and colleagues about the show if you like what you hear. With that, let's get to our conversation with Chris Herrmann.

Shane Phillips 00:03:16
Chris Herrmann is Executive Vice President, Head of Real Estate Equity at Enterprise Community Investment and Affiliate of Enterprise Community Partners. As part of that role, he leads the Renter Wealth Creation Fund, the topic of our conversation today. Chris, thanks for joining us and welcome to the Housing Voice podcast. Thanks, Shane. Great to be here. It's an honor. If you're not familiar with the format here, we always start our conversations with a tour from our guests, a place they know well, want to share with our audience. So where would you like to take us? Sure, I'd love to.

Chris Herrmann 00:03:50
I'll take you all to a little town on Long Island, Savile, New York, where I am today and where I was born and raised. And other than my four years in Boston for my undergrad and two years in New York City, right after that has really been home for me most of my life, including to this day. And Saville is a small suburban community on Long Island, about halfway between Manhattan and Montauk. And a little fun fact about Saville, in the 1990 s, Cal State at Fresno recognized Saville as, quote, the friendliest town in America, which locals still to this day hold in high honor.

Shane Phillips 00:04:26
I would have expected that to go to somewhere in the Midwest.

Chris Herrmann 00:04:28
Yeah, well, this was the 90 s, so times, I guess. But it's also one of the places, one of the three communities on Long Island through which visitors to Fire Island can catch a ferry. So it's a place that enjoys strong tourism support seasonally as well. But for me, it's really home. It's where my wife and I both grew up. It's where we have really strong ties in the community. And it's a place we chose to raise our own family and have been incredibly fortunate my whole life to enjoy the stability of home. And that's really been an enormous inspiration for my career in housing.

Shane Phillips 00:05:02
As a longtime Long Island resident, are you familiar with, have you read The Power Broker? I sure have. Yeah, how could you not? Yeah. The whole saga through that land really, really stuck out to me when I read it a couple of years ago as part of the 99% Invisible book club they did on it. Okay, so today's conversation is a follow up to our previous episode, where we talked about some recent Lewis Center research on renter wealth building, and this idea of shared prosperity rental housing. That episode with Bob Simpson and with Paavo was an overview of the concept as I had outlined it in the report, but you would be forgiven for thinking it sounded a little abstract, a little bit fanciful even. I wanted to have Chris on today because he and his team have been doing the actual thing at a meaningful scale for a few years now. So they're not only showing that this idea has real potential, they're also learning the kinds of lessons that you can really only get from putting it into practice. As of this recording, or at least as of the last thing I read about the program, the Renter Wealth Creation Fund has raised $112,000,000 and invested nearly half of that capital so far alongside other debt and equity to acquire seven properties with a total of 1,226 units at a 96% occupancy rate and an average length of stay of 75 months. They have already learned a lot from the experience, some of which I heard from Chris before publishing our report and some that I am sure will be as new to me today as it is to our listeners. So let's get into it. To get us started, let's just hear a little bit about Enterprise Community Partners as an organization. I know it works in community development and, according to your website, has worked with public and private partners to raise and invest over $50,000,000,000 into affordable housing since 1982. Enterprise is a massive organization that operates all over the country, but I will admit I do not know a whole lot about it. I mainly think of it as being one of the biggest players in the low-income housing tax credit market, the LIHTC program, which subsidizes affordable housing construction and rehabilitation across the US. But tell us what else we should know about the organization and how you ended up working in this emerging area of shared equity, shared prosperity rental, renter wealth building, whatever you want to call it.

Chris Herrmann 00:07:33
Yeah, that's a great introduction, Shane. And as your introduction alludes to, Enterprise is in fact a very large and complicated organization. I'll be celebrating my 20 th anniversary here in July. So for me, it's actually- Congratulations. Thank you. It's, you know, somewhat easy to comprehend and navigate, but I've really grown to appreciate how complex we can present to the outside world. And I believe that's related to the variety of work we do across the country and the fact that different people know us for different reasons. But here's kind of my attempt at a simple overview. Enterprise is a 44-year-old nonprofit organization with a mission to make home and community places of pride, power, and belonging. And we were founded by the pioneering real estate developer and urban planner Jim Rouse. and his wife Patti, and after a successful career developing landmark festival marketplaces like the Inner Harbor in Baltimore, South Street Seaport in New York, and Faneuil Hall in Boston, as well as the first racially, economically, and socially integrated master planned community in the country in Columbia, Maryland, which is where we continue to be headquartered to this day. Jim launched Enterprise as a fusion of his business acumen and his civic and philanthropic interests. Jim recognized that connecting the capital markets to low-income communities was a key ingredient to unlocking opportunity. And today, we organize our work in three divisions and focus specifically on rental housing across the United States. Those three divisions include first the capital division, which is where I sit in the organization, and that's where we aggregate various forms of investor capital, including debt, tax credit equity, and equity, and deploy that capital in partnership with local developers around the country doing very important and impactful work. You referenced the low-income housing tax credit syndication business, which happens to be where I started with Enterprise in 2006, and continues to be one of the things we're most well-known for. But we also operate a leading community development financial institution. We're one of the largest allocatees of new markets tax credits. And we're scaling a real estate equity fund management business that raises and invests more traditional real estate at private equity in mission-aligned projects. The second is our Community Development Division, and that's where we act as a real estate developer and owner-operator, as well as a resident service provider ourselves. This division operates exclusively around our headquarters in the Mid-Atlantic region, where we are the largest nonprofit owner of affordable housing in the region, with a portfolio of more than 100 communities, with 14,000 affordable homes, serving about 24,000 residents. And lastly, our third division is what we refer to as solutions. And that's where we carry out our policy and programmatic work. And this ranges from advocacy at the federal, state and local levels for public policy and resources in support of our mission, to national initiatives like our partners sustainability work, where we're focused on ensuring that the real estate developer owner operators who work in the industry are sustainable through good and bad cycles. as well as on to deeper place-based work that focuses on local needs in about a dozen impact markets around the country. And all together through these three divisions, and since our founding in 1982, Enterprise has invested $92,000,000,000 and created 1,100,000 homes in all 50 states. the District of Columbia, Puerto Rico, and the US Virgin Islands. So quite a long track record and storied history for this organization.

Shane Phillips 00:11:32
Now that you're bringing this up and the timing of this, you're making me wonder, given Jim Rouse's background and his apparent influence, did he have a role in the creation of the LIHTC program? Because Enterprise started four years before LIHTC was created.

Chris Herrmann 00:11:53
He sure did, yeah. Jim was a stakeholder when the program was conceived, and Enterprise was one of the earliest low-income housing tax credit syndicators in the business. In fact, I believe Jim was at the bill signing that enacted the low-income housing tax credit bill.

Shane Phillips 00:12:07
Wow. Wow. So, so that is enterprise. Now I want to get into the Renter Wealth Creation Fund and, and maybe you want to talk about the broader set of things that you're working on, if that makes sense. But for the Renter Wealth Creation Fund in particular, I just want to make sure we give a quick overview before talking about the details. And so I want to ask, what are the key things that we should know about what it's aiming to do for tenants and how it's working with investors and project sponsors to make that possible.

Chris Herrmann 00:12:39
Sure. So the Renter Wealth Creation Fund was launched in response to the renter wealth gap statistic that I'm sure we've all seen and has been widely reported. And that is that homeowners hold roughly 40 times more wealth than renters in this country. or the median homeowner holds roughly 40 times more wealth than renters. And that gap is widening every time a new set of data is released. But over time, over the last several years, both the need for and the groundswell of support for a strategy like this has been reinforced by a series of other statistics Since 2020, home prices are up roughly 50%, renter households are now growing three times faster than homeowner households, and the median age of a first-time homebuyer has jumped from 33 to 40 since 2021. So for millions of households, homeownership is no longer a realistic near-term pathway to wealth. And the Renter Wealth Creation Fund really starts from a different premise, that being if renting is the long-term reality for many families, then rental housing itself must evolve to support economic mobility. And in 2022, we launched the fund. And let's start with first what we mean by a fund. And in our case, a variety of impact investors committed, as you noted, $112,000,000 of capital to an investment fund that we manage at Enterprise and are using to purchase a collection of affordable rental housing communities around the country. and preserve and improve them so they can be long-term affordable housing resources in their communities. The fund invests the capital as equity to acquire an ownership stake in the project, and we do this in partnership with local nonprofit and for-profit affordable housing developers who are experienced in operating communities like them. And to be clear, we pursue a financial return on our investment by making this investment through the ongoing cash flows that these stable properties tend to enjoy and the long-term appreciation that commercial real estate as an asset class can realize. And this is actually an investment strategy that Enterprise has been pursuing since 2013 through what have become known in our industry as preservation funds. But what's unique about Renter Wealth Creation Fund is the unique impact strategy it pursues beyond preserving affordability and housing quality for the long run. And the fund essentially commits a portion of its investment returns to three core wealth building features. The first is monthly cash back for on-time rent payments. Between two and a half and five percent of the tenant paid rent can be earned as a cash back reward by every resident of every fund investment. The second is a profit-sharing program, a long-term profit-sharing program, when properties are refinanced or sold. And the third is tailored resident services at every investment the fund invests in. The fund's goal is to demonstrate the possibility of turning rent from a pure expense into an asset-building tool for residents. And most importantly, it's really no longer just theoretical. As you referenced earlier, the fund currently owns interests in seven communities around the country with over 1,200 affordable rental homes. These range from project-based Section 8 communities to low-income housing tax credit properties to workforce housing communities affordable to residents earning up to 80% of the area median income. And residents, through the end of last year, have received real benefits in real time. $327,000 of monthly cash back has been rewarded to our residents, and this amount grows every month, and we project it to total nearly $9,000,000 over the 10-year fund life. And we've recently updated some of the modeling of the long-term profit-sharing program based on the initial investment performance and are estimating fund-wide an opportunity to share over $37,000,000 of profits with residents of the fund's current and future investments. And we know that resident services can be a key ingredient to maximizing the impact and have made some form of resident services provision a requirement at all fund investments. We're still tabulating the final results of this through the end of last year, but the portfolio has invested about $700,000 in resident services to date. And at the end of the day, let's not forget, we're implementing this through an investment fund that will preserve the affordability and quality of an estimated 2,500 homes around the country in the process.

Shane Phillips 00:17:40
Can you just give a few examples of what you mean by resident services? What kinds of services are we talking about?

Chris Herrmann 00:17:46
Yeah, absolutely. So I asked the team to pull some information from our annual report about resident service provision. And so some good examples of this would be at one of our properties that serves a large family population. Uh, the property offers afterschool tutoring and programming for school aged children. You know, let's broaden our view of what upward mobility can mean, right? Yeah. Providing afterschool programming for students can relieve parents to help them pursue work or school or other mobility-oriented needs. At a property in Colorado, we have partnerships with local credit unions and banks to run financial workshops and debt management workshops, a workforce readiness program to provide job connections. At another property, we do budgeting tutorials, programming around various financial topics, One key theme across our portfolio is we offer at no cost to residents credit reporting of on-time rent payments. So these are some of the examples of resident services and supports we invest in across the portfolio.

Shane Phillips 00:18:53
Got it. And just a point of clarification, you guys are focused on acquiring existing multifamily properties rather than building new ones for this fund anyway, right? That is correct. Could you talk a little bit about that decision? Because this is something that came up in our conversation with Bob and Pavo, too. So I do think it's important because I'll just say in my report, we're really looking at both options. And to me, it's becoming more and more clear that at least as a starting point for this kind of program, acquisition seems like the place to begin.

Chris Herrmann 00:19:24
Yeah, I mean, new development is hard, and it is hard because the math is hard. In order to justify the typical cost of development, the properties need to pursue luxury or market rents, if you will. That tends not to be the focus area of enterprise. There's a role for that, you know, I believe in in the creation of all forms of housing supply will help address the housing crisis. But as it relates to kind of where we focus on affordable housing, serving residents. around or under 80% of their immediate income, the math for preservation works better than the math for new development. And at the end of the day, we're structuring this program through an investment vehicle.

Shane Phillips 00:20:08
So there has to be an investable opportunity for the fund to pursue.

Chris Herrmann 00:20:12
Preservation, because it is valued based on the net operating income of the properties, acknowledges the affordability in the valuation, whereas the cost of building an apartment is the same regardless, and that's why a lot of new affordable housing production requires subsidies like the Low Income Housing Tax Credit in order to buy down the cost of capital in effect.

Shane Phillips 00:20:36
So for these projects, they are generally deed restricted and you're not using additional subsidies?

Chris Herrmann 00:20:43
There can be some variation. So there are often the case that there are operating subsidies of some kind, whether it be a rental subsidy contract or a property tax exemption or abatement that helps support the affordability.

Shane Phillips 00:20:58
Which is common in many states that they'll offer the property tax exemption or welfare exemption, it's sometimes called, yeah.

Chris Herrmann 00:21:04
Correct, correct. But there are no, there are rarely capital subsidies involved. It is the traditional financing structure of these acquisitions is GSE or HUD debt or occasionally CDFI debt paired with equity capital from an investor like the Renter Wealth Creation Fund. and the general partner or sponsor of the project.

Shane Phillips 00:21:30
And are these projects that are often soon going to have their deed restrictions that keep the rents low expiring at some near-term date? Or what do you mean by preservation exactly? Sure, it can vary.

Chris Herrmann 00:21:45
We've executed 150 acquisitions through our preservation funds since 2013. And it's everything from in acquisition of a long-term affordable community, like a 20-year HAP contract on a project-based Section 8 community, where it's unlikely to sort of exit the affordability program any time soon, but where the impact is focused on good stewardship, quality maintenance, reinvestment in the community over time. So we think of preservation as not just exclusively about expiration of affordability, but also about sort of stewardship and reinvestment in these communities over time so they can serve the communities where they are for many, many years and generations to properties that we've acquired that are expiring within a year or have already had their land use restrictions expire. And where our investment strategy is to return those properties to the programs through new low-income housing tax credits indications or other resources that we're able to bring from the state and local level to those properties to commit them back to affordability. So there is some variety in kind of the definition of preservation.

Shane Phillips 00:22:58
Got it. As much variety as there is in the housing market itself, I'm sure. Well, let's explore these three tenant programs in a bit more depth, starting with cash back. So you said two and a half to five percent, you know, do tenants have to do anything to qualify for that? How does it work at a really nuts and bolts level? I noticed that both you guys and the state of Colorado's renter rewards program have partnered with this company stake to administer the cash back. So I'm also curious how that works.

Chris Herrmann 00:23:31
The way we roll this out is upon acquisition of the property, we've learned it's really important to start with the basics, right? Make sure people have their work orders tended to that they have good communication with management, that the trust levels are there in order to build upon and roll out a program that will be new to them and will be something that they likely have not seen before. So we focus there initially, that's become one of our largest lessons learned is not to rush to this outcome, but make sure the basics are tended to.

Shane Phillips 00:24:03
If you're taking over for a landlord who hasn't fixed your refrigerator in a month and suddenly a new operator shows up and says, hey, we have this great cashback program and we're also going to share profits with you in five or 10 years, that's going to sound very unbelievable, I think, to most people.

Chris Herrmann 00:24:21
Yeah, not only would I agree with you, but have that experience, right, of sort of learning that in real time. As you can imagine, with a program like this, investors and funders, they want to see some of the big picture ambition realized quickly. But we've learned it's important to do the basics, right? Make sure people know where to pay their rent, how they can get their work orders filled, things like that. But the cashback is really one of the first things we roll out and we position both the cashback and the long-term profit sharing program as part of a resident loyalty program. This was another lesson learned is just making sure we're presenting something to residents that while it might be new to them as a renter, at least is familiar to them of rewards like that airlines might offer or hotels or the local grocery store.

Shane Phillips 00:25:15
So it's not framed as like we're trying to help you build wealth. It's like we appreciate you staying here as a tenant, paying on time, etc. What's good for us is good for you.

Chris Herrmann 00:25:26
This is a two-way relationship and we want to reward your residency and the role you play in helping our community succeed has been really important framing in order to build trust and understanding. And as far as cash back to your question, we blanket the property with it. We roll it out to every household who's living at the property. So it's not done situationally upon a new lease or renewal. We think it's important for this to be something that the entire property receives the benefit of. And we do fix a specific percentage at each property. It's between 2.5% and 5% in our portfolio that residents have an opportunity to earn when they pay their rent on time. That is the one requirement. It is connected to paying your rent on time, and you receive that reward within a week or two after paying your rent on time.

Shane Phillips 00:26:20
And is this something where if I'm late one month, I might not get the cash back that month, but if I resume on-time payment the next month, I get that cash back every single time I make an on-time payment? That's correct. Got it. And I'm assuming that the credit reporting is a service of stake, this partner that you guys have?

Chris Herrmann 00:26:39
There are actually a variety of vendors who do credit reporting and typically the GP, the sponsor of the property or the property manager has a relationship with the firm they prefer. Sometimes that can be stake and other times there are other vendors who do it. But one of our requirements for investing is that it's offered to residents at no cost to them. That reporting of on-time rent payments is reported to the credit bureaus.

Shane Phillips 00:27:04
Yeah, and I just want to underline, I think I mentioned this in the last episode to near the end, but something I didn't really talk about in my report is this idea of ongoing kind of no strings or very minimal strings in terms of paying your rent on time, cash back on a monthly basis where you're not just, you know, the main benefit is this theoretical five or 10 years down the road. pay out, but actually something that is happening consistently. And again, I think it goes back to this idea of trust and showing we're delivering on this relatively small promise. And that's going to hopefully give you some some faith that we're going to follow through on this bigger promise of the profit sharing.

Chris Herrmann 00:27:45
So I totally agree with you, Shane, that offering the cash back in real time from day one and on an ongoing basis builds trust with residents. And at the same time, you know, we've heard with some regularity with funders and investors, the kind of enthusiasm and interest in the long-term profit sharing program. But one thing I always make a point to say is these benefits on a monthly basis, which can range from $17 at the low point in our portfolio to about $60 per month at the high point, they matter to our residents. They add up, they help relieve stress in the day-to-day lives of our residents. The stories that have come back through this experience have been very rewarding and fulfilling and focused on the value of this cashback benefit that the residents receive. So I really always make a point to say, yes, it's important to build trust in long-term buy-in, but it's also important right now. Our residents have right now needs and this helps them relieve those needs.

Shane Phillips 00:28:52
Yeah, I think this can be a disconnect between the experience of a low, very low, moderate income renter and the kinds of people making these investments who have the resources to put in millions of dollars and be fine with a 4% return and so on. I think it can be easy to overlook the just kind of daily struggle of someone's budget and how $20 in your pocket every month or $40 or whatever really can make a difference and be a lot more meaningful to you than some. Even if it's certain you're going to be paid thousands of dollars in years like you have bills right now. Very much been there myself.

Chris Herrmann 00:29:34
100 percent. And to that point, we've had the hardest time kind of building that trust and understanding about the long term profit sharing program with residents, because it's very much a I'll believe it when I see it approach, which is fair. Right. Like, you know, in fact, I think that is what it ought to be because there's nothing guaranteed under it. Right. But, you know, we do think awareness is important. And even if there's a healthy skepticism about it, residents understanding the intent of their landlord matters. And so we've worked really hard to, you know, spread that awareness and understanding about the long-term profit sharing program.

Shane Phillips 00:30:14
Yeah, and so let's talk about the profit sharing and how this works in a little more detail. So this is a shared appreciation model, I think similar to what I wrote about in the shared prosperity rental housing report. If a project is financially successful, if it earns a high enough return, the tenants share in those profits. So, you know, I have many questions about this, but I think the biggest ones all come back to who is eligible and how much tenants might expect to earn if a project is successful. So I don't expect you to have the numbers off the top of your head for this, but just to kind of put out a theoretical, say one of these investments you make operates for eight years, you guys sell it, it earns a 10% internal rate of return. If I'm a tenant who lived in one of these units for the full eight years, am I getting back another three or 4% of what I paid over that whole period? Is it 10%? Is it more? How does this all work? Like what what should tenants expect?

Chris Herrmann 00:31:13
Yeah, so first of all, the way it's presented to tenants is that The landlord has this profit sharing ambition and intent to share profits when and if there is a sort of profitable realization. Residents earn what are called the occupancy points in our model. I think you refer to them as renter rewards, which I really liked by the way.

Shane Phillips 00:31:37
You can thank Ian Carlton and Jacob at Mapcraft for that, actually. I did not come up with it. But yeah, Colorado apparently chose basically the same, the same thing for their name.

Chris Herrmann 00:31:46
Yeah, I read that. But each year of residency, they earn an occupancy point. And we treat years as being there as of December 31 st. So for simplicity purposes, each December 31 st that passes, a resident earns an occupancy point. And once you have four of those, you're considered vested into the program. So the profit sharing is not intended to be for every resident who passes through the community with a one year lease or two years, but instead for longer term residents who choose to stay for an extended period of time. Our plan and intention was that that period would start when we acquired the property. So our first acquisition was in 2023. So as of December 31 st, 2023, one point as of December 31 st, 24 to 25, three. So in theory, residents would be sitting today with three occupancy points in testing that with residents of that first property. We got a lot of feedback. that they felt like it wasn't recognizing their prior period residency. And we opted to recognize up to two years of prior period residency in this calculation, such that some residents at these properties have in fact vested at this point, in fact, many because there's high rates of renewal at these communities. And for each year thereafter, their occupancy points increase by one. And when and if there's a profit sharing opportunity, those dollars are put in a pool and divided by the number of vested occupancy points. and paid out to the vested residents accordingly. So using the model or the sort of example you gave of a 10% return, and obviously there's a lot of variables here in terms of how much capital was invested, how much turnover there was, and how many occupancy points vested, things like that. using our best estimates based on typical lengths of stay. We estimate it could be between $7,000 for a four-year resident and $50,000 for, in our model, 10-year resident. Wow. So quite a significant amount. I haven't actually translated that to look at what it would be as a percentage of rent they paid over that period. So I'm going to take that as a homework assignment here and look at it that way as well. But I don't have that statistic at my fingertips.

Shane Phillips 00:34:12
Presumably, part of the gap there between the 7,000 and the 50,000 is some of these buildings just have a higher expected profit rate. Also, some have higher rents, maybe.

Chris Herrmann 00:34:22
Yeah, let me clarify it. It's actually more the difference between someone who is there four years and 10. So that would be that sliding scale, right? If you were only there for the minimum length of stay of four. and the comparative was the 10-year length of stay, that's that range I was quoting. To your point though, the investment performance will drive what the range is on a property by property basis. It's not out of the question or even unlikely that a property will have zero in profit sharing at the end of the day because the investment simply underperformed and we didn't pass the cost of capital of the fund. Then there are the other ends of the extreme. where the investments over perform and the profit sharing program can be more robust.

Shane Phillips 00:35:09
Yeah. And in your case, your profit expectation, that return after which some profits are shared with the tenants is pretty low. You know, it's a 4% IRR, which is much lower than a market return. And we'll come back to that. But I did want to ask to follow up on this. If I can speak about something that I saw in the presentation slides you shared with me, you've got the different properties and your profit sharing expectations on a per unit basis in these different buildings. At one end, you had somewhere around $10,000 per unit expected in profit sharing. At another project, it was over $50,000 per unit. And I'm curious, what is driving those different expectations? Even if clearly the actual outcomes at the end of this will not align perfectly, there's some reason that you expect much more profit in some projects than others. So where is that coming from?

Chris Herrmann 00:36:04
Yeah, I think if you think just to the very beginning of this, the per unit amount of investment in those properties varies quite a bit. You know, the cost of a property in a major metro market will require much more equity from the fund per unit than one in Columbus, Ohio, where our lowest acquisition price per unit was in this fund. So the kind of return on investment math there just simply drives a lesser dollar profit per unit.

Shane Phillips 00:36:36
But that's also going to be reflected in lower rents for those ones that are getting lower returns, generally speaking, right?

Chris Herrmann 00:36:42
Yeah, correct. Correct. The other thing would just be how the investment ultimately performs, right? We go in with a set of expectations and intentions and our experience has been that on average, most investments outperform our underwriting, but there are ones that underperform and there are others that significantly outperform. And the market cycle plays a big role in investment performance, of course. So, you know, this long term profit sharing program is, you know, the actual story has not yet been written, quite frankly. But like, you know, it harkens back for me to when we created this idea, because it was on the heels of an investment fund we managed that was very successful for its investors, you know, bought the market right, exited the market right. had great, tremendous impact and outcomes for residents, but the profits passed through the communities. That fund owned 13 communities around the country. Every single one of them outperformed the underwriting, and so our investors did great, and so did our partners, and so did the residents because, you know, the strong investment performance allowed us to keep rents affordable, to invest in more physical upgrades, to invest in resident services. But what we didn't do was write the residents into the waterfall.

Shane Phillips 00:38:02
The waterfall being the way that profits are distributed amongst usually just investors. Yeah.

Chris Herrmann 00:38:08
Yeah. And that was kind of the, in some ways, the inspiration for this fund was seeing that play out and recognizing that had 10 years earlier or eight years earlier, We had simply written the documents differently with a different set of intent. We could have seen dramatically different outcomes for residents of those properties. And it's not to say any regrets about the impact we achieved, right? That's the system. But I think we're in pursuit of a new version of that system that recognizes the role the residents play in the performance.

Shane Phillips 00:38:41
This wasn't a question that I had prepared, but it's coming to me now. And then we did talk about it a little bit in our last conversation as well. I know this is not something that you have in your current iteration of this program, but I'm curious if you've been thinking about the possibility of having more of a portfolio based approach in terms of how you share profits with tenants. You mentioned some projects overperform, others underperform. And I think in many cases, that has little to do with anything that you guys did as investors or operators, or certainly anything that the tenants did. It's just good luck or bad luck. And if you were more kind of pooling everything together and saying, If the whole fund together is profitable, even if some overperform and some underperform, all of our tenants are going to benefit equally or, you know, in proportion to how much rent they paid, et cetera. Is that something that's been on your mind at all or you've been looking into?

Chris Herrmann 00:39:40
100% and was kind of part of the initial ambition it you know the the Practicalities all these good ideas just add complexity unfortunately, you know That's what I was gonna get at which is the practicalities of sort of good intentions can be really hard these properties will sell at different points in time and Our relationship to the residents will change at different points in time. Yet at the end of the day, we have a fiduciary responsibility to that, you know, recognizing it's a concessionary, but nonetheless, it's a return objective that we have for investors in the fund. to sort of deliver that. And so it's just a very tricky analysis to play out and to actually affect that vision is what we found out. So it's one of the, you know, it's one of the imperfections that we haven't solved for, but certainly was part of our early and continued ambition.

Shane Phillips 00:40:30
Yeah, and something that maybe as this kind of program scales up might be a little easier to integrate when there's more happening in many places. Speaking of sales, what happens to the buildings when they're sold or refinanced? This is, you know, in contrast to For a variety of reasons, not all of them entirely realistic and more for modeling purposes. We just assumed in our report that the buildings are just refinanced indefinitely and never actually sold. Yours is a real world program that has to deal with real world restrictions and limitations and realities. And so you are planning to sell these buildings, I believe, at the end of let's say eight or ten years on average. So what happens at that point? Does the program end and the tenants just stop getting cash back? They stop getting shared appreciation? What does this look like when everything wraps up?

Chris Herrmann 00:41:26
Yeah. And let me kind of take it piece by piece, because I think there's one, what happens to the affordable housing, right?

Shane Phillips 00:41:32
Remember, this is a vehicle looking to preserve affordability of housing for the longterm.

Chris Herrmann 00:41:38
And I think we get asked this question a lot because we operate a series of closed end funds, meaning they have a term to them. They have to exit their portfolio typically within eight to 10 years. As you referenced, our experience has been, if you act with intentionality, At exit, you can generate both profit and purposeful outcomes. And so most of our, nearly all of our dispositions are some form of recapitalization of the asset by the partner. So remember where we're buying these with GPs. and they are often resourcing those recapitalizations with new low-income housing tax credits, new debt, new equity. We're investing in a partial ownership role, so when we talk about a sale or recapitalization, the necessity is for us to get out.

Shane Phillips 00:42:26
It's not for the asset to be sold in its entirety.

Chris Herrmann 00:42:29
Now, does that mean that will never happen? No, you know, we do have third party sales in our portfolio, but we are acting in a way that, you know, pursues an extension of affordability as part of our selling efforts. We're not implementing a regulatory agreement ourselves on the sell side, but we are strategically selling to partners and giving them the time they need to bring together the public resources to preserve it as affordable. So we don't view this a disposition as the end of the affordability as we know it. In fact, we view our role in many ways as being setting up that next stage of ownership of the properties and that's one of the greatest impacts we can have is not just during our 10 years of ownership but beyond. Your second question about the program, that is yet to be written. We do not have the intent to make that mandatory. We are certainly building a credible set of data in support of cash back as being good for business and helping generate better property outcomes. And we hope to build the field's understanding of that. And same with the long-term profit sharing, right? Like we, we want to see, I think the industry is more and more, there's more and more energy about this. And so our hope is that in a decade when it comes time to make these difficult decisions, that there will be a more robust system and marketplace of actors who act with that intentionality and implement similar programs in their own ownership. So that's kind of our vision on those two points.

Shane Phillips 00:44:03
In the Lewis Center report that we talked about in the last episode, I worked with our consultant partners at Mapcraft to outline this basic financial model for wealth building rental housing that could attract private investors, at least under ideal circumstances, with the idea being that you really need to be competitive with alternative investments for a model like this to scale up. Alternative investments, you know, chief among them being just putting your money into a traditional market rate rental housing project or even just a traditional deed restricted affordable project that does not have a profit sharing or cash back program integrated into it. So that meant in our case that we were assuming pretty high returns on investment and we were assuming market rents and both of those aspects contrast pretty strongly with the enterprise model here. I think it is really, really genuinely great that there are different models being proposed and being tested out. But I do want to make sure we're being clear about where these models differ and what those differences mean. So on the tenant side, the Renter Wealth Creation Fund, as you said, is targeting projects where the units are mostly or entirely households earning under 80% of area median income. colloquially known as low-income households. On the investor side, you're looking for investors willing to accept returns that are well below market in order to have this positive social impact. I sort of get the impression that you couldn't really have one without the other, that the affordability depends on the low investor returns. Could you talk about how these aspects of the fund are balanced? And you were just mentioning how things like reduced turnover, a higher on-time payment rate may pay for themselves to some extent at least. So could you say a little more about what you're finding there?

Chris Herrmann 00:45:52
Yeah, I mean, I think first I'd start on the premise that the affordability is tied to the below market returns.

Shane Phillips 00:46:01
I would absolutely challenge that.

Chris Herrmann 00:46:04
And the reason is, you know, we manage market oriented funds or have investment funds in our portfolio that pursued double digit IRRs for their internal rates of return for the investors and have achieved them. And we believe that affordable housing as an asset class, specifically in preservation, is very investable with market rate return expectations and have developed a whole practice of doing that. I think the Renter Wealth Creation Fund pushed down the spectrum on returns in order to increase the significance of the cash back and profit sharing programs and as a bit of a demonstration more than anything. But we know and would fully acknowledge that the first Renter Wealth Creation Fund is not yet a market solution. It relies on the generosity of impact first investors who were willing to accept a concessionary return target at the time. But we don't believe and we don't have any false hope that that's likely to be replicable in the future, at least at scale. But we certainly believe it offers a credible prototype to build off of. And we've been thinking hard about what is our theory of how Renter Wealth Creation Fund or a concept like it could scale. You know, we consider this in the testing phase where we're building evidence, we're refining the model, validating the hypothesis that profit sharing can benefit both renters and landlords. But over the next few years, we really see an opportunity to move towards larger incubation and scaling through a future version of this fund, and specifically one that would not mirror Fund One as a concessionary by design vehicle, but instead would really aspire to demonstrate that profit sharing can stand on its own economically. But that will certainly require a higher return target and a lesser profit sharing opportunity. But we think that scaling across more properties and more landlords is the longer-term opportunity. And we've really identified several enabling conditions that we think have to exist in support of scaling. The first is that market-oriented landlords must see this as good business. And quality research like work we're doing here at Enterprise will be critical to making that case. Implementation has to be low cost and low friction. The work that we're doing with property managers and resident ambassadors and residents themselves is generating tremendous lessons learned. that we will apply to achieving this requirement for low cost and low friction. Right now it is anything but low cost and low friction, but we know it has to be in order to scale. And we think policy will be critical. You know, one of the things we lack is a legally codified form of resident profit sharing or ownership, and our mutual friends at Lafayette Square Institute have pointed out how ERISA gave life to employee-owned companies through employees' stock ownership plans in 1974. And so, you know, thinking about the policy, uh, lever as something that will be necessary to enable scaling is something we've been thinking about as well. And these are just some of the many ingredients that will be required to achieve our vision of scale over time, which is not simply a hundred million dollar fund, 2,500 units, but, but how do you mainstream something like this? Um, and I know that's, that's really what your interest is as well.

Shane Phillips 00:49:46
Yeah, yeah. And we're kind of jumping ahead, but I'm perfectly fine with that. I want to talk a little bit more about this scaling puzzle and how you guys are thinking about it. Because in the report we worked on in our last conversation in the previous episode, and in many offline conversations I've had as well, there's just a lot of concern, and I think rightly so, about the proposal as I've structured it with a very high loan-to-value, also how you could potentially get lower interest rates. These are not easy things to achieve, and they come with risks as well as benefits. So in terms of policy, or maybe particularly in terms of finance, What have you guys been considering as, you know, if we wanted to advocate for some kind of federal reform, for example, what is the kind of thing that would actually be both at least potentially achievable at a policy change and political level, but also something that would really attract private market driven investors who on the one hand might be attracted to the potential of higher returns. But if it also comes with the much higher risk that comes with a 90% loan to value instead of a 60%, maybe they're still just not going to be interested.

Chris Herrmann 00:51:02
Yeah, I listened to the last podcast discussion about this, Shane, and I thought it was a really interesting debate around sort of where investors are interested and where they see risk and how did they react. Maybe starting with the policy question. I think the very basic near-term need and policy endeavor that I think is achievable is legitimizing some form of resident ownership or, you know, profit sharing as a concept is very ambiguous, right?

Shane Phillips 00:51:35
And I think we could all use some collective structure

Chris Herrmann 00:51:39
for that, that is recognized and familiar and trusted by both financiers, but also residents themselves. And so I can't minimize the need for and necessity that I believe exists for that.

Shane Phillips 00:51:55
Just as sort of a foundation for it's very hard to make the case for a new financial product or policy reform until you've demonstrated just some basic benefit and viability for this model.

Chris Herrmann 00:52:10
Correct. like structure, you know, if I think about how many of my conversations in pursuit of this since 2020, when I started thinking about this and enterprise started working on this, have been caught in the weeds of, well, how will vesting work? How will, does this interrupt benefits? Is this ordinary income, right? There are so many layers to this that would benefit from some legislation just to put some structure over it. And I think that it would be hard for me to imagine what a government loan program through HUD, for instance, would look like if there wasn't some legitimate structure to the resident ownership piece, right? Like that has to come first, I think. And from there, I could see all kinds of tax incentives and lending programs emerge to support it, just like ESOPs have seen in terms of the tax benefits. It started with the kind of codified structure, and then over time has been kind of supported in mainstreaming it through different enhancements that incentivize the private market to adopt it. I think we could benefit from a structure. in shared prosperity rental housing or profit sharing, whatever it is to be called. But I think there's an enormous opportunity to create and advocate for that, even if it's not sort of subsidized with anything, but at least legitimized in law and with residents and with landlords as an option that the private market could opt into.

Shane Phillips 00:53:46
Yeah, and I think this is why I'm really excited about the Renter Wealth Creation Fund about Colorado's program. There are other smaller programs across the country doing versions of this as well, because I think, to your point, it's very hard to motivate, you know, a policymaker, a state legislator, whoever is necessary to create some policy and structure around this, put some guardrails on it when it's purely theoretical. And I think now that we're getting into the real world practice and finding out where the pain points and the frictions are and where a less good faith actor could take advantage, I think that is really an essential starting point even before the policy at some level. I would agree with that completely. So with seven buildings, over 1200 units acquired, plans for more, it sounds like you've made enough progress to have some real lessons learned by this point. So where do things stand now with a few years of experience under your belt? What have we missed? I'm really curious to hear what's working and particularly what's surprised you about the program so far.

Chris Herrmann 00:54:53
In some ways, the biggest surprise has been the level of distrust that we often find residents meet this with and the need to build that foundation of trust so that they can gather the understanding that's required to fully benefit from the program. I think that, you know, part of me felt like if we were offering cash back and an opportunity to share in the profits at no cost to residents, which is effectively what we do, this would be as easy as flipping a switch and everyone would be thrilled. That has not been the case. There are lots of questions. There are needs to really walk this out with residents in a strategic way. There are lots of barriers to implementation. whether they be language barriers or trust barriers along the way. And we've had to invest heavily in, in implementation and making sure our property management partners understand the program and the role they play in implementing it. And so enterprises had to make a big investment of resources to ensure that the vision became the reality in a way that I think we underestimated.

Shane Phillips 00:56:06
Mm hmm. I want to jump in there just because I feel like at some level, yes, this is surprising. And then once you hear about it, you're like, well, this makes total sense. At the same time, I'm just thinking about the administrative burden associated with securing really any public benefit in the United States. And in your case, you've got residents who are living in usually deed-restricted affordable housing. They've had to go through this whole process just to qualify and probably regular income reporting to stay in the housing. These things that most people just don't have to deal with and so it would be understandable that someone who's gone to all that trouble just to get into a home they can afford would be a little bit surprised. and confused even at a very simple, you know, like no effort needed to opt in or anything program that's just going to effectively give them money, right? Yeah.

Chris Herrmann 00:57:01
And you made reference to the implementation partner we use for cashback stake earlier. And so that's a good example, right? We've had, you know, stake rolls out the program and residents have an opportunity to go retrieve their cash back. Right. And it sits in an escrow account until they, they log in, they sign up, they provide their email address, right. And they, they log in and can transfer that money or withdraw it or save it. set up a bank account, they have lots of options, but we observed that a small percentage were. And that was remarkable to us. So that was kind of our earliest sign.

Shane Phillips 00:57:36
A small percentage were just leaving them unregistered, not grabbing the money. Correct. Not claiming it.

Chris Herrmann 00:57:43
And so, you know, that's where we, that's kind of our first sign that we had to do more resident engagement. and invest in that. And we were able to move that percentage up over time, but it still wasn't quite where we wanted it to be. So we designed a program in the last six months where at the end of every year, any unclaimed cash would be mailed to them as a check, paper check, right?

Shane Phillips 00:58:04
Simple old school, like we have to close this back door somehow.

Chris Herrmann 00:58:08
And we built a workaround that we didn't envision have to build, but we were able to do that and get the dollars where they were intended to go. And I think that, you know, part of the reason to your point is people are busy. They spend a lot of time getting into the housing and they got to work, they got families, they've got obligations. And this is just another email, right? Sometimes it's hesitancy, it's, it's, you know, fear that it's a scam.

Shane Phillips 00:58:33
And, you know, is a legitimate thing to be concerned about these days.

Chris Herrmann 00:58:38
And so, you know, we've had to really work hard to build that trust and credibility. Moving on to the profit sharing program, right? Residents do have to opt into that. They have to sign up. We have a program agreement they enroll through because we need their information because we need to know how to reach them when and if there is a profit sharing opportunity. You know, because residents of the properties who are there for four years, but move away are still eligible. So we need to have good data and good information in order to reach them when and if the time comes to pay them. And so that's been a whole nother exercise that we've learned along the way that, you know, just, we have to strengthen the protocols and the documents around that in order to have good data for when the time comes. And we're building a digital enrollment system this year that will allow us to really strengthen that implementation over time.

Shane Phillips 00:59:35
Is there anything else to say about the resident services? I think in the presentation of yours, I saw there was a comment about the financial literacy education or lessons in particular, not really meeting residents needs. Is there anything you can share about that?

Chris Herrmann 00:59:51
I think that resident services is something that you know it's working when you see it, right? But it's also often the case that you're underwhelmed by the level of participation that residents engage with it in. It's a big investment of dollars, or it can be. And you will often find low rates of participation because people are busy. People, you know, they rented a home. They want sort of their home to be maintained and they want their work orders responded to, but they don't necessarily show up for the resident services events. So we've seen low participation rates than you would might expect. But nonetheless, it matters to the people who do show up. So we continue. investing in it. And then the other thing is just kind of meeting residents needs a little more where they are, right? Like if it's not financial wellness workshops that are driving attendance, but it is after school care, then lean into that. We're also piloting you know, really investing more and more of the resident service coordinators time in implementing the resident loyalty program, just to make sure people have broad and deep awareness of what we're offering and, and making sure we get the engagement there. So just, you know, a lot of our, most of our properties do annual needs assessments of residents needs to be able to respond to surveys with services, but it's constantly, you know, just trying to figure out what, what would be helpful and then delivering that to the residents.

Shane Phillips 01:01:21
Something I actually was not aware of until shortly before while we were planning this interview is that you guys are actually doing a more formal scientific evaluation of this program in partnership with Robert Wood Johnson Foundation, with the NYU Furman Center, and I'm guessing a consulting firm called The Case Made. Is there anything you can share about that and where things stand, what you guys are looking for as a part of this evaluation?

Chris Herrmann 01:01:49
Yeah, I mean, this comes back to the fact that we know that we have to prove our hypothesis with good data in order to achieve the long-term scale we're pursuing. And as you referenced for this, we've had the benefit of partnering with the impact and evaluation team here at Enterprise, which is a separate part of the organization. to pursue an evaluation of fund outcomes in partnership with Robert Wood Johnson Foundation, NYU Furman Center, and The Case Made, which is a consulting agency. The results of the three-year evaluation, which ends later this year, aren't yet available, but we have seen some promising evidence of property performance outcomes in the early days of this program across these seven investments in the form of high physical and economic occupancy rates, effective gross income trending in line with or above pro forma. Same with net operating income trending better than we expected it to. So these are starting to reinforce some of our property performance hypotheses that this is good for business and for residents, which we think is central to the case-making for scaling. And then on the resident front, because the other side of this is evaluating resident outcomes and just making the case to the social sciences field, if you will, or public policy. that addressing this economic mobility goal, if you will, makes sense for society and that it generates kind of better outcomes for people along the way. So all that work is still ongoing. There will be an initial report available at the end of this year, but it is still, you know, the first few innings of this fund in this experiment. So we expect the research will need to be ongoing for the entirety of the fund life.

Shane Phillips 01:03:34
Yeah, that I'm I'm very much looking forward to seeing those early results. Maybe a topic for another episode. Last question here. We've talked a little bit about next steps, scalability, etc. But I just want to wrap up on that topic. It's my understanding that Enterprise is looking at a second Renter Wealth Creation Fund. I think you mentioned that more market oriented. Can you share just a little bit more about where you see this all going internally within Enterprise and maybe externally as well at the policy and finance level? Absolutely.

Chris Herrmann 01:04:09
I think we're excited about the prototype we've built here, but we know it is to be built off of. We know that when we raised the first fund in 2022, it was between 2022 and 2024, it was a very different market with low interest rates and lots of other differences in society at the time. And so as we look ahead, we know that scaling is going to require us to think differently. Think about this more as something that is intentionally aligned to be good for business, for the investors and good for residents. And so I could see us very much moving from a model whereby in fund one, we had a 4% target return. for investors and an 80% profit sharing thereafter to something that has a higher target return hurdle for investors and a lower percentage profit sharing more like a promote would be or something like that.

Shane Phillips 01:05:12
Can you explain what you mean by that?

Chris Herrmann 01:05:14
Yeah. So, well, just to like create something here a bit a thin air and don't hold me to this, but you know, I could see a world where the fund has a more market oriented hurdle rate, say a 7% with a more investor friendly profit sharing distribution to residents say 20%. Okay. And the theory would be that that is obviously less. generous to residents, but more scalable in the capital markets. So that would be one angle. The other would be to actually look at the model of how employee ownership plans are structured, which actually finances the ownership position. of the employee group and allows for all profits after the financing is repaid, which is, you know, by financing, I mean debt to be available to a retirement program for the employees. And so, you know, I think there are different ways that we're thinking about this. And, you know, in 406, we're really planning the design phase of it. And we'll have kind of greater visibility into what we're doing at the end of this year for what we'll plan to launch in 407.

Shane Phillips 01:06:27
Awesome. Yeah. And hopefully more ideas from all corners with the work that Lafayette Square Institute is doing with their National Renter Wealth Coalition kickoff, which we haven't mentioned yet, but we're going to see each other there just next week in D.C. So very much looking forward to that. Chris Herrmann, thank you so much for joining us and sharing this program with us. Really looking forward to hearing more about it as the as the fun progresses and as you guys keep growing.

Chris Herrmann 01:06:53
Thanks for the invitation, Shane, and appreciate the work you're doing in this space.

Shane Phillips 01:07:01
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 and I'm on Bluesky and LinkedIn at @shanedphillips. Thanks for listening. We'll see you next time.