Affordable rental housing demand is skyrocketing, yet most cities cannot begin to offer enough affordable apartments. In the Chicago area alone, the gap between supply and demand is at least 176,000, and it increases every year.

New construction is a popular response to this challenge, but it is not a complete solution. Most new affordable units are funded through the Low Income Housing Tax Credit (LIHTC) program, the subsidies for which are helpful but limited.

Preservation is an essential response to the growing need for more affordable rental housing. "Preservation" means helping small entrepreneurs buy and rehab multi-unit rental buildings in low- and moderate-income communities. It is an effective, cost-efficient and workable strategy for many communities across the United States. 

Part of what makes preservation so appealing is the existing housing stock in many cities. Nearly one-third of rental units nationwide are in small, unsubsidized multifamily communities of five to 49 units. Indeed, contrary to popular belief, 75 percent of low-cost rentals in the United States are privately owned, privately financed and receive no public assistance whatsoever. Helping owners purchase and rehab these buildings is an important way to create more stable, safe affordable housing.

Equally important, preservation is far less expensive than new construction. To preserve an existing small building in Chicago it costs between $40,000 and $60,000 per unit. Building a new LIHTC unit can cost $300,000 to $400,000 or more. 

Chicago-based Community Investment Corporation (CIC) has established a successful preservation strategy that brings together existing housing stock, strong borrowers and committed bank investors. CIC's model is one that other cities with a shortage of affordable rental housing should seriously consider.

The CIC Model

CIC provides financing that makes it possible for borrowers to purchase and rehab multifamily rental buildings. These buildings tend to be older, located in low- and moderate-income communities and have lower median rents than larger multifamily properties.

An effective preservation strategy requires specialized expertise to underwrite loans in underserved neighborhoods, oversee renovations and deliver ongoing support. CIC's approach is a one-stop-shop that provides lending, construction oversight, loan servicing and support under one roof.

CIC loan officers follow projects from start to finish, beginning with careful underwriting and follow-up. Loan officers have extensive knowledge of the communities where CIC primarily lends and help borrowers navigate the process. CIC's construction staff advises owners on the scope of work, budgets and contractors and carefully monitors progress. Once construction is complete and the loan moves to servicing, CIC's staff knows the borrowers and works with them to resolve any difficulties. CIC also offers extensive training about managing rental properties. 

These services complement each other, providing a comprehensive approach to a type of lending that is difficult if not impossible for many banks to do on their own.

That difficulty is one reason CIC initiated its multifamily lending program in 1984, when 14 financial institutions invested $17.5 million to finance the acquisition and rehab of multifamily housing in largely underserved areas. Today, this specialized Community Development Financial Institution (CDFI) is capitalized by more than $400 million in commitments from 40 banks. Since its founding, CIC has provided more than $1.2 billion to finance rental buildings that offer more than 55,000 affordable units.

Greg Sorg has been a CIC borrower since 2007. He owns 119 affordable apartments in Chicago's Austin neighborhood, manages hundreds more apartments around Chicago and employs 40 people.

"CIC was the biggest part of our growth," Sorg says. "When the market crashed, all the other banks ran for the hills. CIC was the only real lender out there."

John Brauc of Checkmate Realty and Development says he appreciates that he can speak directly to his loan officer at CIC.

"This way, I'm speaking right away with someone who knows the deal, as opposed to dialing an 800 number," Brauc says. "If there is a particular problem on a deal, they will work with you to address it so that the deal actually works. They are in the business of making apartment buildings work in the city."

Rafael Leon of the Chicago Metropolitan Housing Development Corporation says, "One great thing about working with CIC is that they are concerned about the community and they are trying to engage landlords to preserve affordable housing and improve these communities."

Keys to Successful Preservation

CIC has proven that preserving and rehabbing existing multifamily buildings is a common-sense, cost-effective response to the shortage of affordable housing. Its model can be duplicated successfully in cities that have three essential components: The "right" housing stock, strong borrowers and committed investor banks. 

First, the available housing stock must be suited to preservation. That is, a city needs neighborhoods with a concentration of older, small multifamily buildings. These buildings may range from five to 100 units and vary from a courtyard building with 30 units to a six-unit building whose owner-occupant rents out five of the units.

These types of buildings are often located in areas that have had high-density neighborhoods for decades. Some of the buildings in these neighborhoods have likely fallen into disrepair, which makes them prime candidates for purchase and rehab.

The low- to moderate-income neighborhoods where these buildings are located usually offer access to transportation and jobs. They also serve residents who exemplify the renter demographic seen across the United States: Younger and less affluent than the population at large, these renters' jobs in construction, teaching, health care, retail and other sectors help contribute to a strong regional economy. In Chicago's Cook County, the median income of the renter households is $33,000 versus $72,000 for owner-occupied households.

Strong Borrowers

An effective preservation strategy needs strong borrowers who want to purchase and rehab smaller multifamily buildings in low- and moderate-income neighborhoods.

Many CIC borrowers are small "mom-and-pop" developers with the desire, knowledge and financial wherewithal to invest in and renovate older multifamily buildings. In contrast to owners of large rental buildings, these small business owners are often relatively new to real estate development and may buy one or two buildings, then steadily build their businesses over time. 

According to the 2012 Rental Housing Finance Survey, 58 percent of five- to 49-unit properties nationally are owned by individuals, households or estates, compared to only 8 percent of larger rental buildings. As these building owners invest additional money in their properties, hire area residents and buy supplies locally, they help strengthen the local economy. In many neighborhoods, the owners of small apartment buildings are among the strongest and most stable local businesses.

Yet CIC's borrowers are often less experienced and may need additional support-one reason CIC offers property management training to help borrowers prepare for the complex job of owning and managing apartment buildings, and help potential owners assess whether this is the right choice for them. The ongoing oversight and assistance that CIC provides through construction monitoring and loan servicing also helps borrowers stay on track.

Anthony Oliver attended CIC's Property Management Training course when he first started investing in communities and credits CIC with helping him to "get it right" when he began taking on larger buildings.

"Organizing the work flow for an 18-unit building is completely different than a 4-flat, which is what I had been doing," Oliver says. "If you don't get it right, you can lose a lot of money. But CIC provided me with more than money. They had the expertise to mentor me and work with me as a partner, not by telling me what to do, but by sharing their experience with me."

Committed Investor Banks

The success of CIC's model relies on a loan consortium structure and the commitment of investor banks, which are essential to making sure there is credit available to finance preservation.

Financing for small multifamily communities has become increasingly scarce across the country. Traditionally, lenders that financed these types of buildings were smaller community banks with in-depth knowledge of neighborhoods, properties and borrowers. Since 2005, there has been a precipitous decline in both the number of lenders and lending activity in communities where most affordable, small multifamily properties are located.

Consider Chicago's experience: Between 2006 and 2010, multifamily lending in low- to moderate-income communities in the six-county metro area declined by 72 percent. In this same time frame, six of the top 10 multifamily lenders either stopped this type of lending or closed their doors entirely.

Further, lending to buy and rehab small apartment buildings is so hands-on and complex that it is difficult for banks to accomplish on their own. A loan consortium model like CIC's helps local financial institutions pool their resources to finance and preserve small multifamily buildings in low-and moderate-income neighborhoods.

Combining resources and creating a specialized CDFI lender like CIC that manages the lending, construction monitoring and loan servicing allows banks to share risks and returns, as well as address needs that each bank is unable or unwilling to tackle alone. As a result, credit is made available to finance small rental properties and provide quality affordable housing. Investor banks also benefit from reaching underserved communities, helping transform neighborhoods and receiving Community Reinvestment Act consideration.

The need for affordable rental housing will continue to grow. Subsidies will remain limited. New construction will be expensive. As cities across the United States grapple with this reality, they should not overlook the power of preservation.

As CIC proves, preservation is an effective, cost-efficient strategy that can increase the supply of quality affordable housing, stabilize neighborhoods and strengthen the local economy. It is also a strategy that is well within reach of many communities. 

John G. "Jack" Markowski is President of Community Investment Corporation and a former Commissioner of the City of Chicago's Department of Housing.