Jordan Moss, CEO and founder of Catalyst Housing, joins us this week to share his insights on the complexities of the Low Income Housing Tax Credit space, and what Catalyst is doing to improve middle income housing affordability. Justin and Jordan chat about why we need to build more and create a better and simpler process that incentivizes landlords to maintain affordable pricing if we want to make headway in tackling the housing affordability crisis.

In this episode, we discuss:

  • The challenges of tackling the housing affordability crisis and the limitations of the traditional LIHTC (Low Income Housing Tax Credit) model. (2:35)
  • How Catalyst is working to find scalable solutions to the middle income housing affordability crisis, affecting first-responders, nurses, teachers, etc. in partnership with California Community Housing Agency (Cal CHA). (5:30)
  • The role of Joint Power Authority's (JPA's) in the housing space and how governmental ownership of assets provide a unique opportunity to address the middle income housing crisis. (10:33)
  • How Catalyst is working jointly with government bond programs and municipalities to actively keep and develop affordable housing in their community. (15:35)
  • The mechanics of acquiring market rate assets for the government bond programs. (18:00)
  • The agreements with local municipalities needed to initiate affordability housing programs. (26:30)
  • How the Essential Housing Fund is striving to create affordable housing for public school teachers in Marin County and promote diversity in the multifamily housing space. (29:05)
  • How Catalyst is leveraging innovations in the PropTech space to pass on affordability to tenants and create operations efficiencies. (35:50)
  • Amenities and technology provided in Catalyst's housing communities to sustain resilient communities in the midst of fires, blackouts, and other crises. (37:18)
  • Innovations and reinventions in the short-term rental space. (40:05)
  • Ideas around assisting tenants graduate from rentership into homeownership. (49:15)

Resources:

California's affordable housing shortage.

California Community Housing Agency ("CalCHA").

Joint Powers Authority ("JPA").

Essential Housing Fund.

Catalyst's Action Plan on Medium.

Transcription:

(1:56) Justin Alanís: Jordan Moss. Welcome to the podcast.

(1:58) Jordan Moss: Thanks for having me.

(2:00) Justin Alanís: I'm excited to chat with you. I know that you have deep experience in the commercial real estate industry, both as an owner, also as a broker, and also as a PropTech investor and advisor. So I want to start the conversation about how you got to Catalyst, a little bit about Catalysts origin story, and how you decided to really get into affordable housing?

(2:22) Jordan Moss: Sure, yeah. Happy to jump right in. I mean, as you said, Justin, I've been in the housing space for close to 20 years now. Hard to believe that that's the case but have done sort of everything in and around the multifamily sector over that time, and started Catalyst a handful of years ago to focus exclusively on affordable housing. And out of the gates, I would say we were more focused on traditional, capital A affordable housing using tax credits and private activity bonds, mostly to develop new ground up LIHTC (Low-Income Housing Tax Credit) communities. And along the way, we just realized that that wasn't the answer, in our view, to the affordability crisis. We realized that there were two major problems with that model that we wanted to address. The first was, the traditional LIHTC capital model is just not very scalable. When you have to commit to a transaction years out and hope and pray for an allocation of bonds and credits in order to make the deal work, there's a lot of uncertainty and sort of insecurity around that capital structure that makes that model pretty difficult. And the other issue we were seeing and wanted to address was the inability to address the middle income housing crisis. The missing middle as we call it, which is really our nurses, teachers, first responders. All the people in this state and increasingly in other states that earn too much to qualify for traditional affordable housing, but don't earn enough to live within the communities that they serve and that depend upon them. And so our hope and our thought when we started Catalyst was that there was a more programmatic, scalable, sort of off the grid capital structure that would allow us to address this missing middle housing crisis at scale. And so that's what we've been sort of hacking away at for the past number of years.

(4:12) Justin Alanís: That's a great lead in and I want to touch on a number of different things that you talked about, especially how you guys are chipping away at it. But first, I want to touch on you talked a little bit about how the existing LITHC affordable housing financing infrastructure is pretty cumbersome. And as you know, I formally did some affordable housing, my background, and I found it to be the same way. There's all kinds of different traunches. There's tax credit bonds. There's tax credits that you need to sell to other corporations. It pretty much is only used for development purposes. And so the barriers to entry for new participants, especially smaller, let's call them small and independent landlords, is pretty high because the complexity is so high. Is that what you found? And did you find that it just wasn't a scalable solution?

(4:59) Jordan Moss: I think you answered your own question, because you obviously enjoyed it so much that you ran off to become a technology entrepreneur rather than sticking with that, right? But I think everything you said is accurate. It's just not... I mean, first of all, I should back up and say, the LITHC program since its creation in the 80s, has been massively influential if you look at the units that have been created across the country. And we'd be in a very different situation today, if that infrastructure did not exist. That said, it's extremely cumbersome as you touched on, and the uncertainty of that structure, as you said, sort of the ability to address the acquisition model. I mean, there are ac-rehab deals that are done. But as you said, a lot of this is sort of a new production model, which is also desperately needed, but there just aren't enough resources to address the affordable housing crisis at scale. And to the smaller landlord, that I know you focus a lot of your time and energy on, it's definitely a super opaque, confusing, web to navigate and just doesn't really scale well in that regard. As you and I have talked about in the past, the multifamily industry is sort of one set of companies and people and obviously, you've worked with those folks for many years. The affordable housing industry, as I found when I decided to jump in back in 2015, is a totally different industry. Really. I mean, it's a different set of people. The financial engineering behind these is totally different. It's definitely cumbersome. I often say, people ask how it can be that the cost of producing low income units in places like San Francisco, for example, could be 30, 40, sometimes 50 percent greater than the cost of producing market rate assets, which is a bit of a head scratcher when you're trying to produce low cost affordable housing. And I think the answer is, it's not as if the actors embedded within that are bad actors in any way. Everyone's got the best intentions. There's a lot of people doing really great things in the affordable housing space. But I just think the infrastructure that you're forced to work with is sort of so... There's a lot of misaligned interest and perverse incentives, and it's just so inefficient that the outcome of that is that housing, which is just massively cumbersome and expensive to build.

(7:17) Justin Alanís: Yeah. It feels bureaucratic, right? When you lose that much money in the process of developing those assets, and then bringing them to market, it feels bureaucratic. It feels like money's falling through the cracks. And so we needed innovation in this space clearly, and we still need innovation in this space and innovation needs to happen as a result of the affordability crisis that we hear so much about. And that COVID is certainly going to be and is augmenting right now. And I think one of the key things that you said earlier is also that LITHC and these other affordable programs, section 8 housing and LITHC, address the the more I'd say severe, lower income folks who exist out there. And what you're doing at Catalyst is maybe one level up where you're talking about workforce housing. You've said nurses, teachers, first responders, civil servants. People like that who need affordable housing and need to stay in areas that are close in proximity to their jobs, so that they're not traveling all over the state and traveling a hundred miles to get to there. job. And so that's really the segment of the market that now you guys are focusing at Catalyst. Is that right?

(8:24) Jordan Moss: That's right. I mean, that's the segment of the market, which is generally referred to as the missing middle. Because as things exist today, there are no subsidies or motivations for people to create housing for households who earn between 60 and say, 120 percent of median income, which is generally where you start to get into market rate rents at those income levels. And so we've had, again, I would reiterate, there's not enough subsidy or money to spread around today to easily solve these issues that we have. I think it's fairly well documented that just in California, we're millions of units short to adequately house everyone affordably and sustainably. But technically, there are funds to address homelessness on one end of the of the income spectrum. The LITHC program we've been talking about is really to address kind of that 0 to 60 percent AMI (Area Median Income) space when you think about household income. And then there's been plenty of market rate capital to address the upper end of the market. I guess there could always be more because if you believe in general trickle down economics of just more supply at scale across the state, that's obviously going to help from an affordability standpoint. Anyone who's taken Econ 101 or believes in the connection between supply and demand is probably on board with the thought that we just need to build more housing period, of any kind. But in that middle income space, that's really where we identified an opportunity and really felt a calling socially, I would say, to try to craft a scalable solution to provide housing for those 60 to 120 percent median income households. And you're exactly right. That is squarely what we're addressing today.

(10:10) Justin Alanís: Great. You talked about scalable again. So walk us through how you guys are doing that. I know that you guys have a relationship with a company called or a government program called Cal CHA (Community Housing Agency). So walk us through how you work with Cal CHA, what it is, and then also how this program differs from LITHC and section 8 housing. What makes it more shareable?

(10:32) Justin Alanís: Yeah. So, a bit more maybe on the origin story. Once we realized that the LITHC model was not only not for us given the level of brain damage in our view that it was just not scalable and not the answer. We spent ultimately, it was about a two year period of time with bankers, attorneys, governmental officials, consultants, trying to figure out how to connect the dots on these two issues, right? On the scalable capital solution, as well as the ability to work within that system that we were looking to create to address the middle income. And on the Cal CHA, the California Community Housing agency side, there was a group of people who were already running a separate JPA, a Joint Powers Authority, in the state of California. And, I don't know how technical, Justin, we want to get on this, but the easy answer is probably there's things called JPA's in California, which are set up for various public purposes to create public benefit in different ways. In the housing space, there's a number of JPAs who are traditionally what you would call conduit issuers. They issue bonds for more traditional LITHC transactions. And so we had a relationship with one of those existing JPA's called Cal PFA, and their team was part of this working group that we had pulled together in hopes of finding a solution to the middle income space. And so ultimately, what we landed on is we thought there was a really unique opportunity around governmental ownership of assets. We've talked on this podcast already a little bit about nonprofit ownership in the LITHC model, as well as private ownership. Just typical for-profit apartment owners, but the governmental ownership piece is sort of the the third option. And so everything we're doing today really hinges around the governmental ownership of assets. And so we've gone out, your question about scale, we in partnership with Cal CHA have now acquired about 600 million dollars of core, relatively Class A for the most part, apartments across northern California over the past 60 months. They're 100 percent owned by Cal CHA. And one of the unique aspects of the governmental ownership is that we can issue our own Cal CHA issued governmental revenue bonds that cover 100 percent of the cost of producing this housing. And that allows us to compete with market rate buyers to go out and buy market rate, unrestricted housing communities and to restrict them to households earning below 120 percent of median income. And one of the most exciting parts of the program is not only that we overnight create this desperately needed band of middle income housing for those nurses, teachers, first responders, civil servants, etc. But on a long term basis, we end up giving these assets to the underlying jurisdiction. I think you and I traded a note about the asset we bought in Livermore last week, for example. 162 units. It was a 49 million dollar acquisition. And literally over the next 30 years, we will fully amortize the bonds on that asset and give all of the embedded equity, the asset itself, the long term cash flow, all of that to the city of Livermore. And if you think about appreciation of real estate in California over multiple decades, that asset alone, it's not unheard of that a 50 million dollar asset 30 years later will be worth 2, 3, 4, 5 times that amount on a free and clear basis and producing pretty significant annual cash flows. And one of the things that we've been happiest about is that all of the cities and counties and housing authorities that have joined Cal CHA as a member, because they want us to come do this within their jurisdiction, they have all cemented in writing that they will reinvest all of the proceeds of this program back into additional forms of housing. And so it's really our intent and our hope and our goal that when we look back on this program decades from now, we will have proven to have created tens of billions of dollars, f you think about our current scale, of public benefit. That's cash flowing billions of dollars annually, and that all of that is being reinvested into additional housing across the state.

(14:51) Justin Alanís: It's amazing what you've been able to accomplish and the benefit to the local authorities, the local municipalities and the state in general. I know you're right now doing this only in California. I'm guessing there's plans to expand beyond California. But essentially what I just heard from you is that you guys work with Cal CHA, which is a government sponsored agency, that then issues bonds. So you guys issue bonds with those local municipalities, for 100 percent of the financing of the deal. You guys go in. You acquire it. And then you set income restrictions on those assets, so that the people who are living there aren't priced out of those units. Then in 30 years, once the bond is fully paid down, those government agencies then actually own that asset. Did I catch that?

(15:37) Jordan Moss: That's right. I mean, maybe just a couple of technicalities. We don't want to force them to own assets. And there's plenty of municipalities that aren't set up to do that and have no interest. So we give them an option. It's not an obligation to take title. But what is not optional is that all of the economics that accrue there will pass to the underlying jurisdiction, whether they take title or not. So even if they ultimately asked Cal CHA to sell one of these properties, they'll be granted all of the sales proceeds. And once again, they have all guaranteed that they'll reinvest that money back into housing. And as far as the regulatory agreement, you got that right as well. So from the day that we close on one of these assets, we implement a regulatory agreement that restricts one third of the units to low income households, one third to median income households, and one third to moderate income households. So that's 80, 100, and 120 percent AMI respectively. And what's amazing is to see when we go through the renewal process with a specific tenant, we learned that they may have been paying, once we income qualify them, we do the math, and we see that they may have been paying 40 to 50 percent of their income towards rent. Obviously, this is well documented as well, the percentage of households unfortunately across California who are rent burdened in that way. But when they get a renewal offer from us, where they're now paying 30 percent of their income towards rent, you can imagine the head scratching that goes on and people asking themselves, can this be real?

(17:04) Justin Alanís: Yeah. And then for the benefit for the municipality also is that, in a normal situation, this asset would trade hands to a new developer or a new owner. They would do renovation of the units. They would enhance or upgrade the units and then jump rent on those assets or on those properties by 20, 30 percent even. And so it becomes even less affordable in a lot of cases, because a lot of these investors are searching for yield out there. And so now these municipalities can ensure through a bond program, that they are keeping their central workforce in their community. They're not being displaced by accelerated rents and new developers or new owners coming in and increasing the rents on them. And so they're able to maintain a semblance of community that's really important for the future, as we think about continued affordability of housing in these communities.

(17:53) Jordan Moss: That's exactly right. I mean, if you were to go look at all of the capital that's been raised around multifamily investment, the bulk of that capital in recent years has been value add money. It's been people seeking yield, just as you referenced. When I hear the term value-add today, now that I've got a slightly different lens than when I was on the market rate ownership side or the brokerage side, when I hear value add today, what I really see is that displacement that you're talking about. In order to justify significant investment into an asset that needs some TLC, you have to jack those rents just to make numbers work on your spreadsheet. And so we need to coin some term on this then. Whatever the opposite of a value add is, but that's sort of what we're doing. Not to keep harping on this Livermore transaction, it's top of mind because we just closed it last week. But that asset actually had an affordability restriction on it that burned off a number of years ago when the city was up in arms at the time. And they couldn't figure out how to rescue those units from rolling from the affordable restrictions they had to the market rate. And in its current state, I know for a fact that the folks that we were bidding against, they meet that sort of value add description that we're talking about. So not only in that case were we able to return the affordability that had previously existed, add additional layers of affordability on top of that, invest the capital that the asset needed and then some, because we've got a 30 year lens. And so we'd probably go above and beyond what some other folks would do from a renovation standpoint, but at the same time, we were able to protect those tenants today and perpetually.

(19:29) Justin Alanís: And so as part of this bond program, you're able to get renovation proceeds into the acquisition so that you can add benefit, add amenity spaces, add new carpets or new flooring, new countertops, new kitchens, things like that for these residents. So not only do they have rent restriction, but they also have a nicer place to live at the end of the day, which is pretty incredible if you think about it. How do you ensure that you're buying these assets for actually market rate? How does the municipality who you're partnering with make sure that they're not overpaying for these assets? Or do they not care?

(20:01) Jordan Moss: They definitely care and the bondholders definitely care. We go through all of the hoops that a normal quote unquote, normal buyer would jump through as far as appraisals and market studies and things like that. There's obviously a lot of faith put on our team at Catalyst. Again, I've been operating in the California institutional multifamily market for a couple of decades now. We clearly have significant relationships with owners, developers, managers, brokers. We see a lot of opportunities. We keep tabs on not only the things we buy, but the things we don't buy and where they traded, and whether we thought those numbers made sense or not. And everyone likes to dream of the off market opportunity that no other buyer has seen, and you have a clueless seller, and you're pulling the wool over their eyes and getting a massive discount. But I think we all know in the information age that we live in that that opportunity doesn't really exist anymore. Pretty much every apartment owner has all kinds of brokers calling them on a regular basis telling them what they can achieve on a sale of their asset. And so, we're held accountable by competing against other buyers and, I think there's ways that we can find to pay a dollar more than the next person but obviously, we do care about the pricing. And we've missed assets too for whatever reason. There's other people that are far more aggressive than we are and we just can't compete, so it's not as if we're buying every asset that we make an offer on. That's for sure.

(21:25) Justin Alanís: Got it. So you have to have still some discipline in the way that you underwrite these assets, especially when you sell the bonds I'm guessing, or when you solicit the the bondholders to come in and buy those bonds. They're going to be looking at the underlying asset and things like the... Well in this case, you don't really have a debt service coverage ratio, right, because you get 100 percent tax exempt financing? But you also get property tax exemptions or I should say the municipality in this case gets property tax exemptions as well. So does that property tax exemption allow you then to kind of push the envelope a little bit more? Because that's such a huge portion of the expense stack usually, in these assets.

(22:01) Jordan Moss: Yeah, it's a give and take. The property tax exemption is huge. This model would not work without that, but you have to remember that we're massively taking a hit on the income side as well by bringing rents in, right? So I like to think of it as taking that tax exemption and reinvesting those dollars into buying rents down for tenants so that they're affordable. And we do still run all of the traditional metrics. You made a comment about debt service coverage ratios. We're definitely still paying attention to all of those things. We look at what's the cap rate on the way in and what do we expect that to be with expansion over time? And what is that debt coverage ratio not only today, but what sort of moderate growth over time? You have to remember that these bondholders are the most sophisticated financial institutions across the globe and so they understand real estate. They understand financial metrics and everybody's paying attention to the same stuff. I would say what we're not doing in comparison to that traditional value add investor who's probably backing into a 5 to 10 year IRR, is we're not running IRR's. Because on the back end we're giving the asset away, right? So there is no residual... I mean, there's a residual value, but it's not coming back to the bondholders or to Catalyst or anyone other than the municipality.

(23:18) Justin Alanís: Yeah. The bondholders are getting a coupon clip of yield every single year, so it's an annual yield for them, and in a very secure asset that houses community members and for a municipality that exists. Now, the property itself then pays down all of those bond payments. And what happens if, for example, you guys for some reason, something hits and there's 80 percent occupancy and you're not able to make your bond payments? What happens in those scenarios? Where does the municipality step in? Where's their obligation under a distress scenario? Now, I don't think it'll ever happen, Jordan, because I know you and I know Catalyst. And I know how well you guys run and operate your portfolio and I know your background, but let's just say something bad happened. What happens in those circumstances?

(24:00) Jordan Moss: Yeah. I appreciate that the commentary and the vote of confidence. I would agree with you that the further below market your rents are in the California in-fill markets that we're buying in, the less likely it is that you have that kind of vacancy problem. I think one of the reasons that you and I and all of our friends prefer multifamily investing to some of the other asset classes is because we know that if you reduce rents enough, somebody is going to live there, right? It's a lot different than having an office building in a suburban location that's fully vacant, and there's literally not one tenant in the marketplace looking for space. Right? Although, who knows. Maybe today, actually, I'd rather own a suburban office building than an urban office building. Yeah, bad example. But I do think it's unlikely to happen. I mean, I would mention, we stress our underwriting pretty significantly. And these transactions are loaded up, not only with proceeds to cover the acquisition price and you touched on renovation dollars, but there's very significant debt reserves in these assets as well. You know, such that, we could bear the brunt of a fairly significant impact, whether it's driven by market dynamics or look at what we're dealing with today. You and I were just chatting pre-recording here about the fires and COVID and blackouts and all of the things we've been dealing with in California, which has been a host of fairly cataclysmic events. But we like to think that we're taking a lot of that into account on the way in,

(25:37) Justin Alanís: Yeah. As a result of that, you guys have had amazing reception from these communities. You have, I think, 10 or 11 total city, county members throughout the state who are now participating in this program. Do you go to them each one one-by-one with Cal CHA, introduce the program, do a presentation, show them your existing assets? How does that conversation typically go and what's the kind of reception that you usually get?

(26:05) Jordan Moss: It's funny you asked that question because I was asking myself recently how a technology focused founder like yourself would deal with the lack of scalability of that blocking and tackling, of going to every single municipality. I figured your head might explode, but you did get that right. We have a full time government affairs and partnerships person on staff at Catalyst that leads all of those conversations. We have a couple of key advisors that help us with those introductions as well. It would be great if we could call up Gavin Newsom and have him wave a magic wand such that we could do this everywhere and anywhere, but that's just not the case. This really is a partnership with the local municipality. As part of that, they need to want this. They need to invite us in to do this. They need to pass legislation at City Council that says hey, we really want to become a member of Cal CHA. We desperately need this middle income housing. You guys can come issue bonds here to do this. We see the upside and the value of these assets that you're going to give us over time. We're going to recycle that into additional forms of affordable housing. And so, we do have to do that blocking and tackling city by city, county by county. Today, I think we have 14 members today, and we should gain 2 more on September 1. I think another one the week after. We had set a goal at the beginning of this year, pre-COVID of getting north of 20 by the end of 2020. And I think even with COVID and living in an era of virtual council meetings by Zoom, I think we're still going to get there. And actually, if there's any upside to the Zoom world that we're all living in, the democratizing factor is we're spending a lot more time with people in Southern California. We really got started in Northern California because when you were allowed to go drive and see people in person, it was easier for our team based up here to go do that locally. And so we think we're going to have a bunch of new members in Southern California as well.

(28:04) Justin Alanís: It's amazing now that the Zoom world can open up actually new avenues for you. Instead of having to hire person down in LA to go knock on those doors and go to those city council meetings, everything's become virtual. So now you can hop on Zoom, take a 30 minute meeting, have a follow up meeting, and maybe you get 10 more cities and counties on your program, which could accelerate your business. Especially in a time when affordability is so desperately needed across the entire state and quite frankly, across the entire country. I know that you guys are doing a lot in also other areas. You have a nonprofit called the Essential Housing Fund. You guys are doing a ton of innovation right now and made some pretty great new hires. So I'd love to talk a little bit about what more you guys are doing right now. And I'd love to start by talking about the Essential Housing Fund that you launched in May. Tell me a little bit about it. What does it do and how does it work?

(28:55) Jordan Moss: Yeah. We're really proud of the Essential Housing Fund. I think that impetus there came from looking at an asset that we had acquired recently in Marin County, which is actually where I live and and where I was raised and I'm very familiar with. We bought an unbelievable class A property here and we were looking at the incomes of teachers. We always say as we talked about earlier, we're looking to serve nurses, teachers, first responders. I just was looking at teacher salaries. My kids go to the public school here and in Larkspur where we live, which also happens to be where this assets located. And the round numbers are teachers on average in Marin earn 50,000 dollars a year. And if you look at even at the 80 percent AMI level, which is our most affordable rent level, because the AMI's are so high in places Marin County, San Mateo County, Santa Clara County, that resulting calculation is still a pretty unachievable number for someone who has decided to give back through being a teacher. And so when you do the math, we're effectively asking teachers to contribute two thirds of their gross income to even live at our community where we've reduced rents below market to provide housing at the 80 percent level. So we were looking at that picture and saying, hey, this has to be a philanthropic endeavor. You get far enough down the affordability spectrum, and if you're operating outside of that LITHC world that we talked about earlier, you're into philanthropic or social impact territory. And so we said, hey, we've been able to figure out this middle income model. It's been a good thing for everybody. Catalyst is generating some asset management fees, etc. And can we give back a portion of what we're earning and fund the Essential Housing Fund to get it started to then go and reduce rents for public school teachers in our communities. And so that was kind of the the impetus. And then as we started to think about what else we could do with our own nonprofit, it became clear. You talked earlier about opportunities in other states. The unique thing that we have figured out here in California, as we talked about is all about governmental ownership. But we think there's some really interesting models in other states that hinge around nonprofit ownership. So pretty similar to what we're doing now with tax exempt issuances, but with nonprofit ownership as opposed to governmental ownership. And then lastly, I would say the third pillar of the Essential Housing Fund. Some of this stemmed from the brutal killing of George Floyd and the reaction and the social crisis on the heels of that. But these are thoughts we were already having within our company and beyond with friends in the industry. I mean, Justin, you've been to every NMHC meeting for the past decade or more, and obviously have a feel for what that looks like demographically.

(31:50) Justin Alanís: Yeah, for sure.

(31:51) Jordan Moss: And it's unacceptable. It really is. We are not cultivating a future generation of leaders in the multifamily space that looks any different from the current generation, which is completely homogeneous, right? And so, we thought that from a diversity and inclusion standpoint, we could do a bunch with the Essential Housing Fund. And we've made some commitments publicly to what some of those things are. And I'm happy to say we're already making great strides on all of those fronts,

(32:24) Justin Alanís: And you put forward a Catalyst action plan on your blog on Medium. It has a bunch of different pillars on how you guys want to increase diversity and have racial inclusion within Catalyst and within your communities and that's definitely something to check out. We'll link to that on our blog page in the show notes after this. But I can say that you guys already doing this, right? You guys just made a hire for your new head of construction, Jonathan Coates, who is an African-American and so your plan is already going into action. Love seeing that and you definitely are a man of your word in terms of all the things that you guys are doing. I think everybody would be really excited to see all the progress that you guys are making there. Let's switch gears really quickly and talk about innovation. This is something that we talk about a lot on this podcast. I have PropTech entrepreneurs on the podcast that bring their stories and how they're building technology, back to how it can apply to owners of real estate as well. And a lot of times they're the ones who have great insight into what's going on across a wide swath of the industry. You also have a similar, I would say approach and mindset. You are an advisor and an investor in many different PropTech companies. And you guys are also using Catalyst now not just to innovate on the affordable housing side, but also to innovate within your own portfolio. Actually how you impact these residents lives on a daily basis by using technology to better harness data, information, to give them things like IoT systems to make their lives easier, amenitizing. Talk to me a little bit about that. What are you guys doing there? I know you guys have made some big hires as well.

(33:56) Jordan Moss: Yeah. You nailed that, for sure. We recently hired, as you're well aware, Steph Fuhrman, who came over from Greystar where she was the Global Head of innovation. And really, I think you would agree, Justin, for many years now has been a real leader in the PropTech space, if that's what we're calling it these days.

(34:16) Justin Alanís: Some people hate that term. Some people like it. I'll keep using it until I hear something different and better.

(34:23) Jordan Moss: Yeah. Until we're banned, right? But Steph has been a friend for 15 years. Even before her journey into that PropTech space. She's been there since the beginning and is really renowned globally, I would say, in that space. And so with her joining us... I mean, as you said, I had already personally been spending a ton of time in the space as an investor, as an advisor. Paying attention to various services, partnerships, platforms, technologies that we could leverage at our own assets. Not through the lens of making a venture style investment in hopes of creating a 100 x return, but looking at how we could leverage the opportunity to drive operating efficiencies. For example, to reinvest those savings into incremental affordability for our tenants, so a very different view. And with Steph coming aboard formally, we launched something called Catalyst Innovation Lab, which we're pretty excited about. We actually are acquiring an asset right now. An existing company that does some interesting things in the multifamily technology space. As part of that acquisition, we're sort of layering some new people and services into that company that's going to do even more interesting things. And again, for other market rate focused people, they'll be able to engage with this company and we know what their incentives will be. They'll be driven by the opportunity to more efficiently operate their assets and drive capital to the bottom line. And for us, we'll continue to view this through the lens of what we can do to continue to iterate around our model to enhance the lives of the folks that live in our communities.

(36:05) Justin Alanís: Great. Walk me through some real technologies or things that you're looking at right now. I know that Steph just started. But tell the audience and tell me about what it is that you're actually doing right now that you think could be one of those things that drives value to the bottom line to then put back into rent or drives the value of the actual residents life on site.

(36:26) Jordan Moss: Sure. I think we only have an hour, so I'll only go through a couple. There's a couple things that jumps to mind. So, in our conversation that we had just before this call around the fires in California that we seem to be dealing with on an annual basis, the resulting blackouts, etc. We've been spending a lot of time from a sustainability standpoint, on the combination of solar panels, battery backup. How to create resilient communities where even in the midst of a crisis like we have seen, unfortunately far too often here in Northern California, we can continue to power our communities. Which on one hand enhances the lives of the folks who live there if they can continue to live their lives, because in the hundred degree weather that we've had here recently, they continue to have AC, etc. But also if you think about the surrounding community, I mean, Justin, we all lived through these blackouts that we've endured over the past couple of years. And I'm sure like me there was a time where you were looking for a Whole Foods where you could plug your laptop in to get an email out or something, right? And when you think about the ability to leverage these assets and the resilient power systems to offer up charging stations for the community. Even more so for elderly folks in the community, for example, cooling stations where we've got AC running and they can come and get a break from this ridiculous heat that we've been dealing with. That's one thing. Maybe that checks the box on the building systems, sustainability, resilient power side of things. Maybe on the opposite end of the spectrum, the short term rental space is something that a lot of people have paid a lot of attention to. Unfortunately, a lot of the operators in that space are now dealing with the results of COVID and the disruptions to their business. I think we've seen some of them close their doors already and I wouldn't be surprised if we see more. We have a very different view of that model. I mean, typically the landlord is sort of taking a scrape for allowing tenants to sublease their units. And if there's a technology platform involved, they're usually taking a scrape for sort of powering that tri-party transaction between, the property owner, the platform, and the resident. But we look at that and are working on some pretty unique partnerships right now where we can get not only the platform, but we as the owner, Cal CHA, to waive those traditional taxes that they insert into these models. Such that if our tenants, for example, know that they're already going to be gone for a week in the summer, they have some trip planned and they can lease their unit out for that short period of time. And use that income to pay a month's worth of rent without us trying to earn anything on their back. I think that's a more interesting way to look at the short term rental space. So that would be another example. I mean, I could give you 10 others, but I'll pause there.

(39:22) Justin Alanís: Those are a great examples because they're dealing with trends that are really relevant to us right now in our lives, right? So the the solar is obviously a big one, where if we're faced with a situation where we have hundred degree weather, rolling blackouts, and fires that are raging. All the while we have a pandemic going on and people need to stay indoors. Not a great experience when you can't have AC and you can't keep your fridge cool and your food cool, right? And so having off the grid power, I think is going to become a huge trend for all citizens, whether you're a homeowner or an apartment owner. And it's going to be probably one of the biggest amenities that you could offer your tenants in the future. And not only that, but it has the double benefit of eventually paying off. Especially on a 30 year basis that you guys are looking at in terms of the horizon, from an energy standpoint where you can push energy to renewable energy to the grid and have, probably not in your case because you guys have so many units. But in a single family residential situation you can probably have, depending on how big the solar grid is, you can have net neutral or zero cost energy. Basically the cost to tie-in to PG&E. And on the second side, another big trend that we're seeing right now is mobility, right? Mobility of people, and being able to not lose space efficiency during that time. And there are a lot of companies that have popped up like Lyric and Sonder and FrontDesk and a number of others in that space to your point. But now, you're talking about instead of having a middle company in this space who is leasing out those empty apartments or that floor of empty units, that you're going to allow the residents to basically lease those units themselves, while having some sort of control at the management level, to make sure that your other residents aren't at risk. That you know who's coming in and out. That you have checkpoint systems. And I'm sure you have a lot of other innovations that would enable all of this to happen throughout the community as well. And I think those are probably two really, really big ones. And two big innovations that I would recommend any landlord whether you're a big landlord out there of big market rate apartments, or smaller landlord with a smaller footprint apartments to look at allowing your residents to have those two really, really interesting features associated with their apartment building.

(41:33) Jordan Moss: I was just gonna say, you mentioned the two but in describing them, at least the second one, you captured a third. If you're going to recommend that people look at that type of setup, they really have to think of access, controls, and smart units, right? So that's another thing that we've been pretty focused on. And just a quick comment there, we started with the unit, as many people have and looked at how do we take a dumb unit and turn it into a smart unit? We're now trying to look further into the future at smart buildings. So how do we make the jump from smart units to smart buildings, where we've got conveyer networks and can just from both a sustainability and in a technology and innovation standpoint, just do a lot more with those buildings and measure a lot more than we can now. So yeah, I could go into that in more detail, but I think that's sort of the next step.

(42:26) Justin Alanís: Totally. It's funny, right? Because I was running a panel at, I don't remember what conference. It was like NMHC or something like that 2 years ago. And it was about amenities in class A apartments and I had people raise their hand. I said, raise your hand if you are going to be okay with having your tenants lease out their apartments on a short term basis. Of the community, which was all C level executives, nobody raised their hand. Maybe one person raised their hand. And you move forward now 2 years and all of these innovations now are allowing for this. And the biggest risk back then was that these landlords didn't want their existing tenants to feel insecure, right? Of who's coming in, who's going out? How do I know that this person, that these people who are staying their via Airbnb or any of these other places are actually good tenants? Are good people? They're not going to do damage to the property and or impact my residents lives. And I think now that people are mostly over that. And I think people now see the benefit of having these flexible lease terms. Allowing the residents to have that flexibility, because they would have that in their own home if they wanted it. And being able to allow them to do that and then being able to create smart access controls to know who's coming and going. To have systems and software to also know who's coming and going is really critical. And it's helping all these residents have ultimately what amounts to be a better lifestyle, more flexible lifestyle. And maybe a lifestyle that a little bit more reflects what home ownership looks like, where you have more control over your domain. And I think that's really important for apartment owners to think about.

(43:56) Jordan Moss: Well, it's gonna happen regardless. Your follow up question should have been how many of you realize that this is already happening? Whether you think you're allowing for it to happen or not. Our hope is that we actually cultivate a group of short term renters that from a social impact standpoint, given that they have their choice between staying at one of our communities short term or staying in a hotel or at a different market rate community can wrap their head around the fact that they may be, with their 4 day stay, or their one week stay, whatever it might be they may be effectively paying a teacher's rent for the month. And so we're working on some ways to market that appropriately such that, the opportunity to stay with us jumps out at people and that they get really excited about pitching in in that capacity.

(44:48) Justin Alanís: Yeah. I think the reality of that situation is becoming more relevant every single day when our US passports don't allow us to travel nearly anywhere in the world right now. I know that my wife and I right now are looking at like, where do we want to go? We got to get the F out of here, right? Let's go to Wyoming. Let's go to Montana. And, so, people like me and people who own homes maybe don't want to be stuck at homes and they want a different change of scenery. And so allowing people to have that flexibility of lifestyle, I think, is going to become the future. And so I think it is just really, really important to think about that in the context of how we operate and run multifamily apartment complexes for the benefit of our residents. Switching gears a little bit and actually maybe circling all the way back to a little bit of the beginning conversation, I talked a lot about affordability. and affordability concerns live definitely in this market rate community. In these Class A or even Class B, big communities. It's definitely there. But if you look at the NMHC numbers right now that they post every week, the ability to pay rent, the number of evictions. It doesn't seem to have a lot of distress in the ecosystem right now, actually. It's surprising, right? And even August seems to be holding up okay. But there is this whole other segment of the market. We'll call them the small and independent landlord segment of the market. Let's call it assets that are valued between one and 20 million dollars, where they have between 5 and maybe 25, 30 units. And the owners of these assets are typically individuals who don't have as much capital behind them. They don't have as much ability to withstand changes in their rent roll and payments in the rent roll, as well. And it just so happens that the residents in this space also are more affordability constrained. And so right now Catalyst is working and operating in this market rate segment, in these let's call it institutional asset space. What are the plans to start moving downstream? And what do you see for enhancing affordability in this small and independent landlord space and tenant space in these smaller buildings?

(46:48) Jordan Moss: Yeah. That's a great question. And I worry a lot about those exact tenants that you're referencing. What pops into my mind granularly is a 20 unit building on the peninsula here in San Mateo County that's owned by an 80 year old person who's owned it forever. And they're a bit asleep at the switch and people are below market and at some point, a lot of those buildings in the not too distant future, I would argue, are going to turn over. We're seeing some of this already. But clearly, those are not the institutionally owned and operated buildings that you referenced where we traffic today. And we worry a lot about that space. I mean, I agree with you that those tenants are most at risk. Our model that we have developed today was really built around an institutional execution. Our average transaction size to date has been north of 100 million dollars. So we're definitely focused on larger more institutional assets and owners. But I would tell you, there's multiple ways that we continue to iterate around this structure. We touched on some of the innovation focused efforts that we think will drive additional affordability. But there's additional financial innovation around the structure that is already working pretty well, but doesn't allow us to address those smaller assets that we think we'll be able to roll out in the near future. Back to kind of an earlier comment about the affordability spectrum, we pay a lot of attention to the entire spectrum, which I see as being anchored by homelessness on one end and homeownership on the other. And so you're referencing generally, I would say households who earn around or inside of one end of our spectrum. The 60 percent AMI area that we're addressing. But even on the other end of that spectrum, as we continue to iterate and innovate around our capital structure, we're also paying a lot of attention as to how we create a housing ladder, such that the residents that live affordably and sustainably with us are able to graduate up and out of rentership completely into homeownership. And what partnerships may exist there to help people apply a portion of their rent towards a down payment. What kind of downpayment assistance programs can we help our renters back into? There's some people like Landed for example. I don't know if you've dug into their business model. They're doing pretty amazing things for teachers, public school teachers around high leverage downpayment assistance to get teachers into ownership opportunities. But it's hard to argue with that being one of the major keys to people's financial freedom. And so we want to make sure that we're not just trying to lock people down into middle income rental housing, so we're providing that housing ladder. And so I would say we're addressing all of those things.

(49:40) Justin Alanís: Yeah. It comes back to the innovation discussion, right? You guys are going to need to innovate. You guys are going to need to create a lot of different partnerships and have maybe beachhead assets in specific markets in order to start moving down market to the smaller assets. And even thinking about maybe opening up how you guys are doing this to other parties, as well. And understanding how other owners can benefit from it. And to your point earlier, there's a ton of innovation in and around the space around helping people make down payments for their house. There's Divvy Homes. There's Zero Down. There's this company Landed that you talked about. And so partnering with those firms or doing something internally within Catalyst to help your residents pay rent towards a mortgage or pay rent towards owning. Being able to graduate up and out of rentership feels very important as we think about continuing to solve this affordability crisis. I know, Jordan, that you are doing a ton around this space. It's super impressive what you guys have achieved today. And you guys are definitely making a huge impact already in affordability and diversity and innovation. Some really exciting areas and I see why you've gone down this path now. It must be a very fulfilling route that you've now headed in your career, so I commend you for that. I want to thank you very, very much for being a part of this podcast and sharing your story and Catalyst's story with me and our audience. Really appreciate it.

(51:01) Jordan Moss: Thank you. Thanks for the kind words and thanks for having me. I really appreciate it.

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