Single mothers whose last “address” was a car. Cash-strapped elderly who need meals and medical care, in addition to housing. Young couples priced out of the market for new homes.
These people—and others like them—make up the new constituency for Dick Banks, who served a distinctly different clientele as manager of large multifamily portfolios at Archstone-Smith and Lincoln Residential Services. Last year, at an age when most executives are thinking of retirement, Banks accepted a job as president and COO of Mercy Housing. His charge: Inject a strong dose of for-profit business practices into the Denver-based nonprofit whose mission has always been to build housing where most developers dread to tread.
Why would Banks, whose last job included responsibility for the 70,000-unit portfolio of Germany's GSW development company, take on what could be the biggest challenge of his life? “I'm at a point in my career where I want to use my experience to give something back,” Banks says. “And Mercy is an incredible organization from a mission standpoint.” Plus, Banks hastens to add, “Sister Lillian was very convincing.”
Sister Lillian Murphy, Mercy's CEO for 20 of its 26-year history, is indeed a formidable force when it comes to championing the cause of low-income housing. “She's not afraid to stand toe-to-toe with congressmen,” notes Shekar Narasimhan, managing partner for Beekman Advisors, a Virginia consulting firm. “With its size and breadth of its product, Mercy is one of the nation's most influential organizations focusing on affordable housing.”
Still, the road to Mercy's reinvention is far from over. With its long history of partnerships, residential services, and creative financing, Mercy has a mission that extends beyond placing roofs overhead. And the company's executive team wants to keep it that way. But they also realize that sticking to business as usual will only diminish Mercy's long-term ability to be a major player in the affordable housing arena, particularly at a time of dwindling government support.
Enter Narasimhan. In 2005, he took what Sister Lillian calls a “50,000-foot look” at the organization. His recommendations forced the company to reevaluate its strategies. “We can't earn enough to sustain our growth if we limit ourselves to properties serving people below 50 percent of area median income,” Sister Lillian explains. “We need to develop more products serving families in the 50 percent to 100 percent AMI range so that we can still afford to serve our traditional market.”
IN FOCUS Their first directive? Focus operations. The company has come a long way since the Sisters of Mercy of Omaha invested $500,000 to start a housing program in 1981. Over the last 26 years, 12 other orders of religious women have added their support as co-sponsors, contributing another half million to a million dollars in unrestricted funds.
What's more, Mercy has established relationships with nine “Strategic Healthcare Partners,” mostly large Catholic hospital networks. These healthcare partners participate in Mercy's local boards of directors, help assess local housing needs, provide favorable financing, and frequently provide land and potential rehab properties, often at a steep discount or as an outright gift. “There's a direct correlation between successful health care and having a good home,” says Lloyd Dean, president of Catholic Healthcare West, which runs 42 hospitals and medical centers in the Southwest.
Indeed, since 1998, the Strategic Healthcare Partners have aided development of 188 properties with 8,540 units worth $867 million. Some 3,200 additional units are in the planning and construction stages. Overall, Mercy has developed more than 19,100 units—about 75 percent rentals—for some 59,000 residents.
Yet, the company's commitment to its residents doesn't stop when the painstaking development process is over—and there lies the operational conundrum. The nonprofit spends $6 million annually on a wide array of residential services, from childcare to meal service for seniors. And it leverages millions more in collaborative programs with community agencies such the Boys and Girls Club.
Mercy's managers are convinced that such efforts are essential to building stable individuals and families, yet they wrestle with the impact that program expenses have on the bottom line of their properties (see “Give and Get,” page 36). “Mercy provides so many residential services that their operating expenses can, at times, get out of whack,” observes Joseph Hagan, president of Chicago-based National Equity Fund, which has found investors for several of Mercy's projects.
Still, when your portfolio includes “special needs” properties that serve the mentally ill, AIDS patients, struggling refugees, and single parents, it's difficult to cut such ancillary services.
As a result, one tactic the company is implementing is paring down the number of states in which it develops, owns, and manages properties from 19 to nine, in order to achieve greater operating efficiencies and economies of scale. “We can't be all things to all people,” Sister Lillian says.
That will allow the company to maintain services at communities such as Denver's Decatur Place, a transitional housing apartment property for single parents. “About 90 percent of our families are coming right out of crisis, often brought on by drugs, alcohol or domestic violence,” says Sister Kathleen Andrews, who has managed the Mercy-owned property since 1999.
Decatur Place's many services include cooking courses, parenting classes, after-school computer training, and an anti-bullying program for children. The apartment project also is one of seven Mercy properties that offer their residents an eight-week “Making Dreams Happen” financial education course, funded by a $600,000 grant from the Citigroup Foundation.
FROM THE TOP DOWN
To keep operations in focus, the company has also sought to establish a more professional headquarters operation. That's where new COO Banks is making a mark.
Banks has already hired high-level staff with impressive private-sector experience for Mercy's team. New CFO Brian Shuman comes from one of the country's largest REITs, AIMCO Properties. Frontier Airlines veteran Jeff Truax now directs IT operations. And REIT veteran Cheryll O'Bryan heads Mercy Services Corp., which manages the nonprofit's portfolio of 220 properties; she previously managed a 28,000-unit portfolio for Equity Residential.
Ultimately, Banks believes that these steps will give Mercy an edge when approaching investors and lenders. The result could be access to a broader range of capital sources and faster execution of deals. In fact, as part of Mercy's new five-year plan, Banks wants the nonprofit to be less reliant on fundraising. Currently, Mercy depends on monies from fundraising to defray about 28 percent of its operating costs. Banks wants to cap that percentage at 10 percent, so that more of the $12 million raised annually through giving can drive innovative programs such as new supportive services in senior projects.
Sister Lillian sees such Banks-led changes as essential to move the nonprofit forward: “We are committed to our affordable housing mission, but we need to be smarter about it.”
Along with a more focused corporate operation, though, Mercy would need to develop a stronger system of local accountability, Narasimhan suggested. For that reason, the organization's five geographic business presidents—four of them hired since early 2006—have been given P&L and asset management authority for all properties in their region.
That's a hefty responsibility, considering the complexity of some of Mercy's financing structures. “I have seen Mercy projects that involve up to 10 different funding sources,” notes Hagan of National Equity Fund. “It's like layers of lasagna. Mercy almost never gets a plain vanilla deal.”
Case in point: The Margo and Harold Schiff Residences, a new single-room occupancy building for homeless people in Chicago's Near North. Its nearly $18 million in funding came piecemeal from various sources, such as low-income housing tax credits, the Illinois House Development Authority, Federal Home Loan Bank Board funds, HUD grants, and more.
“In all, development on this project took about five years,” notes Cindy Holler, president of Mercy Housing Lakefront in Chicago. Even so, the 96-unit property showcases many “green features” to keep costs down and conserve resources. These include an energy-conserving metal skin, roof-mounted solar panels and wind turbines that are expected to generate up to 15 percent of the building's energy, and a graywater treatment system.
The responsibilities of Mercy's empowered managers extend beyond fiscal oversight. They are also able to make property-level decisions. For instance, managers are not bound to use Mercy Services Corp., the nonprofit's management arm. And local residential services report to them—not to the management company. So far, the new system seems to be working.
MIX IT UP
In the end, no amount of operational efficiency, leadership, or decentralization would save Mercy, if they didn't establish a greater mix of housing, Narasimhan told the company. Without abandoning those below 50 percent of AMI, he urged more participation in mixed-income projects and an increased emphasis on for-sale housing. “Why shouldn't Mercy help create wealth for its residents, which is what ownership does?” Narasimhan adds.
Mercy is taking the advice seriously. In Denver's sought-after City Park South area, people with incomes of up to 95 percent of AMI have snapped up Mercy Housing's Legacy condominiums, where one-bedroom units sell for $111,000. The land for the four-story, 33-unit building came from Opus Northwest, which is building luxury housing towers in the area and was looking for a nonprofit partner to help it fulfill the city's mandated affordable housing component.
“Legacy is a great example of a partnership between a large for-profit builder and a nonprofit,” says Brad Buchanan, the project's general contractor. “It's an excellent model for the mixed-income developments that will make affordable housing more acceptable to communities.”
In California, Mercy is planning its first condo project in Oxnard. Jane Graf, president of Mercy Housing California, the nonprofit's largest division with more than 6,000 units in its rental portfolio, sees this as indicative of a shift toward a new strategy, one where Mercy will assemble larger tracts of land, use a portion for its own projects, and sell the rest to for-profit developers for market-rate housing.
Also on the for-sale front, Mercy, over the past year, has moved aggressively to buy and rehab more than 100 foreclosed HUD properties in Denver, selling the units to buyers with incomes of up to 115 percent of AMI (the average is 80 percent). “HUD has told us that we are the national leader in this program,” says Jennifer Erixon, president of Mercy Housing Colorado. Mercy hopes to expand this effort to other cities, such as Atlanta.
From all indications, this and the other changes are energizing the Mercy Housing staff, who see the new strategy as essential if Mercy is to continue to play a dominant role in addressing what they see as a looming crisis in affordable housing. “It's a train wreck waiting to happen,” Banks says. “And it will take a paradigm shift to address it.”
Lawrence D. Maloney is a freelance writer based in Ashland, Mass.
LEADERSHIP LESSONS:
SISTER LILLIAN MURPHY
- First “real” job: Billing clerk at a wholesale grocery company.
- Best business decision: Engaging Beekman Associates to do an organizational assessment that led to changing our business model to more effectively meet our mission.
- Worst business decision: Hiring for a key position too quickly. Wait for the right person, even if it takes longer than you think it should.
- Your ideal leader: Someone who listens, is decisive, and is willing to take risks.
- Best advice someone gave you: If you want to be successful, surround yourself with excellence.
- Your greatest challenge as a leader: Integrating the best of the for-profit and nonprofit worlds within Mercy Housing.
- Favorite quote: “Worry is like a rocking chair. It will give you something to do but it won't get you anywhere.”
—Humorist Erma Bombeck
MERCY HOUSING
- Founded: 1981
- Headquarters: Denver
- Top Executives: Sister Lillian Murphy, CEO; Dick Banks, President/COO
- Employees: 1,130
- Fiscal 2006 Revenues: $92.02 million
- Rental Portfolio: 220 properties
- Median Income of Residents: $18,276 (families); $11,702 (seniors)