Scaling Impact: How Mergers Can Advance Housing in Communities

Recently, when I asked an executive of a large renewables company what the loss of the federal solar tax credit would mean for his business, he was surprisingly sanguine. Compared to many of his competitors, my friend explained that his company is well capitalized, diversified, and strong. If subsidies were to end, many companies would go out of business, but my friend told me that his firm was in a good position to absorb the losses. In short, achieving scale allows his firm to weather many storms.

Affordable housing shares many characteristics with the renewables sector, with a crowded landscape of players buoyed by subsidy dollars and relatively low barriers to entry. Yet the affordable housing business is increasingly complex, requiring significant operations and maintenance costs. Growth is capital-intensive.

One place where affordable housing differs from renewables is a relative lack of openness to mergers, which places many nonprofit housing firms in a potentially vulnerable position.

Could that change? From where I stand, as the leader of the National Housing Trust, a national housing nonprofit, I think it might. And, if mergers are done well, our sector and the communities we serve could benefit.

The Benefits of Mergers in Affordable Housing

At present, the affordable housing sector is characterized by many small- to medium-sized actors. While nationwide data is hard to come by, it’s instructive to look at the Washington metropolitan region, where I live and work. HAND, the regional association of affordable housing organizations, counts over 40 nonprofit members that serve the 22 cities and counties that comprise the region. Many of these organizations were founded to serve a single jurisdiction, such as Arlington County, VA; Montgomery County, MD; or the District of Columbia.

But as the field evolved and subsidy dollars grew scarcer, many place-based affordable housing nonprofits expanded from their original service areas to serve broader geographies. They are joined by many for-profit organizations that do the same.

There are fewer affordable housing developments…than 20 years ago, with more developers (both for-profit and nonprofit) pursuing them.

Arguably, the transition to larger service areas benefits residents searching for affordable homes throughout the region. However, having many competing small actors means that potential renters are forced to navigate multiple websites and application processes. Consolidation through mergers could eliminate some of this complexity and burden on residents.

Mergers could also alleviate competition for limited financing. Subsidized affordable housing is effectively a closed-end system. Capped low-income housing tax credits and gap financing sourced through the US Department of Housing and Urban Development’s HOME Investment Partnerships program and Community Development Block Grant (CDBG) program, as well as local tax revenue, mean that only a limited number of projects will move forward in any year.

Most of those resources have not kept up with population growth, widening income inequality (which increases affordable housing demand), inflation, and construction costs, even before the anticipated impacts of the Trump administration’s budget cuts. The net result, borne out of data from the Low-Income Housing Tax Credit (LIHTC) program, is that there are fewer affordable housing developments being financed by the LIHTC than 20 years ago, with more developers (both for-profit and nonprofit) pursuing them.

A larger scale of affordable housing projects, facilitated by mergers, can reduce per-unit fixed costs of developing and financing affordable housing by spreading those costs across more units. The process of building affordable housing can be costly and time-consuming, requiring multiple interacting elements. Housing nonprofits must assemble multiple sources of investment, while specialized accountants and systems are needed to track progress and expenses. Other players include analysts, underwriters, and asset managers, as well as human resources, communications, and fundraising staff.

Considering the typical three-year (or more) gestation period to cultivate and close deals, profit margins continue to shrink and residents end up absorbing those losses. Discretionary expenses—like high-impact services that help renters navigate community resources and gain access to healthy food, job training, and preventive health screenings, for example—are often the first to be eliminated.

Nonprofit Skepticism of Mergers

But if consolidation can increase housing production efficiency and improve organizational ability to weather federal budget cuts and other threats, why is it so rare among housing nonprofits?

For-profit organizations facing the same margin squeeze frequently turn to mergers and acquisitions. Historically, however, housing nonprofits have been more hesitant, even viewing mergers as a sign of failure. Some argue that the skepticism arises from such factors as nonprofit lionization of founders or the conviction that their own organizations are unicorns, too unique to benefit from merger. Regardless of the cause, nonprofit mergers among affordable housing organizations are rare.

Regardless of the cause, nonprofit mergers among affordable housing organizations are rare.

Indeed, most mergers occur when an organization is faltering. Jane Graf worked for 33 years for Mercy Housing, including six years as its CEO. She was involved with multiple merger acquisitions—including Catholic Charities Housing Department in the archdiocese of San Francisco, Rural California Housing Corporation, Santa Cruz Housing Corporation, Lakefront Supportive Housing, and Franciscan Ministries—that created the Mercy Housing of today. As of December 2023, this national affordable-housing nonprofit has preserved or created over 45,000 units, servicing over 109,000 residents across the country, of which 90 percent were low-income. According to Graf, what those organizations shared was the realization that long-term survival in their current form was unlikely and, in some cases, financial failure was imminent. Mercy gave these organizations and their assets a sustainable home.

Other nonprofit sectors have been less reluctant to embrace mergers and acquisitions. Vitalant, a nonprofit that leads in transfusion medicine, is the second-largest blood donation center, after the American Red Cross. Vitalant was formed in 2018 by the merger of over 10 local and regional blood donation centers in the western half of the United States. Dave Green, Vitalant’s CEO, told me that the key to successful mergers was focusing on the upside potential to the organization’s mission and stakeholders.

Green pointed out that board members “want to know the story they can tell their constituents to whom they’re accountable. The benefit can’t be just financial.” For Vitalant, that pitch intentionally was not that any organization was failing, but that the market was changing, and scale would allow them to go from surviving to thriving and better serve patients and communities that need blood products.

Obstacles to Merging

At this point, you might wonder, if I’m so excited about nonprofit mergers, why hasn’t National Housing Trust pursued this option? The answer is I’ve tried and fallen short three times.

The first time, I approached a significantly larger organization. I understood early that a sticking point for many nonprofit leaders is potentially losing their role, so I offered from the start that I was not expecting to lead the combined organization. Nonetheless, our potential combination fell apart when the other organization ruled out any changes to their current structure.

The question is not about doing a merger for a merger’s sake; it’s about meeting community members’ needs for quality homes at affordable prices.

Board buy-in can also be an obstacle. My second try was when the leader of a similarly sized regional nonprofit developer retired. This natural transition offered the chance to merge without a leader needing to step aside. But their board preferred hiring a new CEO when faced with the unfamiliarity of combining entities.

Similarly, during my third try, the nonprofit’s CEO was open to the idea, but its board preferred the organization the way it was.

Principles to Consider

Through my efforts, I have gleaned some insights that might help the field become more open to at least exploring the idea of a merger:

1. Center stakeholders. Start with what is in the best interests of the people and mission you serve. During my 20 years in the financial services private sector, the mantra was maximizing shareholder value. Nonprofits may not have shareholders, but we certainly have stakeholders. The nation has a deep affordable housing crisis, and nonprofit leaders need to constantly ask what advances their mission. How would a merger affect the ability to deliver quality housing and services to the greatest number of families? One leader who I admire said of his organization: “I like the people here a lot, but I like the mission more.”
2. Add independent directors. Boards of affordable housing nonprofits often have the look and feel of friends and family, especially with a founder’s board. Too often, in my experience, the interests of the people who work with the current organization—leadership, staff, board—are prioritized over the people who benefit from its mission. Independent directors, usually members of the board whose main role is to provide objective oversight and advice, may have an easier time separating an organization from its personalities. Similar to private sector institutions, to attract and motivate board members that can bring skills from outside the usual nonprofit circles, housing nonprofits should consider compensating them—yes, it is allowed—and asking them to pledge to do what’s in the best interests of the people and causes served.
3. Embrace change. Even though Mercy Housing was in the driver’s seat when it acquired nonprofits, the organization changed with each acquisition. According to Graf, mergers helped Mercy Housing diversify its talent pool. Frequently, talented people in acquired organizations ended up in leadership positions, and with each combination, the organization evolved and improved. Similarly, Vitalant’s standard blood protocols drew more heavily from the acquired organizations than from the legacy organization.
4. Communicate with and compensate staff. Good communication and reasonable severance and transition packages are essential, if staff are asked to leave in the process. According to Green, when the “why” behind a merger is understood clearly, most staff at Vitalant are open to change, even when managerial positions are eliminated.
5. Expand philanthropic support. Philanthropic partners can change grant practices to support mergers that will deepen community benefit. Currently, the maximum grant size for policies can often deter consolidation. SeaChange Capital Partners, a financial firm focused on nonprofits, is a rare leader in that space, offering small grants to offset the costs of exploration and combination. We need more funders to support this exploration process.

Building the Field, Not Just Organizations

Another friend with 30 years of experience in the renewable energy sector has lived through 10 mergers and acquisitions. Sometimes he stayed, sometimes he left. He attributes much of his advancement in the field to the new opportunities presented to him through becoming part of a larger organization.

This friend also contended that the acceleration of renewable technology, including dramatic declines in the cost of solar panels, has been catalyzed in some part by mergers. Mergers, he said, help prime the creative process and refresh strategy. Some people will stay because they have opportunities, or they prefer to remain with systems they know. Others will leave, sprinkling their experience and knowledge on new start-up ideas or helping older ones evolve. In the end, the entire field moves forward.

Will this work in housing? It might. Ultimately, the question is not about doing a merger for a merger’s sake; it’s about meeting community members’ needs for quality homes at affordable prices.

In short, by being open to change and using resources strategically, nonprofits can help create a more efficient, impactful housing system. Our communities deserve nothing less.