plus/minus epsilon

Mercy Housing

11 Aug 2022

I’ve been curious for a long time about how nonprofit organizations play a role in the housing market so today I decided to read the published financials of Mercy Housing, one of the largest nonprofit developers in the US.

Mercy’s charitable purpose is to provide housing to families, seniors, and those with special needs who lack the economic resources to access safe housing opportunities themselves. They separate their activities into four arms:

  1. Capital Partnership. Mercy can provide grant fundraising assistance as well as help raise money from investors for the development of low-income housing projects.
  2. Housing Development. Mercy both engages in new construction housing development, as well as purchasing and renovating existing properties. When developing for external parties Mercy is compensated by fee, computed as a percent of project cost.
  3. Property Management. Mercy provides management services to their own buildings, as well as on a contractual basis to owners of residential rental real estate. These services include leasing, accounting, and compliance with regulation. When managing properties for external parties Mercy is compensated by fee, computed as a percent of rental income.
  4. Resident Services. Depending on the type of housing project, Mercy provides resident services such as senior care, career services, mental health care, so on.

They originally caught my interest because they seemed to have either built or been managing a surprisingly large number of buildings that I just happened to notice, usually because they’re particularly nice. Here’s the list of properties they manage in San Francisco alone (with ones that I already knew about in bold),

Mission Creek Senior225 BerrySenior140Referral Only
Tahanan833 BryantSupportive146Referral Only
290 MalosiFamily167Waitlist Closed
Sister Lillian Murphy Community691 China BasinFamily152Waitlist Closed
455 FellFamily72Waitlist Closed
Madonna Residences350 Golden GateSupportive70Referral Only
Edith Witt66 NinthSenior107Waitlist Closed
Bill Sorro Community1009 HowardFamily67Waitlist Closed
1100 OceanFamily71Waitlist Closed
1180 FourthFamily150Waitlist Closed
10th & Mission1390 MissionFamily136Waitlist Closed
Vera Haile Senior129 Golden GateSenior90Waitlist Closed
Presentation Senior301 EllisSenior93Waitlist Closed
Polk Street Senior1315 PolkSenior72Waitlist Closed
Open House55 LagunaSenior40Waitlist Closed
Notre Dame Senior347 DoloresSenior66Waitlist Closed
Monsignor Lyne118 DiamondSenior20Waitlist Closed
Mercy Terrace333 BakerSenior158Waitlist Closed
John King Senior500 RaymondSenior91Waitlist Closed
Francis of Assisi145 GuerreroSenior110Waitlist Closed
Dorothy Day54 McAllisterSenior100Waitlist Closed
All Hallows1711 OakdaleSenior45Waitlist Closed
345 ArguelloSenior69Waitlist Closed
1880 PineSenior113Waitlist Closed
2698 CaliforniaSenior40Waitlist Closed
Westbrook Plaza227 SeventhFamily49Waitlist Closed
Natalie Grubb Commons255 FreemontFamily119Waitlist Closed
Padre Apts251 JonesFamily41Waitlist Closed
Padre Palou3400 SixteenthFamily18Waitlist Closed
Midtown Park Apts1415 ScottFamily140Waitlist Closed
JFK Tower2451 SacramentoFamily91Waitlist Closed
Heritage Homes243 ReyFamily148Waitlist Closed
Columbia Park21 ColumbiaFamily50Waitlist Closed
Carter Terrace530 CarterFamily101Waitlist Closed
Britton Court Apts1250 SunnydaleFamily92Waitlist Closed
111 JonesFamily108Waitlist Closed
1101 HowardFamily34Waitlist Closed
1028 HowardFamily30Waitlist Closed
Fourth & Channel1180 FourthSupportive7Waitlist Closed
Mercy Commercial1360-1372 MissionSupportive25Waitlist Closed
The Dudley172 SixthSupportive75Referral Only
The Rose125 SixthSupportive76Referral Only
Junipero Serra House926 FillmoreSupportive25Waitlist Closed
Marlton Manor240 JonesSupportive151Waitlist Closed
Derek Silva Community20 FranklinSupportive68Referral Only
Bayview Hill Gardens1075 Le ConteSupportive73Referral Only
Arlington Hotel480 EllisSupportive154Referral Only
Arc Mercy Community1500 PageSupportive17Waitlist Closed
205 JonesSupportive50Waitlist Closed
Mercy Family Plaza333 BakerFamily36Waitlist Closed

That’s a lot, huh? The total is about 4,100 rental units which means they manage 1% of the entire housing stock in San Francisco. They divide their properties into family, senior, and supportive. Family housing is for working families so it doesn’t provide additional services, senior housing provides assisted living services, and supportive housing provides services targeted toward a specific need like mental illness, physical disability, addiction recovery, or HIV/AIDS care. All three types are considered affordable housing, which means tenants pay 30% of their income in rent+utilities and the rest is subsidized.

Screen Shot 2022-08-11 at 8.10.56 PM.png

The proportion of different housing types, at least in San Francisco, are roughly equal. Mercy states that nationally, 70% of their residents are low-income families, 21% are seniors, and 9% are special needs.

Screen Shot 2022-08-11 at 7.51.28 PM.png

Looking at their balance sheet, they own roughly $3 billion in property with $2 billion in long-term debt, leaving Net Assets of $1 billion. Note that nonprofits have “Net Assets” instead of “Shareholder Equity” because nonprofits don’t have shareholders. Digging down further:

Screen Shot 2022-08-11 at 7.51.54 PM.png

Their assets overwhelmingly consist of buildings and land. A small amount of their debt consists of revolving credit lines from various banks, and a larger chunk of construction loans due in the next 2 years. However, the vast majority is plain mortgage debt maturing over the next 60 years. Mercy also states that they have a small number of swap contracts for the purpose of converting any of their adjustable-rate debt to a fixed-rate.

Screen Shot 2022-08-11 at 7.52.19 PM.png

Mercy’s income statement is fairly typical of a real estate company, with the majority of income coming from rent and the expenses largely just consisting of staff, debt, and maintenance. But while it might look like they’re losing money, given that they have a net loss, this is really just a fluke of how subsidiary accounting works when different organizations partner together on projects. While Mercy’s partnerships seem more likely to lose money (and as we'll discover later, this is intentional), Mercy themselves is profitable. Over the past 10 years they’ve grown at an average 7% per year, some years as high as 14%, which seems to be a normal pace in real estate.

Screen Shot 2022-08-11 at 7.52.40 PM.png

They maintain a consistent liabilities-to-assets ratio of 2:3, which means that every $1 of growth in Net Assets is immediately leveraged into $3 of housing. The question then is: what drives their Net Assets growth?

Screen Shot 2022-08-11 at 7.53.02 PM.png

Historically, they’ve raised an average of $115m in equity capital per year, had a consolidated operating loss of $59m, and grown net assets by $60m. Initially this looks pretty weird – nonprofits can’t raise equity? And they’re definitely not supposed to distribute profits. However, a nonprofit can own a for-profit that does those things, and it can back the for-profit with the nonprofit’s resources as long as it has a controlling interest. A controlling interest ensures that the for-profit uses those resources “charitably.” A weird thought.

Mercy creates LLC subsidiaries and raises capital by offering Low-Income Housing Tax Credits (LIHTC). This is a program that allows investors who put money towards a low-income housing project to reduce their federal income tax by an amount equal to a fixed percent of the project’s cost each year for 10 years. However private investors don’t have to pay the entire cost of the project to be able to claim the full reduction. Projects are allocated credits by the government with certain properties (what the percent of the project cost can be credited, and usually also a maximum value if the project is over budget), and investors bid up their price in a competitive market. In general a $1 tax credit sells for 85-95 cents, so for example, an investor will put down $85,000-$95,000 in exchange for a $10,000/yr reduction in federal income tax each year for the next 10 years ($100,000 total).

That’s similar to an investment with a 1-4% internalized rate of return. I decided to model it by looking at one scenario where we simply pay our $10,000 income tax bill every year and put $75k into a compounding 3% investment, and another scenario where we negate our tax bill in year one with an LIHTC and invest the saved money from the 9 following years into a 3% compounding investment.

Screen Shot 2022-08-08 at 10.45.54 AM.png

This ends up being a pretty good decision. Particularly if your investments are already in the 1-4% return range, then the slight reduction in tax rate frees up more capital for investment later which compounds the benefit further. Partnering with Mercy very likely has further benefits that are harder to determine from the outside – for example, capital partners can claim the operating loss of a property which would further reduce taxable income, despite not actually contributing to the operation of the property.


This largely gets to the end of my understanding of Mercy Housing’s operations:

  1. They raise capital by offering tax credits to private investors
  2. They leverage that capital into construction and mortgage loans
  3. Raised capital and loan proceeds are put into low-income housing projects
  4. Government-subsidized rental income largely pays for the long-term debt, maintenance, and services at those properties.

Admittedly it’s disappointing that tax revenue is the primary source of funding. Government regulation is the main restriction on market-rate housing in the first place, and then the government is paying the inflated development and rental costs that it itself caused to house those that were priced out. It seems unfortunate to not be able to spend that money on people that need services, but also just wildly unsustainable.