A Different Approach: Affordable Housing REIT Prepares to Grow

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The Housing Partnership Equity Trust, a private real estate investment trust devoted exclusively to acquiring and preserving affordable and workforce multifamily rental housing properties, is the first affordable housing REIT launched by nonprofits.

Initially capitalized with $100 million in investment, the Equity Trust deployed $40.1 million in 2013 to acquire three properties, anticipates more deals in 2014, and will seek to raise another $500 million to expand its ability to acquire and preserve affordable housing units nationwide while creating new jobs.

The Equity Trust was formed in December 2012 by 12 nonprofit organizations in collaboration with philanthropic and institutional partners. The initial $100 million was raised from the John D. and Catherine T. MacArthur Foundation, the Ford Foundation, and Prudential Financial, which provided equity; and Citi and Morgan Stanley, which provided debt. Also providing equity was the Housing Partnership Network, a business collaborative of housing and community development nonprofits as well as the sponsor of the Equity Trust.

The current nonprofit members of the Equity Trust, which are also equity investors, are:

 

  • AHC Inc. – Arlington, Va.
  • BRIDGE Housing Corporation – San Francisco, Calif.
  • Chicanos Por La Causa, Inc. – Phoenix, Ariz.
  • Community Preservation and Development Corporation – Washington, D.C.
  • Eden Housing, Inc. – Hayward, Calif.
  • Hispanic Housing Development Corporation – Chicago, Ill.
  • Homes for America, Inc. – Annapolis, Md.
  • LINC Housing Corporation – Long Beach, Calif.
  • Mercy Housing – Denver, Colo.
  • Nevada HAND, Inc. – Las Vegas, Nev.
  • The NHP Foundation – New York City, N.Y.
  • NHT/Enterprise – Washington, D.C.

The 12 nonprofits collectively manage properties valued in excess of $3 billion containing more than 60,000 affordable housing units

The Transaction Structure

The Equity Trust closes each transaction in partnership with a nonprofit member. The REIT provides most of the required capital; the nonprofit also makes an equity investment and serves as the operator.

The three properties acquired so far have been:

 

  • 2000 Illinois Apartments, a 128-unit unsubsidized market-rate property in Aurora, Ill. purchased with Mercy Housing Lakefront;
  • Woodmere Trace Apartments, a 300-unit unsubsidized market-rate property in Norfolk, Va. acquired with Community Preservation and Development Corporation; and,
  • Woodside Court Apartments, a 129-unit low-income housing tax credit property in Fairfield, Calif. that had reached the last year of its initial 15-year tax credit compliance period. The Equity Trust and Eden Housing joined to acquire and preserve this development.

 

The REIT fills a need in the affordable world by providing another vehicle – and source of capital – to make preservation deals viable.

“The pot of money to preserve affordable housing is shrinking,” says Drew Ades, president and CEO of the Equity Trust. “We can’t rely on the government to solve the problem; we need to change the way we think about preservation.”

The Equity Trust’s unique structure aids nonprofit members in competing with for-profit developers to buy existing multifamily properties and then preserve them as affordable and workforce housing. The REIT can close quickly, eliminating the long lead times and delays typical in traditional preservation transactions.

Targeted Properties

The properties targeted by the REIT for acquisition are well-located near job centers and transportation hubs and in danger of being lost from the affordable and workforce housing stock. Typically they are not current candidates for syndication with new housing tax credits. However, transactions will be structured, to the extent possible, to preserve the ability to utilize tax credits in the future if appropriate.

A typical Equity Trust transaction will include moderate rehabilitation in order to reduce operating costs, improve energy efficiency, address deferred maintenance, and extend the property’s useful life. For example, with 2000 Illinois, Mercy Housing completed an upgrade of the physical plant that included installing a new energy-efficient boiler along with Energy Star appliances in apartments. At Woodside Court, Eden Housing will use low and no-VOC interior paint and address water usage. The most extensive rehabilitation will occur at Woodmere Trace, where CPDC has completed the first of three phases to renovate nearly all units with more efficient appliances, upgrade common areas, and improve the grounds.

Impetus for Equity Trust

The impetus for the Equity Trust began in 2009, when several nonprofit members of the Housing Partnership Network began exploring the possibility of forming a real estate investment trust, a special type of entity under the federal tax code. The nonprofits needed an edge to compete with for-profit cash buyers to acquire conventional apartment properties that were naturally affordable, given that they were unable to move quickly and lacked ready financing.

The Housing Partnership Network provided the shared platform upon which its members could begin building the affordable housing REIT, and developed a pathway to the capital markets to find investors.

The MacArthur Foundation and the Ford Foundation were the first to commit funding for the Equity Trust, providing seed capital in the form of program-related investments. These allowed the REIT to attract additional private capital from institutional investors aligned with the Equity Trust’s social mission: to acquire and preserve safe, decent, affordable rental homes to stabilize and strengthen neighborhoods.

The REIT enables its investors to invest in a stable asset class that has been traditionally underserved by the institutional market. By reducing vacancy, resident turnover, and operating expenses at acquired properties, the Equity Trust and its nonprofit operators improve cash flow and generate an appropriate risk-adjusted rate of return for investors.

The REIT’s unique structure confers significant competitive advantages. For example, nonprofit members can avail themselves of preferential programs and tax treatment limited to nonprofit operators. Without the REIT, nonprofits often have difficulty using these programs because of the longer time needed to assemble the required capital for a deal.

In addition, the nonprofit members will receive a future income stream from the Equity Trust. Under federal tax law, real estate investment trusts must distribute at least 95% of their taxable income to shareholders annually to maintain their special tax status.

Nevertheless, the Equity Trust still operates in a competitive market, and it is not uncommon to be outbid for properties by for-profit developers looking to acquire and reposition an asset and significantly raise rents.

Plans for Expansion

The promise of this affordable housing REIT is gaining traction and attention beyond the initial nonprofit members and investors. The REIT’s sponsor, the Housing Partnership Network, was selected as a featured commitment with the Clinton Global Initiative America in June 2013, and recognized with a Wells Fargo NEXT Opportunity Award in September 2013.

With future capital raises, the Equity Trust will expand its slate of nonprofit members and its pool of institutional investors.

“We’re bullish on our prospects for expanding the REIT,” says Ades. “Investors have embraced our approach, and communities are depending on us to succeed.”

Nancy Rase is president and CEO of Homes for America, Inc., a nonprofit developer and owner of affordable housing properties based in Annapolis, Md. She is also a member of the Editorial Advisory Board of Tax Credit Advisor. Rase may be reached at 410-269-1222, [email protected].