Getting in the Game Community Bank Makes the Leap to LIHTC Investor
By Caitlin Jones
5 min read
Tax Credit Advisor, March 2010: Brookline Bank, a community bank in Eastern Massachusetts, illustrates a success story that many would like to see replicated to help restore the challenged low-income housing tax credit (LIHTC) equity market to a sound footing.
The bank’s story shows the motivations and path of one financial institution in becoming an investor in housing credits for the first time.
Based in the Boston suburb of Brookline, Brookline Bank is a $2.5 billion publicly traded institution that closed on its first LIHTC equity investment in December 2009. The company made a “side-by-side” investment in Shillman House, a 149-unit new mixed-income rental housing development in Framingham.
Brookline’s equity investment of roughly $3.2 million, to be made over 18 months, is alongside a separate $3.3 million LIHTC equity investment in the project by a multi-investor fund organized by the Massachusetts Housing Investment Corporation. MHIC, a nonprofit syndicator that invests in LIHTC projects throughout Massachusetts, had lobbied Brookline Bank for years to try to get it to invest in housing credit deals.
Return and CRA
Wesley Blair, Senior Vice President of Brookline Bank, said the attractive yield and the federal Community Reinvestment Act (CRA) were the primary motivations for the bank’s initial foray into LIHTC investment, in Shillman House. “When you look at the ten and a half percent yield, and at what the impact was on our tax rate, it made very good sense for us. As I like to say, we could do well by doing good.”
LIHTC investment was a natural next step. For many years, Brookline Bank has provided construction and permanent loans for conventional apartment and LIHTC projects throughout the Boston area, so it is familiar with underwriting multifamily rental housing developments. This output has included a number of fairly large affordable housing projects financed as part of the bank’s efforts to meet its CRA obligations. In addition, the bank has obtained grant funds for affordable housing projects under the Federal Home Loan Bank’s Affordable Housing Program.
Peter Sargent, Director of Capital Development at MHIC, said MHIC officials had “crossed paths” with Brookline Bank in the past. “When we’d done some activities on the equity side, they had been there on the debt side. So they were always on the radar screen, and it just became the right time.”
Years ago the bank first looked at possibly investing in housing credits, but the returns at that time “weren’t where we thought they should be,” says Blair. “It came back to our attention this past summer, in June, when we were approached by the folks at Shillman House, [who asked] would we be interested in this. And when I started to look at it again, the numbers made a lot more sense to us.”
In June, Blair and MHIC began serious discussions that resulted in shaping an equity investment for Brookline Bank in Shillman House. Sargent said many other professionals – attorneys, etc. – also provided “lots of input and help” to Blair.
Internal Bank Process
Blair described the process that the bank went through to get to the point of saying “yes” to a LIHTC investment commitment in Shillman House.
First was to review the “real estate piece” – the project, pro forma, and underwriting – to get comfortable about the proposed level of debt, projected rents, market demand, and the like. Next was to do due diligence on the project’s sponsor, Jewish Community Housing for the Elderly (JCHE), a Boston nonprofit and a new relationship for the bank. “They’ve got a very long track record of developing some very impressive affordable housing,” says Blair.
Crucially, the bank was confident that it will continue to be profitable and have tax shelter need over the next 10 years – the LIHTC credit period. The bank has been consistently profitable over its 140-plus year history, even during the financial industry crisis of 1988-91, and the current economic downturn.
Finally, after getting comfortable with the real estate, underwriting, and sponsor, Blair noted, “I sat down with our CFO and our CEO, and said, “˜This is what I’m proposing. What do you think?’ And they both said, “˜It makes good sense to us; it has a nice impact on our bottom line from a tax perspective. Let’s do it.’”
A key to the bank’s decision to invest was that MHIC will perform the asset management for the bank’s investment. The bank decided to do a side-by-side investment in Shillman House instead of investing in a MHIC fund, according to Blair, to have a “bit more control over what we’re doing and who we’re doing it with.”
In addition to its investment return, Brookline Bank will get some new deposits from the project’s sponsor.
More Investment Expected
Blair expects the bank to make more LIHTC investments; he’s “seriously looking’ at two or three proposals now. “As long as yields stay roughly where they are now, I think this will be the first of a number of these.”
Shillman House, expected to be completed in April 2011, is a HUD Section 202 elderly rental housing project that will include 90 LIHTC units and 50 market-rate apartments. Fifty of the affordable units will have federal project-based rent subsidies.
MassHousing, a state housing agency, will provide a $22 million construction loan and $12.8 million permanent mortgage. Other funding sources are five subordinate loans, federal HOME program dollars from the town, and a deferred developer’s fee. Of the subordinate loans, one, for $2.9 million, is of federal Tax Credit Assistance Program (TCAP) funds.
Besides housing credits, the project will also generate federal renewable energy tax credits claimed for solar and geothermal equipment.
