A Small World: Two REITS Focus on Housing Preservation Deals

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6 min read

A small niche in the affordable housing world has just doubled in size. The number of real estate investment trusts (REITs) that exclusively provide capital for multifamily preservation transactions has increased from one to two.

The newest entrant is the Housing Partnership Equity Trust (HPET), a Washington, D.C. startup established by the nonprofit Housing Partnership Network. HPET joins a field long dominated by the Community Development Trust, a New York City-based private REIT established in 1998.

Governed by federal tax rules, REITs are special purpose pass-through investment vehicles required to distribute at least 95% of their income to shareholders, such as in dividends. The three types of REITS are equity REITs, which invest in real estate; mortgage REITs, which invest in mortgages; and “hybrid” REITS, which invest in both types of assets. REITS are best known for investing in all types of conventional real estate – commercial, industrial, residential.

 

Newest Preservation REIT

The Housing Partnership Equity Trust has established an initial $100 million fund capitalized by equity or program-related investments from the John D. and Catherine T. MacArthur Foundation, the Ford Foundation, Prudential Life Insurance, and Citibank.

“We’re going to be using that money to acquire multifamily properties in partnership with twelve high-performing nonprofit developer/operators across the country,” says HPET President and CEO Drew Ades. “The idea is to put those nonprofits in a position to quickly acquire assets and preserve them as affordable housing.”

The 12 nonprofits are: AHC Housing, Inc.; BRIDGE Housing Corporation; Chicanos Por La Causa; Community Development and Preservation Corporation; Eden Housing; Hispanic Housing Development Corporation; Homes for America, Inc.; LINC Housing Corporation; Mercy Housing; Nevada HAND, Inc.; NHP Foundation; and NHT/Enterprise Preservation Corporation.

HPET will make joint venture equity investments alongside the nonprofit sponsors in multifamily rental housing properties acquired by the nonprofits and preserved as affordable rental housing. HPET will be the limited partner and the nonprofit the general partner in the limited partnership formed to acquire and own each property.

Ades expects the nonprofits to acquire properties without using new federal low-income housing tax credits. Likely acquisition candidates, he said, include HUD Section 8, Year 15 LIHTC, and even conventional apartment properties. “What we’re looking at,” he says, “is naturally affordable properties – properties where the market rent is affordable and we’re trying to operate them in a way that keeps it that way.”

According to Ades, the fund will provide low-cost capital to nonprofit sponsors to enable them to more quickly acquire properties and make needed renovations with lower transaction costs.

“We’re trying to take the complexities out of acquiring these properties,” he says. “We hope that with lower transaction costs and a greater speed of execution we can pick up properties at a better price and use that pricing advantage to both preserve the rent stability and the operation of the properties and provide a decent return back to our investors.”

 

Established Veteran

The Community Development Trust (CDT) has invested $900 million in debt and equity to date to preserve and create more than 32,500 affordable housing units in 42 states. A hybrid REIT, CDT makes long-term equity investments in affordable multifamily rental housing properties and both originates and purchases long-term mortgages supporting the development and preservation of such properties. It utilizes capital raised from institutional investors. All of its investments satisfy Community Reinvestment Act requirements.

CDT “is focused specifically and exclusively on providing long-term capital for the preservation of affordable housing,” says President and CEO Joseph Reilly.

CDT provides conventional equity investments based on a property’s projected cash flow, typically serving as the sole limited partner investor and providing 80% to 90% of the total capital for a transaction. The developer or owner, as the general partner, provides the remaining 10% to 20%. General partners (for-profit or nonprofit) use CDT’s funds to pay for acquisition and rehabilitation costs, buy out their existing limited partner investor, or purchase the general and limited partner interests in a property.

According to Reilly, these transactions don’t utilize new low-income housing tax credits, though acquired properties may be existing LIHTC developments. CDT typically provides equity investments for transactions involving Section 8 or Year 15 LIHTC properties.

CDT’s return comes from a share of the property’s cash flow and any future residual benefits, such as from a sale. Typically, the firm’s equity investments are long-term in nature, with a greater focus on projected annual cash flow.

Reilly said CDT normally utilizes a “promote” structure for transactions when making an equity investment. Under this, CDT receives one or more levels of a preferred return after which the general partner catches up. The general partner’s share of benefits grows with the greater success of the project. “We structure a deal where there’s an alignment of interests between the general partner and ourselves as the limited partner,” says Reilly. “That allows the general partner to share in the success of the property over time.”

CDT also provides debt for bridge loans or long-term permanent mortgages. It can lend to a project directly or buy loans made by other banks or community development financial institutions (CDFIs). This provides liquidity to CDFIs, enabling them to make additional loans in their communities.

In addition to being a hybrid REIT, CDT is a CDFI, an approved Fannie Mae affordable lender, and a member of the Federal Home Loan Bank of New York.


Maryland Nonprofit Expects to Benefit from Trust

Homes for America, Inc., an Annapolis, Md.-based nonprofit, expects to benefit in a few ways from participating in the Housing Partnership Equity Trust (HPET), says President Nancy Rase.

She anticipates that Homes for America will be able to compete more effectively to buy existing properties, with lower transaction costs, while expanding its affordable housing portfolio. By being able to access funds from the Trust, the nonprofit will be able to close on the purchase of properties much quicker, says Rase.

“Over the last few years we’ve had a growing frustration at our inability to compete in the market to buy properties, to a large extent based more on timing than on price,” says Rase. “We pursue properties, but there’s a lot of investment money in the market now that can do cash closings in 60 days or less, and we’ve needed more time to secure financing and pull everything together to be able to buy properties…With this new vehicle we should be able to move quickly and compete on the basis of time with others in the market.”

Rase indicated that the Baltimore area and Northern Virginia have been two markets where Homes for America has run into heated competition.

She expected that Homes for America will be using funds from HPET to buy Section 8 or Year 15 low-income housing tax credit properties. Rase anticipated that the nonprofit will purchase the properties in order to preserve them as affordable rental housing, perhaps doing some modest rehab but not utilizing new housing tax credits.