Talking Heads: Armand Tiberio and Jeff Kunitz, CBRE Affordable Housing
By Darryl Hicks
9 min read
When properties subsidized by Low-Income Housing Tax Credits approach the end of their mandatory 15-year compliance period, the General Partner (developer/owner) and the Limited Partner (tax credit investor) have some big decisions to make. Because the Limited Partner will almost certainly want to exit the deal after the 15th year, the General Partner needs to consider all options, including sale, buy out or recapitalization. Developing an exit strategy can be complicated and stressful if not planned well in advance, but that’s where CBRE Affordable Housing can help.
Last December, CBRE acquired Seattle-based Tax Credit Group, a real estate brokerage firm once affiliated with Marcus & Millichap that pioneered the market for valuing and selling Section 42 and Section 8 assets. In 2015, TCG brokered 184 sales transactions involving 23,991 units with a market value of $1.65 billion.
Vice Chairman Armand Tiberio and Executive Vice President Jeff Kunitz are two key figures within CBRE Affordable Housing who frequently share their experiences and knowledge at events hosted by the National Housing & Rehabilitation Association. In an interview with Tax Credit Advisor, Tiberio and Kunitz talked about the recent acquisition, current sales trends and offered advice for owners who are approaching Year 15.
Tax Credit Advisor: Where did you both grow up, what were your college majors, and how did you become involved in affordable housing?
Armand Tiberio: I grew up in Seattle and studied Business and Finance at Pepperdine University in Southern California. I joined Marcus & Millichap in 2000 and was part of the team that formed the Tax Credit Group in 2002. Today, we have 63 employees who are now part of the affordable housing group within CBRE. I did not have any experience in affordable housing prior to joining Marcus & Millichap.
Jeff Kunitz: I grew up in Wisconsin and went to the University of Wisconsin-Madison where I focused on Real Estate and Business. Before joining the Tax Credit Group, I ran the Midwest division of AIMCO and worked on the syndication side for KeyBank.
TCA: How has the integration of Tax Credit Group into CBRE gone so far? Has the CBRE platform enhanced the services you provide to your clients?
AT: With any integration there are challenges, but the big benefit is that we are now licensed, designated lenders under the Fannie Mae and Freddie Mac umbrellas. Before the acquisition, we referred our clients to different lenders, whereas today we are Direct Affordable Housing Lenders.
TCA: What was your sales volume last year and do you anticipate exceeding that figure in 2016? Can you break it down by type of transaction and the end investor’s likely execution strategy?
JK: Last year, we sold 184 properties worth $1.65 billion spread across 25-plus states. This year, we project to do a little better. The markets are incredibly aggressive right now. Debt, being as low as it is, has driven a lot of sellers to put their properties on the market.
AT: Less than 10% of the total volume last year was sold in conjunction with a new syndication or acquisition/rehab.
JK: So the other 90% are fee simple, yield-driven buyers.
TCA: What is driving demand?
JK: There is a lot of equity out in the market trying to chase yields and real estate is still a very good investment for the long hall. Pricing is aggressive because on the agency side Fannie and Freddie have a mandate to put debt on affordable housing.
TCA: How much further can cap rates compress and for how much longer?
AT: I don’t believe we have seen a significant further erosion or compression in cap rates in 2016. We are at the low point compared to where we were the last two to three years on where debt rates are. The driving factor on cap rates has been the relative cost of debt. Because supply and demand is also more or less in check, we don’t envision a tighter demand than what we currently have right now. A lot of major MSAs were behind the curve ball on developing new multifamily units. We don’t expect an oversupply, but we are seeing a lot of the major MSAs where there was such a depletion of stock and inventory relative to the number of new renters coming into the market – the Millennial Generation if you will – that pipelines of new development have been more or less restored to historical averages. The combination of replenishing new stock and low debt rates, I don’t foresee us going lower. If anything, it will be more a question of a slow and steady uptick in cap rates over the next couple years.
TCA: There is a lot of confusion about who some of the end buyers of LIHTC transactions are and their motivations. Without breaking confidentiality, can you describe who some of the non-traditional players are and what they hope to get from investing in LIHTC properties? Where are they getting their capital from?
AT: Historically, the most aggressive buyers and the largest buyer pool were privately syndicated operators who raised capital through high net worth individuals. Today, it is more institutional capital. There are more than a dozen institutional equity providers that are backing operators in the affordable housing space. One example is Avanath Capital Management, Daryl Carter’s group, which recently created its third institutional fund backed by half a dozen large financial institutions. That trend didn’t exist five to seven years ago.
TCA: What brought these institutional investors into the market?
AT: I think they want to be more socially invested. Historically, they supported the development of affordable housing through tax credits. Today, these institutions are sitting on a lot of cash, which they are investing in more socially responsible ways, like affordable housing assets, instead of market rate.
TCA: CBRE has been involved in the sale and/or recapitalization of several large portfolios of affordable housing properties recently – is this a trend you expect to continue? If so, why and can you provide any insight or lessons learned that might help buyers/sellers in this market place?
JK: The number of portfolios that we have recently seen is unique and unpredictable going forward. I don’t foresee future portfolio sales being as robust as they are right now due to different investors and groups wishing to hold on to their assets. So I don’t foresee us having the same volume or it will be on a smaller scale.
TCA: What types of deals does the market find most appealing? Is it particular products? Locations?
JK: Everything is selling right now, in your core cities, but also in tertiary markets, like the Midwest, where cap rates and competition vary. The economics of the city or MSA is also driving demand. We expect to see a slow-down in some major markets, where there is a softening of market-rate, class A rent growth and occupancy. But at the moment every deal, no matter where, is getting sold.
AT: We have also seen an uptick in transactions where just the general partnership interest is being sold, which is something we haven’t seen since the downturn in 2009. I think this year and next you will see the largest number of general partnership transactions since the mid-2000s.
TCA: What other noteworthy trends are you seeing in the affordable housing marketplace?
AT: We are all paying attention to the consolidation that has occurred in limited partnership interests and companies. There has been a massive amount of change as to the control of LP interests and how that impacts the transaction environment. What they are wanting to do with the new company versus what historically has been done by a syndicator, as an example, might be different. We are also starting to see some soft debt financing coming back into certain geographic locations. When soft debt comes back as an available source and use tax credit developers are able to compete better against the cash-flow yield buyers.
TCA: When should property owners who are looking to sell first contact you? Year 15 or sometime before?
AT: I would say Year 8.
JK: What we typically do is help the owner prioritize his portfolio so that by Year 11 there have already been discussions with the limited partner. So sooner rather than later. Out of 184 sales last year, probably 150 to 160 were initiated prior to Year 15.
AT: The average sale year is still Year 13.
TCA: Given the lack of affordable housing in America do your clients seek buyers who are going to keep the housing units affordable or are they mostly concerned with maximizing the highest bid?
JK: The sellers are absolutely requiring the buyer to assume the land-use restrictions and extended use agreement to maintain the property’s affordability. We haven’t gotten any phone calls from investors, syndicators or state housing finance agencies who are angry over what our buyers have done with the assets. If you look at what buyers do with the assets post-acquisition, the majority of the properties are rehabbed or receive other improvements, such as better management systems. Oftentimes, these assets wind up a year later being in better condition compared to what they were prior to the transaction.
TCA: What are some of the common reasons why owners of LIHTC properties want to sell?
AT: We have a fair amount of general partners who are hitting a period in their development career where for estate planning reasons or diversification reasons, it’s time to sell the asset. All across the country, you have aging developers who see how hot the real estate market is, they have lived with these assets for 12, 13, 14, 15 years, and they are looking to redeploy their capital into other areas, like market-rate housing, or leave the real estate business altogether.
TCA: What advice would you give to a property owner who is thinking of selling?
JK: Understand your agreement, understand the relationship with your limited partner, surround yourself with independent professionals who understand what the market is, what needs to be done and the process. These are not easy transactions and a lot of general partners haven’t read their partnership agreement in years. They may think they own the whole property, but they don’t. It’s all about getting their partners on board with the transaction.
