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The Value of Aff ordable Housing

APARTMENT FINANCE TODAY • November/December 2008

One of the nation’s largest aff ordable housing portfolios changes hands in 2008.

BY DONNA KIMURA

Two new companies announced themselves in a big way this year with the purchase of a portfolio containing 270 properties and 27,000 lowincome housing tax credit (LIHTC) apartments.

The move was made by MacFarlane Costa Housing Partners (MCHP) and Avanath Aff ordable Capital, which acquired the portfolio from Simpson Housing Solutions (SHS), a subsidiary of Denver-based Simpson Housing.

“There haven’t been a whole lot of trades of portfolios like this,” says Michael Costa, president and CEO of MCHP. Few know the properties better than Costa, who served as president of SHS before launching MCHP.

The deal is signifi cant because it shows the credibility and desirability of tax credit properties.

The terms of the deal, which closed near the beginning of May, were not revealed. The value of the properties in the portfolio, however, is estimated to be about $3 billion when tallying the debt and equity used to build the projects. Most of the apartments are in California.

Tax credits are a key source of financing behind the properties. LIHTCs are the nation’s biggest tool for fi nancing aff ordable housing developments. Developers sell the credits to banks and other corporate investors to raise money for their projects. The investors then use the credits to off set their federal income tax liability. But beyond the tax credits, the program leads to the development of new apartment communities.

Costa teamed with San Franciscobased MacFarlane Partners to start MCHP. They own 80 percent of the portfolio while Avanath, a subsidiary of Avanath Capital Partners, owns a 20 percent stake. In the transaction’s second phase, Avanath plans to acquire the entire existing portfolio this year, and MCHP would then concentrate on developing new properties.

Daryl Carter, founder and CEO of Avanath, said he would continue to operate and manage the properties as aff ordable housing. “We believe very strongly in the strength and demand of aff ordable housing, both short-term and long-term,” he says. “The fundamentals of the business, despite the challenges of the market, are still very strong.”

When Carter, who is raising investment funds for the deal, takes over the portfolio, Avanath would become one of the largest owners of aff ordable housing in the nation. SHS was ranked No. 5 on Affordable Housing Finance’s Top 50 owners list earlier this year.

“Avanath is raising an investment fund to provide long-term capitalization for the acquisition and to pursue more acquisitions in the aff ordable housing space,” says Carter. “We are targeting institutional investors including pension funds, endowments, insurance companies, and other fi nancial institutions.”

MCHP will also be busy, with about 10 deals in the pipeline, which puts it on track for its goal of building about 1,000 to 1,500 units a year.

The fi rm also plans to look at developing 80/20 deals financed with tax-exempt bonds. These are projects where 80 percent of the units are market-rate and 20 percent are affordable.

“There’s such a huge demand for affordable housing, especially out in the West,” says Costa. “It’s a matter of working through the process to get the equity and financing that you need. Clearly, there’s a need.”