The Wall Street Player

AFFORDABLE HOUSING FINANCE • November 2008

Horvath uses his capital markets talents to create solid investments in affordable housing communities

BY BENDIX ANDERSON

Warren Horvath resisted the lure of better pay to keep bringing investment dollars to affordable housing—and steered clear of the chaos now gripping Wall Street.
(Photo by Bendix Anderson)

Editor’s Note: AFFORDABLE HOUSING FINANCE has selected 15 outstanding industry leaders under the age of 40. These 15 individuals are being featured in the June, July, September, October, and November issues.

HOBOKEN, N.J.—During the boom on Wall Street, several companies tried to lure Warren Horvath away from the affordable housing business. Real estate investment trusts (REITs) dealing in luxury apartments came calling, along with equity firms with concentrations in commercial real estate, and the 33-year-old received offers that would have doubled his pay.

Horvath has a special talent for bringing new investment to affordable housing deals, according to experts familiar with his work. At New York City-based Community Development Trust (CDT), he used this talent to help build a portfolio of more than $650 million in affordable housing assets, rising to become the firm’s chief investment officer. He’s still creating new opportunities to bring investment to the cash-hungry affordable housing business today, despite the crisis on Wall Street.

Horvath left CDT in June—part of a changing of the guard after the firm’s founder, Judd Levy, moved on in 2007.

Near his home in New Jersey, just across the Hudson River from Wall Street, Horvath seems relaxed, despite the tough job market for finance experts like himself and the layoffs downtown. He’s considering a variety of options at the moment, including eventually starting a new company to invest in affordable housing, potentially with some of his old colleagues in the industry.

FHA Finance Wunderkind

COLUMBUS, OHIO—Nick Gesue was the first intern hired at Lancaster Pollard, and it’s only fitting that the company decided to expand its internship program based on his success. Gesue started as an analyst but quickly rose through the ranks to become a senior vice president and director of affordable housing for the firm at just 28 years old. He has been an integral part of Lancaster Pollard’s rise as a top affordable housing lender, particularly in regard to the company’s work as a Federal Housing Administration (FHA) Multifamily Accelerated Processing lender.

In late 2004, the FHA changed its regulations to make it easier for owners of Sec. 202 properties to refinance their Department of Housing and Urban Development direct loans. Gesue helped to advocate for those changes as a member of the American Association of Homes and Services for the Aging. But more important, since no lender had refinanced a Sec. 202 property before, Gesue took it upon himself to develop in-house policies and procedures for executing such transactions, helping to build this now very profitable business line.

“Ever since that program has been around, we’ve been the nation’s No. 1 underwriter in 202 refinances, and that’s really an extraordinary accomplishment on Nick’s part,” says Lancaster Pollard’s CEO Tom Green.

-Jerry Ascierto

Orgel Crosses the Line

NEW YORK CITY—Look! Up at that high-rise! It’s a church! It’s a condo! It’s affordable housing! Actually Fifth on the Park, now under construction in this city’s Harlem neighborhood, is all three, and it’s exactly the kind of boundary-crossing deal Ron Orgel specializes in. As managing director and co-founder of New York City-based equity capital provider Phoenix Realty Group (PRG), the 33-year-old is a fearless financier of innovative, complicated deals.

“We’re a one-stop shop for equity,” says Orgel. Through PRG, affordable housing developments receive equity from the syndication of low-income housing tax credits. Market-rate and workforce housing deals also win equity from PRG’s institutional clients. For the right properties, like Fifth on the Park, Orgel’s company will also act as a development partner.

When Orgel co-founded PRG in 1999, the 24-year-old engineer and predevelopment expert worked for Lehrer, McGovern, & Bovis, Inc., helping prepare bids for more than $1 billion in construction contracts. He walked away from that job when family friend and Related Cos. alumni Michael Fried invited him to found a new company.

PRG has structured six private equity funds with more than $700 million under management. When fully invested, these funds are expected to produce more than 5,000 units of workforce housing.

—Bendix Anderson

“He’s one of the brightest and most talented guys in the business,” says affordable housing expert and fellow CDT alum Stephen O’Connor.

In the meantime, Horvath just returned from a week in Atlanta, consulting with Habitat for Humanity on its capital markets program. Horvath’s work with Habitat is as good an entry as any into the kind of complicated investment vehicles he has spent his career to date creating and maintaining. The Accelerated Asset Recovery program, originally created by CDT founder Judd Levy and now maintained by Horvath and Habitat, helps Habitat’s affiliates raise money to make more zero percent downpayment home loans to low-income families.

Since the program began nearly a decade ago, Habitat has pooled loans to its affiliates that funded about 1,100 home loans. Habitat issues unrated privateplacement bonds backed by these loan pools. Habitat credit-enhanced the bonds themselves, putting Habitat on the hook for any losses up to 5 percent of the pool. Habitat then sells the A-piece bonds at rock-bottom low yields of roughly 3 to 4 percent to investors, such as the social investment arm of Prudential Financial, Inc., and Citibank, which use the investment to satisfy the requirements of the federal Community Reinvestment Act (CRA). So far, Habitat has raised $74 million through the program.

The program is an education in the difference between highyielding risky bonds backed by predatory subprime loans and Habitat’s low-yielding bonds backed by community development loans. Habitat’s bonds are relatively safe because the nonprofit takes most of the risk itself, says Horvath. As for the underlying home loans, unlike the victims of predatory lending, Habitat’s homebuyers receive credit counseling. Though they didn’t make a cash downpayment in their homes, Habitat homebuyers typically invest “sweat equity” by helping to build the houses themselves. So far, the affiliate loan program has had no defaults, says Horvath.

Fresh from college

Horvath started working for CDT in February 2000, soon after the company was founded in 1998. He was just 24 years old, and he’d only been out of college for about a year, graduating from Rutgers University in 1999 with a degree in urban planning and development.

He’d worked his way through school visiting properties and doing appraisals, market studies, and feasibility studies. “I knew I wanted to get into real estate,” he says.

But it was his skills in finance that got him noticed at CDT, where Horvath’s main responsibility was to bring in new money to preserve affordable housing. CDT is a privately traded REIT that raises money by selling shares in itself to investors, such as banks eager to meet their CRA requirements.

“We had this hybrid private REIT specializing in affordable housing—no one’s ever done that,” Horvath explains.

Investors liked the diversity of CDT’s large portfolio of properties and loans. That diversity helps protect investors from the risk of default relative to, for instance, a guaranteed low-income housing tax credit fund comprising only 15 properties, says Horvath. Since its founding, CDT has financed 25,000 units of housing.

CDT’s first sale of its stock simply valued the company at the liquidation value of its property portfolio plus the mark-to-market value of the loans it held on its books. “The valuation wasn’t really capturing the enterprise value of the company,” says Horvath.

Later stock issues were priced based on projections of what the REIT would earn in funds from operations in 12 months. Horvath managed CDT’s largest sale of shares to date in late 2006, raising $64 million and beating the firm’s target. “We were looking for $50 million,” Horvath remembers.

He was also directly responsible for the purchase of more than 3,000 units of affordable housing during his time at CDT, putting the equity raised by CDT to work to preserve aging affordable housing properties often strangled by decades-old regulatory agreements and desperately needing new capital to make repairs.

“I try to bridge the gap between the capital markets and this really quirky product,” says Horvath.