Affordable Housing Finance

SPECIAL FOCUS

The AHF 50

Growing a Company

AFFORDABLE HOUSING FINANCE • April/May 2010

Dominium capitalizes on distress, expands portfolio

BY DONNA KIMURA

Armand Brachman and Paul Sween are principals at Dominium Development & Acquisition. Brachman has been with the company for 31 years, Sween for 21 years.

(Photo by Jonathan Chapman)

PLYMOUTH, MINN.—Paul Sween likens the affordable housing business to planting oak trees. In both, the work requires patience, and the rewards come slow.

“It takes a long time to grow oak trees,” he says, explaining that it is also often at least 18 years from when an affordable housing project is identified to when its developer can sell it.

If apartments are indeed like trees, Sween’s firm, Dominium Development & Acquisition, LLC, has sowed a lot of them over its 38-year history.

Dominium stands as one of the nation’s largest affordable housing owners, with 11,793 units in 155 properties, making it No. 10 on the AHF 50 list of owners. It’s also No. 4 on the latest list of companies completing acquisitions, having taken over 16 properties with nearly 1,500 units last year. And, it ranked No. 42 on the AHF 50 list of developers.

At a time when many affordable housing developers have had to scale back or even shutter their doors because of the downturn in the financial markets, Dominium is putting up impressive numbers.

“We’ve stuck to the core business of affordable housing,” says Sween, a principal at the firm. “The second factor is we have a large mature portfolio, so we’re coming into this period with liquidity that allows us to take advantage of various opportunities.”

The for-profit firm has also nurtured strong relationships with both equity and debt sources that have been critical in keeping deals flowing, adds Armand Brachman, another principal at Dominium.

Finding opportunities

While a sputtering economy and a lack of capital in the low-income housing tax credit (LIHTC) market have cursed many developers, Dominium is using those situations to its advantage.

Albertville Meadows Townhomes features 37 affordable housing units, including four for formerly homeless families, in Albertville, Minn. The $8.4 million project is one of Dominium’s latest developments.

Last year, the firm was approached by two financial institutions to step in as the general partner on six distressed assets with 490 units. In one case, Dominium took over two Denver projects that were in default, including one that was only about 45 percent completed.

The company finished construction, including some corrective work and redesign, and placed the units in service in about five months. The bank was able to avoid having any tax credits recaptured, says Brachman.

In a separate case, Dominium worked with another financial institution to take over and stabilize four properties scattered across the Midwest.

While these deals were important on their own, Dominium saw them as an investment in building stronger relationships with the banks.

Those transactions also have led to other potential deals.

In March, Dominium was looking at acquiring another group of properties for one of the lenders.

In general, many of the cases that Dominium has seen involve assets in sustainable or growing markets, but the developer has been involved in some form of for-sale housing or had some other problem that has preoccupied them, according to Sween.

Dominium has 36 potential acquisition deals in its pipeline, with hopes of closing as many as 15 this year.

Seven of the possible deals involve distressed assets. Four are straight acquisitions where a general partner is selling their interest or the limited partner has removed the general partner and is looking for a replacement. Another four potential transactions involve acquisition/rehabilitation opportunities.

The firm finances its acquisition/rehab deals with a combination of LIHTC equity, soft funding, and either tax-exempt bonds or conventional financing.

“Each deal has its own specific financing structure, but typically it will consist of some combination of these things,” says Brachman.

In cases involving a distressed asset, Dominium may finance the general partner acquisition by using its own internal resources, including lines of credit, revenue from other projects, and the sale of owned properties.

For other developers looking at an acquisition opportunity, Sween stresses the importance of studying and understanding the market.

It’s not just about getting a property at a good price. “We’ve tried to stay away from projects that are in markets where no matter who’s there there aren’t enough customers,” Sween says.

Brachman’s advice is to maintain good relationships with debt and equity sources. If you do, there’s a good chance that those sources will notify you if an opportunity comes up in a market where you are active.

A strong track record

Practicing what it preaches, the firm, which also owns about 3,000 market-rate units, has built a strong track record.

Dominium has partnered with Minnesota Housing, the state housing finance agency, on 22 projects over the years.

“They have a keen sense for how to get projects done while effectively collaborating with communities to achieve both positive housing and community impacts,” says Commissioner Dan Bartholomay. “As a result, they have helped Minnesota Housing preserve a substantial number of federally assisted rental housing units in Minnesota and across the country by taking a proactive approach.”

Others agree. “It’s a solid organization with all the tools at their disposal to get even the most difficult and complex workout situations closed, completed, and stabilized,” says John W. Schiffer, vice president and director of LIHTC asset management at U.S. Bancorp Community Development Corp.

Dominium’s roots are in building new projects, but the business has tipped heavily toward acquisitions. Five years ago, Dominium was developing roughly 1,500 units in new construction projects. Last year, Dominium started just one and completed two new construction developments. In 2010, Dominium is looking at starting four new construction projects with 566 units.

It’s a sign of the times. Other developers, including The Michaels Organization and The NRP Group, also say they will be looking for acquisition opportunities as other firms sell properties.

In another move, Dominium is planning to resyndicate a number of projects in its portfolio that are coming out of their 15-year LIHTC compliance period.

The company’s portfolio includes 77 properties that are 13 years or older. Resyndicating projects means seeking a new allocation of tax credits to make improvements and keep the developments in the LIHTC program and affordable. This is often done with tax-exempt bonds.

Sween expects to begin closing the resyndications in June and doing a number of them each year.

It fits into the company’s philosophy of sticking with the business for the long term. After all, oak trees don’t grow over night.