Work is ready to begin on a full renovation of the 210 apartments at Casa Devon, which have provided affordable housing to seniors in South Miami Heights, Fla., for nearly four decades.
“It was definitely in need of renovation,” says Sydne Garchik, founder and president of MRK Partners, an affordable housing developer based in Miami.
MRK bought Casa Devon in June 2019 from a for-profit investor. The purchase was executed via a bridge loan arranged by CBRE Capital Markets. The bridge loan was needed to allow time for MRK to structure the redevelopement and arrange for the associated permanent financing.
MRK’s primary competition for the purchase of the property was for-profit developers with an eye toward converting the property to market rate even though the apartments must remain affordable for at least a decade because of its existing rental subsidy contract. The for-profit buyers would be happy to operate the property as affordable housing until the contract expired and then convert it to market rate.
“There is a lot of patient capital out there,” says Garchik. “This deal would be ripe for redevelopment on the expiration of the contract.”
MRK first heard Casa Devon was available to purchase in February 2019. The affordable developer needed to make an offer large enough to entice the seller—and quickly, without waiting for the permanent financing to fall into place.
“With the seller’s market that existed early this year, the seller wouldn’t wait six months for a tax credit execution,” says Jim Flinn, vice chairman of debt and structured finance for affordable housing for CBRE Capital Markets. “A bridge loan would allow the permanent execution to get done.”
CBRE therefore arranged a $38 million, interest-only bridge loan, which MRK used to buy Casa Devon for $43.5 million, or $207,000 per unit. The bridge financing bought MRK the time it needed to work with the Department of Housing and Urban Development (HUD) to renew project-based Sec. 8 rental subsidies on Casa Devon at higher rents. The new subsidy amount averages about $1,500 per month per unit, based on the latest fair market rents for the area set by HUD.
While MRK worked through the contract process with HUD, the developer also locked in a low-interest rate on the permanent mortgage for the redevelopment. “We index locked the 10-year Treasury to remove all interest rate risk on July 9, 2019,” says Flinn.
CBRE arranged a $47.4 million permanent 20-year, Freddie Mac Tax-Exempt Loan. MRK also sold 4% low-income housing tax credits (LIHTC) to R4 Capital, a national LIHTC syndicator headquartered in New York City, for $21.6 million. Those sources provided the majority of the financing for the project.
That cost includes $13.3 million in hard construction costs for a $63,241-per-unit renovation. Originally built in 1982, Casa Devon is finishing its fourth decade and is in need of a renovation of this magnitude. HUD inspectors had already failed the building on its latest Real Estate Assessment Center (REAC) exam.
Renovations were planned to begin at the end of March, starting on the outside of the buildings and continuing to work inside the apartments in April. The coronavirus crisis may delay the start of renovations, but work will go forward once the crisis is over, says Garchik.
For more information on financing solutions for affordable housing developers, visit CBRE Affordable Housing.
