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More Institutional Investors Warming Up to Workforce, Affordable Housing

Pension Funds, Insurers and Private Equity Jumping Into Tight US Market for Affordable Apartment Housing
October 9, 2017
Institutional investors are shelling out significant amounts of capital to take debt and equity positions in affordable and workforce housing as the long U.S. apartment bull market enters its later stages and yields tighten on new upscale apartment supply in major U.S. markets.

TruAmerica Multifamily, Beacon Communities and other apartment developers and operators have been expanding their stakes in the affordable and workforce space, while investment managers and equity and debt funds such as LEM Capital LP, TH Real Estate and Sabal Capital Partners have all recently announced ventures with well-financed funds and companies such as Allstate Corp. and large pension funds such as California State Teachers' Retirement System (CalSTRS) and Pennsylvania Public School Employees' Retirement System, which are ramping up allocations to workforce and affordable housing acquisition and development.

In the latest example, privately held finance and investment company Red Stone Equity Partners, LLC, closed a $188 million investment fund involving 11 institutional investors utilizing Low Income Housing Tax Credits (LIHTC). Red Stone's 2017 National Fund, L.P. is the seventh and largest offering to close in the last six years. Proceeds from the fund are earmarked for construction financing for more than 1,800 affordable housing units in 25 properties across 12 states.

Over the summer, Northbrook, IL-based Allstate Corp. acquired more than 7,600 units of affordable apartments through a joint venture with Los Angeles-based TruAmerica Multifamily in what the insurance company called a safe defensive play.

And just a few days ago, Boston-based private multifamily investor Beacon Communities acquired a Pittsburgh-based design-build company along with a portfolio of affordable apartment properties totaling 5,300 units in five states, including Florida and Louisiana, The acquisition doubles Beacon's portfolio of 60 apartment communities in the Northeast, and adds Florida, Louisiana and other Southern states.

Beacon plans to use the LIHTC program to refinance and rehabilitate many of the properties. In addition to attractive yields, companies willing to navigate the complex and highly regulated affordable housing sector can reap other rewards, Beacon vice president of development Josh Cohen tells CoStar.

"As aging (apartment) owners exit the space, our company and companies like ours have an opportunity to acquire existing affordable housing businesses and portfolios," Cohen said.

The Taxman Taketh Away?
The deals by Red Stone, Beacon and others come as Congress debates the potential elimination of deductions and tax credits to fund Republican and Trump Administration corporate and middle-class tax cut proposals.

Housing analysts say that, even if Congress does not scrap housing tax credits outright, a lower U.S. tax base could cut into funds available through LIHTC and other incentives to construct low-income and other affordable housing.

"With many federal housing programs facing deep cuts and with the tax reform tempest swirling around us, we are proud to have executed on this fund closing which will provide construction and permanent jobs, as well as much-needed quality affordable housing to thousands of people," said Red Stone President and CEO Eric McClelland.

Other capital providers seeking to tap into the debt market for workforce housing by capitalizing on small-balance loan (SLB) offerings by Fannie Mae and Freddie Mac.

Newport Beach, CA-based lender Sabal Capital Partners, LLC, this week announced the closing of a $129 million multifamily portfolio of Freddie Mac small balance loans in Bronx, NY, for Emerald Equity Group encompassing more than 850 total units. Sabal said it's the largest single SLB transaction processed through Freddie Mac since its inception in 2014.

Pat Jackson, chairman and CEO of Sabal Capital Partners, said his company closed the loans individually in a marathon two-day surge amid a "strong pipeline of other loan fundings that were happening concurrently.”

"We only expect institutional interest to increase, on both the debt and equity side, for this type of product," Jackson said.

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