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Unique Foundation-Based Multifamily Housing Partnership Launches; Makes First Investment

May 8, 2013
In a novel approach to acquiring affordable housing, the newly formed partnership three Wall Street titans, Citi, Morgan Stanley, Prudential Financial Inc., and two major philanthropic foundations, the John D. and Catherine T. MacArthur Foundation and the Ford Foundation, has raised $100 million and established an equity trust that will operate as a REIT and partner with members to purchase unsubsidized multifamily properties on the open market.

The Housing Partnership Equity Trust (HPET) was formed as a social-purpose real estate investment trust, sponsored and operated by the Housing Partnership Network, a business collaborative of the nation's leading housing and community development nonprofits.

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Based in Washington, DC, HPET plans to provide a ready source of long-term, low-cost capital, enabling these 12 mission-driven nonprofits to acquire apartment buildings for the purpose of providing homes for families, seniors and others with modest incomes.

Its first transaction closed last week, with funds provided by HPET enabling Mercy Housing Lakefront to acquire and rehabilitate a 128-unit property in Aurora, IL.

"The Housing Partnership Equity Trust demonstrates a new approach to funding affordable housing-one that will streamline the capital-raising process for acquiring affordable housing units and sharply reduce transaction costs as well as the time it takes to close on a transaction," said Drew Ades, CEO of HPET.

Ades joined HEPT last year. He previously was involved in the multifamily business at Fannie Mae where he was responsible for starting an entity similar to HPET as well as for launching Fannie Mae’s Green Initiative.

Based on its performance in buying the property in Aurora, Ades said the arrangement should result in more affordable rents for residents, greater financial sustainability for the nonprofits, and stable returns for investors.

"The underwriting and return structure of HPET enabled Mercy Housing Lakefront to make a competitive bid, perform a thorough due diligence process, and ultimately close on the transaction in far less time than is typical of a transaction that would be dependent upon Low-Income Housing Tax Credits," he said. "By placing this property in the hands of a motivated and mission-driven nonprofit, whose interests in preserving the property is aligned with the tenants who live there, we are able to make an investment with an adequate return, cure significant deferred maintenance, improve energy efficiency, and extend the useful life of the property."

"Over the next several months, we will raise additional funds to further expand our scale and impact," he added.

Typically, multifamily affordable housing transactions depend upon project-specific subsidies and investments from a wide range of tax credit and subsidy programs. To be successful, nonprofits have to become highly skilled at assembling resources from governments at the local, state, and federal level, and negotiating project-based financing agreements with multiple private financial institutions and investors. This approach maintains a strong focus on the performance of individual properties but makes it exceedingly difficult to quickly acquire properties, efficiently manage operations and raise capital, HPET said.

Acquisitions funded by HPET will target properties with access to public transportation and other community amenities. Capital improvements will be made to lower operating costs and utility expenses.

"Even as the weak economy put downward pressure on the incomes of the working class and working poor, private investors in real estate, seeking double-digit returns, have either raised rents or cut back on capital investments in their properties," said Cynthia A. Parker, chair of HPET's board and president and CEO of Bridge Housing, which operates affordable properties throughout the West Coast and is one of HPET's 12 nonprofit partners. "Too many affordable properties are being lost due either to gentrification or neglect. By providing a ready source of funds, enabling Bridge and similar organizations to acquire properties, HPET is the answer that so many community development organizations have been looking for to address the pressing need to preserve and improve our existing stock of affordable rental housing."

"HPET represents a fundamental shift in both the way affordable housing is financed, and the way nonprofit real estate operators build their balance sheet and their capacity to expand their mission," said Ommeed Sathe, vice president, social investments, community resources, at Prudential Financial Inc. "We view the creation of HPET as an important initial step in modernizing the financing structure for affordable housing, by aligning incentives through which investors get a steady return, while stabilizing the stock of affordable units."

"Using philanthropic dollars to unlock private capital is a powerful way to creatively achieve impact at a meaningful scale," said Debra Schwartz, director of program-related investments at the MacArthur Foundation, in describing the critical role of "program-related investments" by HPET's two foundation investors. "By design, HPET makes it easy for mainstream investors to put large amounts of capital to work while dramatically improving the ability of leading nonprofits to increase their impact in communities across the nation."

The 12 nonprofit members of HPET are: AHC Housing Inc.; Bridge Housing Corp.; Chicanos Por La Causa; Community Preservation and Development Corp.; Eden Housing Inc.; Hispanic Housing Development Corp.; Homes for America Inc.; LINC Housing Corp.; Mercy Housing; Nevada Hand Inc.; NHP Foundation; and NHT/Enterprise.

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