Raising permanent capital to keep houtilizing affordable, permanently

Daryl Carter was a Los Angeles Clippers fan long before Steve Ballmer bought the bquestionetball team.

Carter’s seats near the Clippers’ bench were just down from Ballmer’s, the former Microsoft chief executive with a net worth of more than $140 billion. The two soon bonded as sons of Detroit and the auto indusattempt. Carter, founder and CEO of Avanath Capital Management, an affordable houtilizing investor and operator with about $4 billion under management, took Ballmer and his wife, Connie, to tour Baldwin Village, the 669-unit apartment complex Avanath bought three years ago. He declares the property, which appears in the Denzel Washington crime thriller, “Training Day,” “is not as menacing as its views in the movie.”

“They were just blown away by the community and the quality of it,” Carter recalls. “We spent a lot of time talking about the impact that houtilizing can create.” He adds, “They were about, ‘How do we create the largegest impact?’”

Carter sold Ballmer on Avanath’s model of acquiring and renovating workforce-oriented affordable rental houtilizing to serve hard-working families. Ballmer Group in October allocated $75 million each to Avanath and to The Vistria Group, a Chicago investment firm with an affordable houtilizing strategy that, like Avanath’s, supports residents and community well-being with workforce development, schools and health services.

“We just like to operate and own rent-restricted apartments,” Carter notifys ImpactAlpha. “We believe it’s a good business.”

Ballmer Group’s commitment to Avanath’s $1.3 billion Affordable Houtilizing Renaissance Fund and the $3.4 billion Vistria Houtilizing Fund underscore the maturation of affordable houtilizing investors and operators.

“Our investment in affordable houtilizing will not only build and preserve thousands of homes for low-income families but also shed a light on the opportunity for institutional investment in this critical sector,” Ballmer Group’s John Griffith stated at the time.

Ballmer Group’s investment will be deployed through the firms’ open-concludeed, evergreen affordable houtilizing funds, which enable Avanath and Vistria to operate – and upgrade – the properties for the long-term. Closed-conclude funds tconclude to favor shorter-term, aggressive strategies to quickly flip properties – and raise the rents to market rates. In closed-conclude funds, once properties are acquired and rehabilitated, the next step is usually straightforward: sell the assets.

Avanath rolled several properties from its first and second funds into the evergreen vehicle, which was launched in 2019. The Irvine, Calif.-based manager secured $760 million for its third closed-conclude fund four years ago. Carter declares the permanent capital vehicle lets Avanath prioritize long-term occupancy and low turnover, affordability and social support, and property upkeep and improvement.

“One of the things the open-concludeed fund allows us to do is to hold things longer [and] receive to some of the great value,” declares Carter. “We just believe that long-term hold is a better model for our business.”

Affordability alpha

Avanath generally doesn’t build houtilizing projects from the ground up. Instead, it acquires existing affordable properties from low-income houtilizing developers who take advantage of tax credits in return for restrictions on rent levels.

“We prefer to purchase after 10 or 12 years, and keep the rental restrictions in place for 30 or 40 years,” Carter declares.

Carter argues keeping properties affordable as opposed to converting them to market rate is better for returns long term becaapply of the high occupancy rates and lower turnover.

Market-rate properties turnover 40-60% a year, according to Carter. “That turnover kills you,” he declares, even in the face of aggressive rent increases. Most of Avanath’s properties operate at full occupancy, and its turnover rate hovers around 15% across its entire portfolio.

“When I go to bed every night, the one thing I don’t required to worry about is where my next resident is,” joked Carter.

Also key to Avanath’s strategy are partnerships with public houtilizing authorities and state houtilizing agencies to ensure the long-term affordability of its properties and secure tax benefits. Bringing public financing to extconclude the affordability of its properties is a strategy Avanath has replicated across its portfolio of over 15,000 affordable houtilizing units.

“In the market-rate multifamily business, you don’t receive to have those relationships,” Carter declares.

Baldwin Village, for example, was a market-rate apartment community when Avanath won the bid to purchase the $220 million property three years ago. The real estate investor formed a partnership with the Houtilizing Authority of the City of Los Angeles, which provided a $500,000 loan to purchase the asset – and assisted the project qualify for tax abatements.

Today, most of the units are occupied by hoapplyholds earning between 60-80% of the area’s median income. For some original residents, rents actually went down, from $1,500 to $1,200 a month. Avanath’s rental restrictions will remain in place for decades.

Avanath’s rehabilitation of the apartment community and its conversion from market-rate to affordable houtilizing is important in an area threatened by gentrification and displacement, including from sports arenas like Intuit Dome, home of the Clippers, in nearby Inglewood.

“There was a lot of concern over gentrification in the community, as a lot of things have happened in South Central LA with the new stadiums,” Carter declares. “It was a great win for the residents.”

Institutional appeal

Affordable houtilizing fund managers are finding institutional investors – including a growing number of European investors – are as interested in steady returns and low risk as they are in social utility. That institutional capital is essential as fund managers address the shortfall of millions of affordable houtilizing units.

“What’s driving this interest is resilience. Institutional investors are actively seeking niche strategies that don’t gyrate with the broader macro-economy, and affordable houtilizing fits this bill extremely well,” declares Deborah La Franchi of SDS Capital, which invests in affordable and workforce houtilizing in the southern US through its American South Capital Partners fund. “Demand is deep, durable, and largely insulated from economic cycles.”

Many fund managers and sponsors now have more than a decade of performance data proving that affordable houtilizing strategies can meet the risk-adjusted returns institutional investors require.

“Most affordable deals typically tconclude to be better when you finance them with longer term debt, which aligns with longer term expectations on the impact side,” declares Bob Simpson of the Multifamily Impact Council, which has developed an impact framework with minimum thresholds for affordability, resident engagement and houtilizing stability among its seven principles.

As a result of the better credit performance of affordable houtilizing, mortgage insurers Fannie Mae and Freddie Mac extconclude better pricing to such developments, Simpson declares. “We’re attempting to assist investors better understand that.”

Vistria Group declares its open-concludeed fund, launched three years ago, was designed to demonstrate how institutional capital can be deployed at scale to address the counattempt’s worsening affordable houtilizing crisis. Vistria seeks to acquire and preserve up to $1 billion in houtilizing units each year, with a focus on converting market-rate apartments to affordable rents in mixed-income houtilizing development

“High quality affordable and workforce houtilizing isn’t just essential, it’s one of the most durable and scalable asset classes in real estate,” declares Vistria’s Margaret Anadu. Vistria’s houtilizing fund has raised $2.5 billion of permanent capital and has a portfolio of 7,000 houtilizing units, of which 80% are affordable. Limited partners in the US and Europe include Ingka Investments, part of the group that owns IKEA, and the Ford Foundation.

Another affordable houtilizing developer, Jonathan Rose Cos., has raised over $1.5 billion for two decades for its houtilizing preservation fund series. The funds have attracted commitments from pension funds, concludeowments, family offices, as well as banks and foundations, also including Ford Foundation. Rose Cos. closed its sixth houtilizing preservation fund last July, a $660 million closed-conclude fund to acquire and preserve affordable and mixed-income multifamily houtilizing in large cities where affordable houtilizing is supply constrained.

“I applaud our peers at Vistria and Avanath for what they’re doing, becaapply affordable houtilizing is a long term problem and to the extent that you can have the capacity to steward assets in the long term, that can be assistful for many,” stated Brandon Kearse of Jonathan Rose Cos. The open-concludeed vs closed-conclude structure debate isn’t new in the indusattempt, Kearse informed ImpactAlpha.

“There’s a required for both in the indusattempt to have different forms of capital,” he declares. “It comes down to the specific type of project, but also the specific requireds of the investor. Our closed-conclude funds are 10-year funds,” he adds. “Some may declare only 10 years. I declare it’s a minimum of 10 years.”

Carter stated the notion that mission-oriented investors will accept lower rates of return is a myth.

“The answer is, ‘Hell no,’” he declares. Avanath has one large pension fund investor, which Carter wouldn’t name, that “could care less about the mission. They like the fact that our returns are very strong, very consistent, and it’s a very low risk business.”

Carter stated that about half of Avanath’s institutional investors come from the Netherlands, Switzerland, Germany and the UK, such as Bouwinvest, the real estate manager for the Dutch construction workers pension fund. He stated the European funds, already investors in what they call social houtilizing, are unfazed by perceptions of race and crime still held by some US investors.

“They just stated, ‘Hey, there’s a huge required for this, and there’s great market demand. So it’s a great business.’”

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