BH Properties, a Los Angeles, California-based real estate investment management company, is seeking to build a $1 billion portfolio of affordable housing properties over the next five to six years as it aims to add more cashflowing assets to a portfolio with an opportunistic tilt.
The firm last month brought on Bill Stoll, who joins the firm from affordable housing Steadfast Communities as a managing director, with a mandate of ramping up the platform. The affordable housing niche will sit alongside a 10 million square foot portfolio that includes 2,000 multifamily units as well as value-add acquisitions, bankruptcy financing and investments in commercial real estate debt.
BH Properties anticipates starting the initiative within the next 12 months, during which time it has a goal of acquiring $100 million in properties. “We will ramp it up from there and aim to do about $200 million of acquisitions in each of the subsequent years,” Stoll added.
The firm has a specific focus for the type of asset it is seeking – properties financed 15 years ago under the US Department of Housing and Urban Development’s Low-Income Housing Tax Credit Program, Stoll said.
The LIHTC program, widely seen to be a critical way of creating affordable housing in the US, has an initial 15-year compliance period during which developers must maintain the affordability of an asset. After the initial period, a property will enter into what is called an extended-use period, after which a developer can opt to convert the asset into market-rate housing or re-syndicate the tax credits. The length of the extended-use period varies by state, Stoll added.
“We are looking for year 15 properties that are in their extended use period and maybe have 10 to 15 years left on them, during which [time] we will maintain the properties as affordable housing,” Stoll said. “We are using this as a yield play to mitigate against our bigger bets in the office and retail space. This strategy will allow us to create cashflow on a day one basis, as opposed to what we are doing on the other side – buying empty buildings and putting money into them.”
While BH Properties is hopeful the initiative will help with the preservation of affordable housing stock, the firm is not a developer and will not be creating new affordable units.
“It is more about taking already affordable housing and continuing down the path that has already begun,” Stoll said. “There is obviously a trickle-down effect in that if the people who put the LIHTC credits on a property are selling to BH Properties, that transaction will allow developers to build new affordable housing stock.”
The firm likes the profile of these properties because of their annuity-like income stream, rather than from the impact of assuming the tax credits, said Jim Brooks, president of BH Properties. The plan is for the company to acquire assets of 100 units or more, with the aim of holding the properties for at least 10 years. BH Properties will source firms via brokerage and advisory relationships and is already looking at deals in Texas, California, Arizona and Colorado.
While the initiative is a new one for BH, the company historically has had multifamily assets as a part of its strategy and this experience was part of the trigger for launching the platform.
“We have six workforce housing properties, purchased a decade ago, that show low deviation on cashflow because they are usually 90-95 percent full,” Stoll said. “If rents are going up by an average of 2-3 percent per year and you hold these assets for 10 years, you are creating rental income of 30-35 percent. This creates cashflow and will allow the company to make bets on the retail, office and industrial space.”