A group of institutional investors pooled $210 million to address the US’s growing affordable housing shortage through short-term loans that will help keep the availability of rental units at below-market rates.
With signs of a housing crisis looming, Impact Community Capital closed its Mortgage Opportunities Fund this week after drawing commitments from four of the manager’s founding institutions and, for the first time, third-party capital.
The US faces an affordable housing shortage of 7 million units for its poorest renters after pay cuts and job losses during the pandemic hit lower-income communities. Rental prices have also surged amid a hot real estate market, according to a report published in March by the National Low Income Housing Coalition. Affordability restrictions for more than 120,000 units are scheduled to expire, leaving property managers with the choice of increasing rent to market rates.
Property managers seeking to extend the affordability status of their units must navigate lengthy federal processes to obtain subsidies and financing, so Impact Community Capital’s new fund is providing bridge loans to help hold managers over.
“The idea of this fund is to make capital available to developers that want to keep their units as affordable housing but need time to get through the federal process of securing subsidies and long-term financing,” Impact Community Capital chief executive Jeff Brenner told New Private Markets.
The firm, an investment advisory launched in 1998 by six insurance companies, expects to preserve the affordability status of at least 5,000 units across the US. Founding members including Pacific Life, TIAA-owned Nuveen, Farmers Insurance Group and Nationwide committed to Impact Community Capital’s latest vehicle, which also added Bank of Labor and the New York Life Insurance Company as third-party newcomers.
Impact Community Capital completed the fundraise in around seven months, and Brenner said the firm is planning to deploy 90 percent of the investment vehicle within the next year to 18 months. Since its founding, the firm has originated investments totalling $2 billion. Half that amount has helped finance the development of 44,000 affordable units, typically using 18-year loans.
Managing federally approved affordable housing units, which qualify for tax credits, requires property owners to cap rental prices at 18 percent of area median income and only accept renters earning less than 60 percent of AMI, according to the US Department of Housing and Urban Development. But when affordability restrictions expire after 30 years, property owners can choose to increase rent to market rates.
Financing these developments presents investors a tradeoff between return profile and long-term yield. Returns are generated at a clipped coupon rate in the low single digits, but assets will produce reliable cashflow for years.
“Once people in affordable housing get a good, safe, quality place to live, they tend to stay there, particularly in uncertain times like this,” Brenner said. “This opportunity fits perfectly for insurance companies trying to match their liabilities with similarly long-dated assets that produce income.”
Interest in affordable housing has been increasing over the last year, according to an article published by affiliate publication PERE earlier this month.
Last year, Boston Financial Investment Management purchased an affordable housing portfolio that roughly doubled the firm’s $7.7 billion portfolio, while Starwood Capital Group acquired a portfolio comprising 4,618 units. In June, Blackstone agreed to a mega-deal for the sector with the $5.1 billion purchase of an 83,000-unit portfolio from the American International Group.
Kathleen McCarthy, the firm’s co-head of real estate, told PERE that high affordable housing occupancy rates and protection from inflation sold Blackstone on the deal. McCarthy added that the firm plans to keep the affordability status of the newly purchased units. “We do not intend to convert any of them to market rate; we want to keep them affordable,” she said.