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LINC in the News

Nonprofit Firms Form REIT
Wall Street Journal, April 29, 2013
By A.D. PRUITT and DAWN WOTAPKA

Some of the nation’s largest housing-related nonprofit organizations are delving into the for-profit world to protect affordable housing.

The nonprofits, including Mercy Housing Inc., LINC Housing Corp. and Nevada HAND Inc., created a private real-estate investment trust that will acquire apartment buildings across the country, mainly in communities where rising real-estate values have prompted landlords to turn low-income housing into housing for the middle class or affluent.

The REIT, called the Housing Partnership Equity Trust, is the nation’s only real-estate company owned and operated by nonprofits and the second REIT to focus on affordable housing.

The REIT has raised more than $100 million from private-sector investors, including Citigroup Inc., Morgan Stanley and Prudential Financial Inc. also secured funding from the John D. and Catherine T. MacArthur Foundation. Housing Partnership closed on its first acquisition Friday, a 128-unit apartment building in Aurora, Ill., that was acquired by Mercy Housing’s Chicago center for $5.2 million.

The Housing Partnership says the REIT structure, which is exempt from most corporate taxes as long as it pays 90% of its taxable income as dividends, gives it access to low-cost capital and the financial ammunition to compete with deep-pocketed investors who are increasingly looking for older buildings to buy, fix up and charge higher rents. The strategy is leaving fewer options available for financially strapped tenants.

The Joint Center For Housing Studies of Harvard in its report for 2011 noted that 8.7% of low-cost rental space was upgraded to higher rents on a net basis during the last decade and the shortfall of affordable units doubled to 5.1 million from 2001.

“There’s an awful lot of investors at this point looking to buy rental housing in the U.S.,” said Andrew Ditton, managing director and co-head of Citi Community Capital, one of the nation’s largest affordable-housing lenders which provided the REIT $65 million in debt financing.

’The ability to compete in that market for a nonprofit is limited because they don’t have the capital on hand to throw a cash bid and win a deal like most for-profit developers.”

The REIT started raising money a year and half ago and aims to raise $500 million from institutional investors. The nonprofits, scattered across the country, own equal stakes in the REIT and will acquire and redevelop existing multifamily properties established as affordable rentals. These organizations will also take small stakes in their acquired buildings which they operate and manage.

While the REIT is set up to deliver a stable and reliable return, it isn’t for the profit-driven investor. “We’re appealing to a class of socially conscious investors who want to make an economic impact as well as a social and mission impact,” said the REIT’s chief executive, Drew Ades. “We’re not trying to sell a big-growth story.”

The housing crash sent millions more Americans into apartments over the past five years, which depressed vacancy rates. For instance, in the first quarter, just 4.3% of apartments were vacant nationwide, well below the 8% available after the housing crisis, according to Reis Inc., a real-estate research firm.

Such demand has developers rushing to build new supply. But, much of what is being built are high-end properties filled with amenities like saunas and rooftop pools for which they can charge hundreds, or even thousands of dollars, a month.

Luis Mejia, director of multifamily research for CoStar Group, said while Housing Partnership’s business model is a “very unusual” and “not a bread and butter type of investment” for a REIT, the nonprofits could benefit from a growing market in lower-end housing as the luxury market becomes saturated.

Denver-based Mercy Housing, one of the largest nonprofits focused on affordable housing, plans to invest $1.5 million to redevelop the Aurora property for which it has 5% stake via its Chicago unit Mercy Housing Lakefront, says Cindy Holler, president of the center. She added Mercy will focus on acquiring properties near job centers, particularly health-care hubs. “We’re looking around hospital systems which are big job creators. We want to make sure that the hospital systems have their work force affordably housed.”

Ms. Holler said because Mercy is a nonprofit, the seller of the building received a state tax benefit for selling the property to the organization at a lower price.

“It’s not the most common occurrence,” said Michael Grupe, executive vice president of research and investor outreach for the National Association of Real Estate Investment Trusts, of the new REIT's business model.

“Typically the owners of such enterprises are trying to maximize their economic profitability. But, it is pretty clear that there are significant segments of the investment community that are focused on socially responsible investing in various formats,” he said.