There may be a new way to finance apartment projects that include affordable housing.
Align Finance Partners, a recently formed private commercial real estate finance company, plans to provide subordinate gap financing for the acquisition, renovation, and development of multifamily communities in the West.
The financing will be structured as a tax-exempt private-activity housing bond or 501(c)(3) bond, secured by a second deed of trust on the property or interest in the ownership entity.
“We’ve created something new that hopefully benefits the industry in a big way,” says Michael Costa, president of Highridge Costa Cos. and one of the founders of Align.
A veteran affordable housing developer, Costa says he saw a need for an additional financing vehicle at a time of rising interest rates and changes brought on by tax reform.
As a first step, Align is creating a bond fund with the goal of investing $100 million to $150 million in tax-exempt subordinate bonds. So far, the company has raised about $50 million.
The subordinate bonds are intended to provide financing for the portion of the capital stack between 60% and 90% loan to value. Loan amounts will be between $5 million and $15 million.
“It’s a program that will provide the second-position B bond to an A-position tax-exempt bond financing,” says Costa. This is unique because the traditional sources of funding usually only provide the A piece.
Qualifying projects must reserve a minimum of 20% of the units for low-income residents. The fund will be designed to provide investors with a stable, tax-exempt cash flow while providing affordable housing developments with needed mezzanine capital, according to Align leaders.
Costa says potential borrowers include nonprofit organizations that are general partners of exiting low-income housing tax credit properties in years 10 to 15 of their cycles and want to buy out their tax credit partners.
These owners can create a 501(c)(3) tax-exempt bond A piece and then Align can attach a B piece that’s 501(c)(3) bonds as well. The new fund’s subordinate financing can help these nonprofits facilitate the early purchase of the limited partner in their existing partnerships, according to Costa.
Other potential borrowers include large, market-rate multifamily developers who face inclusionary zoning requirements. The new fund looks to save these developers money by switching them to a tax-exempt bond financing structure. The objective is to replace a large chunk of what normally is very expensive “profit participating” mezzanine and/or equity above a typical first loan, at 70% of cost, with a fixed-rate “B” loan up to 90% of cost, according to Costa.
He expects Align to start delivering commitments to projects this year. Other founding partners of the company are Robert Tetrault, CFO and senior vice president at Highridge Costa, and Michael Potter and Dani Evanson, managing directors of Regis Metro Associates, a real estate investment management firm.