Sabal Capital Takes on Affordable Housing

Sabal Capital Partners has been approved as a seller-servicer for Freddie Mac’s targeted affordable housing express offering, and will provide a capital solution for sub $10 million affordable housing deals. Affordable housing has become a growing investment class amid the housing and affordability crisis both in California and nationwide. Debt sources are integral in fueling this investment activity and to providing a solution to the affordable housing crisis, according to Pat Jackson, CEO at Sabal Capital Partners. The program will provide non-recourse loans of $10 million or less nationwide to properties with a subsidized housing component. We sat down with Jackson to talk about the program and why the firm is taking on affordable housing.

GlobeSt.com: Tell me about Freddie Mac’s Targeted Affordable Housing Express offering.

Pat Jackson: Freddie Mac has always been focused on affordable housing, and the reason that the agencies even exist is to provide liquidity in the market for people that fall within a certain income band. If you think about the residential markets, many mortgages originated by banks end up with one of the agencies. Freddie Mac has always been focused on that mission—making sure there is liquidity for workforce housing. About three and a half years ago, they launched the SBL program, and we were part of the pilot for that. That has been phenomenally successful. That is really for the sub $7.5 million apartment loans that are mainly focused on on-luxury, appealing more to the workforce housing space. That program has been amazingly successful. When they were looking at the success of that program and the profile of loans that were being done through the targeted affordable program, they found that there were very few loans that were above $10 million. They recognized that based on the success they had through the SBL program, there was a need for them to come up with the express program that had certain changes to be better suited for small balance loans. We think that being able to offer a capital solution for small-balance, sun $10 million loans that have regulatory agreements in place is a really underserved space. Already, we have seen tremendous interest and acceptance in the program.

GlobeSt.com: What was the impetus for you to service affordable housing deals?

Jackson: We are small-balance focused only, and we want to be able to serve that market as much as we possible can. Certainly through the SBL program, we are focused on workforce housing. When we looked at these numbers with Freddie, we saw an opportunity and knew that we wanted to lean into it. We looked at the billions of loan opportunities that came across our desk and the loan opportunities that we were able to supply to satisfy those requests, and it was a much reduced subset. We looked at how we could have a product to say yes to those loans that we were saying no to. We weren’t saying no because they were bad loans. They were great loans, but they had some uniqueness about them. One of the things that jumped out at us was that we were saying no to any loan that came across our desk that had a regulatory agreement in play. By working our numbers and being close to our mentors at Sabal, we saw a mission-rich opportunity where we can really help Freddie further expand their uniqueness in the market relevant to affordable housing. We analyzed the need in the market and matched it with the importance of providing liquidity for affordable housing, which is so near and dear to the agency’s business model.

GlobeSt.com: Do affordable deals come with increased risk profiles?

Jackson: Capital markets ultimately respond to risk return. We are doing a commercial real estate, NOI-based underwrite. We aren’t looking the other way because this is affordable product. These are well underwritten, performing loans that happen to have an incremental income stream relative to the cash flow that is subsidizing certain units in the apartment building. When we look at that income stream, we see that it is incredibly reliable. Then, when we look at the subsidized portion of these apartment buildings, there is always a line to get in. So, there is very high occupancy in these properties. Naturally, you can already eliminate some of your risk. Then, when you look at the typical investors and managers at these properties, they are usually more sophisticated because they have to be able to operate the apartment building within this regulatory regime. Just by the very nature, you get stronger sponsors, more sophisticated sponsors and better operators in this space. When we add all of that up and look at it from a risk perspective, we love this product type. At the end of the day, we are a commercial real estate investment company first, and we like this profile.

GlobeSt.com: There is definitely an increased demand for affordable investment as a result of the housing crisis, and that is especially true in California. You are a nationwide lender, but will you focus on specific markets with this program?

Jackson: Absolutely not. We are a nationwide lender, and actually, California is not one of our bigger markets. We follow where the opportunities are, and we need to be able to offer a nationwide solution to our partners. Often, they have banking clients all over the country—and this is a nationwide issue. We can offer a very consistent, technology based solution nationwide. There is a really supply demand issue that is not being met, and that is an important investor opportunity, but having competitive capital for debt to match up with the investors is an important solution to solve this. This is a long-term issue and it isn’t going to be solved overnight. We are trying to be able to provide one-leg of the solution, and that is competitive debt solutions for sub $10 million affordable properties.

GlobeSt.com: Do you have any specific goals in terms of deal volume or capital allocation this year?

Jackson: Yes, we have a goal for this year, but it isn’t really relevant what it is. This is a long-term commitment, but in some respects, this is a demo because the program is new. We think that there will continue to be improvements to the program as we get smarter. Most programs you don’t get right out of the gate. We continue to evolve the program; so, focusing on the number this year is less important that what the number may be in the future. We think this could be an important part of the housing issues.