LIHTC Properties Come to Market With Value-add Two-fer

FORT WASHINGTON, MD—In many respects, the recent trade of Henson Creek Manor, a 210-unit affordable multifamily community at 5201–5301 Haras Pl. here was a straightforward transaction. The property sold for about $23 million, or $110,00 per unit. The buyer was a New York City investor AMAC Holdings and the seller was an LLC.

Greysteel's Mid-Atlantic multifamily investment sales team of Ari Firoozabadi, John F. Mullen, W. Kyle Tangney, Lance Ahmadian, Mike Bediones, Jake Ying, and Alicia Orkisz represented the seller.

The buyer is getting a great property, particularly because of its close location to MGM National Harbor and Saint Elizabeth's, Mullen tells GlobeSt.com.

It is also a value add play, he adds.

Most apartment buildings outside of DC's core usually are. But dig a little deeper and one gets a better sense exactly where the value add is coming from -- and why similarly-structured properties are coming to market, and being snapped up.

Developed in the 1990s in two phases, Henson Creek Manor is a Low Income Housing Tax Credit structured deal. There were many such deals in this period of time; it was hard in the 1990s not to make a profit. LIHTCs were seen as a viable way to mitigate tax liabilities.

Now many of these properties are passing their initial compliance period of 15 years required by Section 42 of the US Tax Code, which governs LIHTC -- and in some cases the developer and sponsors want to sell to realize gains. But as they do there could be yet unrealized value add to be garnered from the deal if the affordability covenants are still in place, but scheduled to expire in the coming years.

Let me back up.

To comply with LIHTC requirements a developer cannot sell before ten years. It may be able to sell after that period, but the optimal time to sell, if that is what it wants, is after 15 years when there is no more liability and no more credit flows.

It could still be a profitable property to hold after 15 years -- and indeed many owners view these LIHTC-financed properties as long-term holds. But enough are seeking an exit that more and more properties are coming to market.

"We are seeing more tax credit properties hit the market as these properties are coming up on years 15 and 20 and the limited partner wants to get out," Mullen says.

For buyers, the opportunities are twofold, he says: they get a solid class B or class C apartment building and they may well be line to benefit from a conversion to market rates if the timing is right.

There is an element to that with the Henson Creek Manor. The property was constructed in two phases in 1994 and 1997.

Phase one was structured in the negotiations with the state as 60% Area Median Income (AMI). These affordability covenants will disappear in 2024 -- giving AMAC Holdings the opportunity to upgrade, reposition and raise rents if it chooses.

Phase two is newly built and consists of 50% AMI.

None of this is to say that the market will be flooded with LIHTC-structured properties. But certainly these deals are becoming increasingly more common.

One recent example was the acquisition of the 168-unit Grove at Flynn's Crossing in Ashburn, VA, for $31 million. The buyer was Seattle-based Security Properties making its first foray in the DC area.

The affordable property is aimed at individuals and families earning up to 60% of area median income.

 Meanwhile, as we enter into a another profitability cycle, new properties are coming up using LIHTC financing.

Girard Street Community Partners, a joint venture of local developers Menkiti Group and Dantes Partners, recently broke ground on the Girard Street Senior Apartments project in Brookland.

The $11 million project is being financed through a combination of Department of Housing and Community Development gap financing, a private first trust debt and 9% LIHTC.