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Avanath, MacFarlane Plan $100M IPO For First OZ Affordable Housing REIT

Two major commercial real estate players are creating a public multifamily real estate investment trust via a $100M IPO, the industry's first to focus on affordable and workforce housing, its founders say. 

Dubbed Aspire Real Estate Investors, the REIT is controlled by Irvine, California-based Avanath Capital and San Francisco-based MacFarlane Partners, both among the largest Black-owned real estate companies in the country. 

Representatives for both Avanath Capital and MacFarlane Partners declined to comment, citing the “quiet period” that began after filing an IPO on Oct. 2. But documents submitted to the Securities and Exchange Commission offer a look at plans for the first wave of investments Aspire would make, including spending $582.4M on nine initial multifamily properties across the country, six of which are located in opportunity zones.

Avanath Capital Management CEO Daryl Carter

The demand for affordable housing across the country far exceeds the supply, Aspire’s founders said. That demand continues to rise because of a double whammy of rising market-rate rents and stagnating wages for lower- and middle-income earners, the filing said.

“These sectors historically have been fragmented in ownership and underserved by institutional capital, yet they comprise a majority of the U.S. multifamily market (by units) and offer strong long-term fundamentals to generate attractive returns for investors,” the filing said.

Five of the projects Aspire has lined up involve redevelopments of existing properties. At the Seaport Village in Long Beach, California, the plan is to renovate the 358 existing units in the development, which Aspire classified as workforce housing, as well as buy an adjacent shopping center and raze it to build market-rate apartments.

In Ontario, California, Woodside Senior apartments will add a market-rate component after Aspire buys the office building between the two parcels that make up the senior complex, razes the office building and builds market-rate apartments on the former office building site.

Aspire has other projects lined up in Florida, Texas, Illinois, Michigan and North Carolina. Three of the properties in Aspire’s portfolio are rent-stabilized, income-restricted developments whose restrictions expire in the next four to six years. Only one project, in Detroit, will be ground-up construction. 

Affordable housing is not typically a space that REITs have been interested in, which Aspire’s founders attribute to “high barriers of entry,” including the limited availability of tax credits and the specialized knowledge needed to maintain compliance with regulations for this type of housing.

“Our management team has been able to overcome these barriers through the development of sophisticated operating strategies and reporting procedures and through the implementation of cost management strategies,” the prospectus said. “We intend to leverage this experience to pursue development and redevelopment projects that our competitors may be unable or unwilling to pursue.” 

Experts saw other potential reasons why REITs might not be very active in this sector.

“REITs are looking for an institutionally relevant complex where they can push rents heavily. That’s hard to do in affordable housing,” said Barry Oxford, a senior analyst at D.A. Davidson Cos. who specializes in REITs.

“It’s hard to squeeze net operating income out of those [tenants],” said Oxford, citing the rent restrictions that accompany affordable units. 

Avanath already focuses on these types of properties. The company’s portfolio includes 80 buildings, about 85% of which fall under Section 8 or tax credit housing, CEO and Chairman Daryl Carter noted in a National Multifamily Housing Council webinar in April. 

The timing of launching a public REIT focused on affordable housing right now did not strike Stuart Gabriel, the director of the Richard S. Ziman Center for Real Estate at UCLA, as odd. “A lot of people are out of work or hanging on by a thread. In some parts of the country there is an almost unlimited demand for affordable housing,” Gabriel said. 

But experts said that a part of the challenge for a REIT that is doing something different will be getting investors to warm up to it. But there are advantages to offering something that real estate portfolio managers don’t already have.  

“This REIT offers something different: a way to play affordable housing,” Oxford said. It might also be of interest to investors who have concerns about Class-A apartments, he said. 

Aspire’s attention to properties in opportunity zones is also part of the equation. According to its filing, Aspire intends to qualify as an opportunity zone fund. 

The OZ program, created by the Tax Cuts and Jobs Act of 2017, allows investors to receive tax breaks if they put their capital gains into an opportunity zone fund, which then invests that money into a business or property in one of the more than 8,700 opportunity zones across the country.

The program has received criticism for a number of reasons, including that the list of OZs was out-of-date and included a number of already high-end neighborhoods that don’t need any help drawing investment. Most of Los Angeles’ booming Arts District is an OZ.  

“We believe the potential for a diversified portfolio of Opportunity Zone real property investments across a range of markets at different stages of development will help manage the risks associated with an investment strategy focused on underserved real property markets,” the filing said.