By Michele Lerner
Components of most REITs’ business plans are to own and/or operate properties where rent growth will drive income. However, privately held Community Development Trust has a different approach. The REIT is providing a solution to high rent housing across the nation. “We are the first REIT devoted to providing capital for maintaining and improving affordable housing,” says Judd Levy, president and CEO of Community Development Trust.
The company was started in 1998 with seed money from the Local Initiatives Support Corporation, the largest community development intermediary in the country at that time. Since then, Community Development Trust has worked with local and national partners to invest or commit more than $583 million in debt and equity capital to properties in 38 states and regions, helping to preserve or develop more than 23,000 units of the nation’s affordable housing stock.
“We are able to do well for our investors and do good for others at the same time,” says John Divers, COO and CFO of Community Development Trust. “Our goal is to preserve and expand the base of affordable housing. We’re trying to do our part to stop affordable housing properties from being sold and flipped.”
Levy says the inspiration for forming Community Development Trust happened when he watched REITs going public using the UPREIT structure. “I thought, ‘Why can’t we take that idea and apply it to affordable housing, especially for owners of Section 8 property who couldn’t sell it because of tax issues?’” Levy says.
Giving to the Community
Community Development Trust collaborates with local developers who are committed to providing affordable rental housing. Some Community Development Trust properties are under government rent control, but for those that are not, the REIT requires the local partners to ask for its permission before raising the rent.
“To date, we focus on affordable rental housing rather than for-sale housing,” Levy says. “Fannie Mae, Freddie Mac and state and local housing agencies have the for-sale market covered. What was missing was rental housing.”
Caring Investors
Since the company has community interests in mind, it attracts similar investors. Community Development Trust’s initial group of 21 investors included financial institutions with leaders who are socially motivated, as well as a few non-profit groups.
Crestwood Apartments is a 276 unit multifamily rental property located in Mesa, AZ. |
Levy says that all Community Development Trust investments must satisfy Community Reinvestment Act (CRA) regulations, which require them to invest in low-income areas. In fact, Community Development Trust’s bylaws require it to invest only in mortgages subject to CRA rules.
“Financial institutions can get CRA credits when they buy the company’s stock,” Levy says. “These institutions are also attracted by our commitment to run Community Development Trust as a for-profit business that will generate market returns. Initially, when our company was a start-up, those investors took a leap of faith to choose us. Now we have a substantial portfolio that generates positive returns for them.”
“Our first two offerings were outright common stock,” he says. “Recently, we tried a convertible preferred shares offering, and it was extremely successful. Our goal was to raise $50 million, but investor interest was so strong that we raised the offering level and closed at $64 million.”
Convertible preferred shares have two benefits. “First, the shares act like a bond or debt, with a fixed rate of 4.25 percent,” Divers says. “Then, after five years, the shares convert to common stock. This results in a better yield upfront and a healthy source of funds.”
Community Development Trust does not originate any loans, but they have a growing base of community development lenders such as Wachovia Securities, JP Morgan Chase, Wells Fargo Financial and California Community Reinvestment Corporation (CCRC), according to Divers. The REIT buys mortgages from the banks that originate loans for affordable housing developments, then bundles and sells them to institutional buyers.
Broadening Horizons
Now that Community Development Trust has some solid success stories in its portfolio, it is beginning to look into expanding its development strategy to meet other local needs in addition to rental housing.
“We’re looking at broadening our assets, potentially investing in charter schools, health facilities and retail strip centers near rental housing,” Levy says.
Divers says Community Development Trust will analyze which of these areas are most in need of development and where the REIT can make the biggest difference. Many of Community Development Trust’s partners are handling the mortgage side of charter schools, so one possibility would be for the company to buy those loans and syndicate them. “We know we can’t just provide housing for people,” says Levy. “We need to improve schools in order to improve cities.”
While the sub-prime mortgage market slowdown hurts many others in the business, Levy says he anticipates the situation will benefit Community Development Trust.
“The market moved a lot of people into homes they couldn’t afford,” Levy says. “Some people with bad mortgages or bad lenders will need to move back into rental housing, so this slowdown will actually have a positive effect on us.” That will help them stabilize their financial situation, so the next time they look to buy their own home, they’ll be financially ready for it. “I won’t be surprised if our occupancy rates pick up in the next 12 months.”
Michele Lerner is a regular contributor to Portfolio.
