Value-Add MF, Workforce Housing Attractive, Says Dealmaking Panel

PHILADELPHIA, PA—Value-add multifamily and workforce housing are attractive sectors for lenders in the current market, but Opportunity Zones may not live up to their promise for real estate, according to participants in the “Deep Dive in Deal Making” panel at ALM’s GlobeSt.com Philadelphia Conference this week at the Crystal Tea Room. The panel was moderated by Jerry Kranzel, senior vice president, capital markets – institutional properties, CBRE

“We really like value add multifamily,” says Christophe Terlizzi, senior vice president & market leader for commercial real estate lending, KeyBank. “We see that as being one of the safest bets for balance sheet lending, and it also drives permanent loan business through our off-balance-sheet channels.”

Terlizzi described a recent deal involving a workforce housing project of 210 units where the sponsor wanted to buy out his equity partners and needed to recapitalize the transaction, but the property’s rents were about $250 a month below the market because other more modern properties attracted a higher rent.

“We structured a loan that provided him with 98% of the capital to buy out his equity,  and we structured a deal with 100% of the renovation costs, to be advanced over basically a four-year period,” says Terlizzi. The financing included two one-year extension options and a principal guarantee. Despite complex tax issues because of foreign investor participation, Terlizzi says Key was able to close the deal in 45 days.

“I’m seeing a lot of clients leaving New York, and taking that money and bringing it over to Philadelphia and New Jersey,” says Amanuel Mekonen, director, Greystone & Co. “We are in love with affordable housing and workforce housing. I really think you can’t go wrong. Anytime we see developers looking into affordable housing or workforce housing, we’re going to be excited about it.”

Mekonen’s firm provides bridge financing to developers working on zoning approvals and converts that to FHA construction loans after land is acquired and approved, he says.

“Last year, I didn’t see a lot of that,” he says. “This year, I’m getting a lot of requests and spending a good amount of time on that. And we closed around $1.8 billion last year, so I can see that really gearing up.”

Opportunity zones could provide an extra incentive for developers to look at affordable housing developments in a city like Philadelphia, Mekonen says.

“I think that only adds to the flavor, because if you can underwrite it right and the deal works, it’s only going to get better,” he says.

But Terlizzi and panelist Leo Addimando, co-founder and managing partner, Alterra Property Group, were not as sanguine about Opportunity Zones.

“I’m a big believer in the notion that you have to have a market,” Terlizzi says. “You can subsidize whatever you want, but if there’s no market, there’s really no value to be created. There are some opportunity zones that, if one scrutinized the locations, really didn’t need to be opportunity zones. So if you’re in one of those and you’re a developer, you’re going to get a bonus because there is a market, and the tax-advantaged equity that you can attract is going to be financially attractive to you.”

“If the real estate deal makes sense, the opportunity zone is just an extra sweetener, but I’m very skeptical about making real estate deals that only work because of the opportunity zone program,” Addimando says. “I don’t think it’s the big windfall that that people are predicting it’s going to be.”

In a discussion of complex structures, panelist Jacqueline Buhn, principal and CEO, AthenianRazak, described her firm’s master lease on most of the retail space in Philadelphia’s Suburban Station commuter rail hub, owned by the Southeast Pennsylvania Transportation Authority, known as SEPTA.

“SEPTA likes to master-lease retail for good reasons,” Buhn says. “It’s not their core business, and they’re also constrained in a number of ways by what kind of deals they can do, so they put an intermediary in, and we can do anything the market can do.”

Suburban Station has long suffered from a perception among commuters of a dingy, unpleasant concourse with limited retail options, but Buhn’s firm has been attacking that perception with a rebranding effort, she says.

“We determined early on we had to do something fairly dramatic to begin to recognize the value in the station,” she says. Hesitation by SEPTA to permit bank financing of a retail redevelopment has limited the focus to what Buhn calls “the Gold Coast,” retail locations facing commuters as they descend stairs into the rail station.

Describing an adaptive reuse deal involving a former department store chain’s warehouse property for a combination of retail space for a Target store and office space upstairs, Terlizzi says the client wanted to take advantage of credit tenant lease financing that “would provide an advance rate that would not be available under a typical financing.”

The bank arranged a 20-year credit tenant lease loan, the proceeds of which were pre-funded by the permanent lender into a deposit account at the bank, Terlizzi says.

“If that had been done by two separate lenders, there would have been an issue with respect to resolving inter-creditor issues and so forth,” he says. “Instead, we were in a position to do both executions, because we have the investor placement program that accesses the credit tenant lease proceeds, as well as the balance-sheet funding.”

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