Daryl Carter was a Los Angeles Clippers fan long before Steve Ballmer bought the basketball team.
Carter’s seats near the Clippers’ bench were just down from Ballmer’s, the former Microsoft chief executive with a net worth of more than $140 billion. The two soon bonded as sons of Detroit and the auto industry. Carter, founder and CEO of Avanath Capital Management, an affordable housing investor and operator with about $4 billion under management, took Ballmer and his wife, Connie, to tour Baldwin Village, the 669-unit apartment complex Avanath bought three years ago. He says the property, which appears in the Denzel Washington crime thriller, “Training Day,” “is not as menacing as its looks in the movie.”
“They were just blown away by the community and the quality of it,” Carter recalls. “We spent a lot of time talking about the impact that housing can make.” He adds, “They were about, ‘How do we make the biggest impact?’”
Carter sold Ballmer on Avanath’s model of acquiring and renovating workforce-oriented affordable rental housing to serve hard-working families. Ballmer Group in October allocated $75 million each to Avanath and to The Vistria Group, a Chicago investment firm with an affordable housing strategy that, like Avanath’s, supports residents and community well-being with workforce development, schools and health services.
“We just like to operate and own rent-restricted apartments,” Carter tells ImpactAlpha. “We think it’s a good business.”
Ballmer Group’s commitment to Avanath’s $1.3 billion Affordable Housing Renaissance Fund and the $3.4 billion Vistria Housing Fund underscore the maturation of affordable housing investors and operators.
“Our investment in affordable housing will not only build and preserve thousands of homes for low-income families but also shed a light on the opportunity for institutional investment in this critical sector,” Ballmer Group’s John Griffith said at the time.
Ballmer Group’s investment will be deployed through the firms’ open-ended, evergreen affordable housing funds, which enable Avanath and Vistria to operate – and upgrade – the properties for the long-term. Closed-end funds tend to favor shorter-term, aggressive strategies to quickly flip properties – and raise the rents to market rates. In closed-end funds, once properties are acquired and rehabilitated, the next step is usually straightforward: sell the assets.
Avanath rolled several properties from its first and second funds into the evergreen vehicle, which was launched in 2019. The Irvine, Calif.-based manager secured $760 million for its third closed-end fund four years ago. Carter says the permanent capital vehicle lets Avanath prioritize long-term occupancy and low turnover, affordability and social support, and property upkeep and improvement.
“One of the things the open-ended fund allows us to do is to hold things longer [and] get to some of the great value,” says Carter. “We just think that long-term hold is a better model for our business.”
Affordability alpha
Avanath generally doesn’t build housing projects from the ground up. Instead, it acquires existing affordable properties from low-income housing developers who take advantage of tax credits in return for restrictions on rent levels.
“We prefer to buy after 10 or 12 years, and keep the rental restrictions in place for 30 or 40 years,” Carter says.
Carter argues keeping properties affordable as opposed to converting them to market rate is better for returns long term because of the high occupancy rates and lower turnover.
Market-rate properties turnover 40-60% a year, according to Carter. “That turnover kills you,” he says, even in the face of aggressive rent increases. Most of Avanath’s properties operate at full occupancy, and its turnover rate hovers around 15% across its entire portfolio.
“When I go to bed every night, the one thing I don’t need to worry about is where my next resident is,” joked Carter.
Also key to Avanath’s strategy are partnerships with public housing authorities and state housing agencies to ensure the long-term affordability of its properties and secure tax benefits. Bringing public financing to extend the affordability of its properties is a strategy Avanath has replicated across its portfolio of over 15,000 affordable housing units.
“In the market-rate multifamily business, you don’t get to have those relationships,” Carter says.
Baldwin Village, for example, was a market-rate apartment community when Avanath won the bid to purchase the $220 million property three years ago. The real estate investor formed a partnership with the Housing Authority of the City of Los Angeles, which provided a $500,000 loan to purchase the asset – and helped the project qualify for tax abatements.
Today, most of the units are occupied by households earning between 60-80% of the area’s median income. For some original residents, rents actually went down, from $1,500 to $1,200 a month. Avanath’s rental restrictions will remain in place for decades.
Avanath’s rehabilitation of the apartment community and its conversion from market-rate to affordable housing is important in an area threatened by gentrification and displacement, including from sports arenas like Intuit Dome, home of the Clippers, in nearby Inglewood.
“There was a lot of concern over gentrification in the community, as a lot of things have happened in South Central LA with the new stadiums,” Carter says. “It was a great win for the residents.”
Institutional appeal
Affordable housing fund managers are finding institutional investors – including a growing number of European investors – are as interested in steady returns and low risk as they are in social utility. That institutional capital is essential as fund managers address the shortfall of millions of affordable housing units.
“What’s driving this interest is resilience. Institutional investors are actively seeking niche strategies that don’t gyrate with the broader macro-economy, and affordable housing fits this bill extremely well,” says Deborah La Franchi of SDS Capital, which invests in affordable and workforce housing in the southern US through its American South Capital Partners fund. “Demand is deep, durable, and largely insulated from economic cycles.”
Many fund managers and sponsors now have more than a decade of performance data proving that affordable housing strategies can meet the risk-adjusted returns institutional investors require.
“Most affordable deals typically tend to be better when you finance them with longer term debt, which aligns with longer term expectations on the impact side,” says Bob Simpson of the Multifamily Impact Council, which has developed an impact framework with minimum thresholds for affordability, resident engagement and housing stability among its seven principles.
As a result of the better credit performance of affordable housing, mortgage insurers Fannie Mae and Freddie Mac extend better pricing to such developments, Simpson says. “We’re trying to help investors better understand that.”
Vistria Group says its open-ended fund, launched three years ago, was designed to demonstrate how institutional capital can be deployed at scale to address the country’s worsening affordable housing crisis. Vistria seeks to acquire and preserve up to $1 billion in housing units each year, with a focus on converting market-rate apartments to affordable rents in mixed-income housing development
“High quality affordable and workforce housing isn’t just essential, it’s one of the most durable and scalable asset classes in real estate,” says Vistria’s Margaret Anadu. Vistria’s housing fund has raised $2.5 billion of permanent capital and has a portfolio of 7,000 housing units, of which 80% are affordable. Limited partners in the US and Europe include Ingka Investments, part of the group that owns IKEA, and the Ford Foundation.
Another affordable housing developer, Jonathan Rose Cos., has raised over $1.5 billion for two decades for its housing preservation fund series. The funds have attracted commitments from pension funds, endowments, family offices, as well as banks and foundations, also including Ford Foundation. Rose Cos. closed its sixth housing preservation fund last July, a $660 million closed-end fund to acquire and preserve affordable and mixed-income multifamily housing in big cities where affordable housing is supply constrained.
“I applaud our peers at Vistria and Avanath for what they’re doing, because affordable housing is a long term problem and to the extent that you can have the capacity to steward assets in the long term, that can be helpful for many,” said Brandon Kearse of Jonathan Rose Cos. The open-ended vs closed-end structure debate isn’t new in the industry, Kearse told ImpactAlpha.
“There’s a need for both in the industry to have different forms of capital,” he says. “It comes down to the specific type of project, but also the specific needs of the investor. Our closed-end funds are 10-year funds,” he adds. “Some may say only 10 years. I say it’s a minimum of 10 years.”
Carter said the notion that mission-oriented investors will accept lower rates of return is a myth.
“The answer is, ‘Hell no,’” he says. Avanath has one large pension fund investor, which Carter wouldn’t name, that “could care less about the mission. They like the fact that our returns are very strong, very consistent, and it’s a very low risk business.”
Carter said that about half of Avanath’s institutional investors come from the Netherlands, Switzerland, Germany and the UK, such as Bouwinvest, the real estate manager for the Dutch construction workers pension fund. He said the European funds, already investors in what they call social housing, are unfazed by perceptions of race and crime still held by some US investors.
“They just said, ‘Hey, there’s a huge need for this, and there’s great market demand. So it’s a great business.’”
