The Community Development Trust (CDT), the nation’s first and largest REIT dedicated to affordable housing, is marking its 25th anniversary at a time when demand for its services is at an all-time high.
The private, hybrid REIT based in New York City provides long-term capital for the preservation and development of affordable housing. Working with partners, CDT makes long-term equity investments and originates and acquires long-term mortgages.
CDT has grown from its first capital raise of $32.5 million in 1999 to $3.6 billion in total current investments, currently supporting more than 38,000 affordable units and 140,000 residents.
“We’ve come a long way from our first deal,” says Joseph Reilly, CDT president and CEO. Since its inception in 1998, CDT has created or preserved more than 59,000 units of affordable housing, providing apartments for more than 175,000 residents.
Building on its quarter century of expertise and strong partnerships, CDT closed in April on a $1.2 billion portfolio of 90 affordable housing communities across eight states—its largest deal to date. In fact, it’s one of the largest preservation transactions in the affordable housing industry’s history.
CDT, along with its partners The Michaels Organization and Goldman Sachs Urban Investment Group (UIG)—dubbed the Essential Housing Impact Partnership (EHIP)—will preserve a 10,000-unit portfolio, housing 30,000 residents. The average monthly rent across the portfolio was below $1,000 at acquisition.
“To leverage our 24 years of experience and growth and have an impact on this type of scale is very gratifying to our team,” Reilly says. “If you look at where we started in 1998, we were doing smaller, individual transactions, and we grew to a position of being able to do this on a much larger scale. We expect to be successful with this portfolio from both a mission and economic perspective, which hopefully leads to more opportunities that will have this kind of significant impact.”
The portfolio was previously owned by Harmony Housing, and most of the properties were developed or rehabbed with federal Low-Income Housing Tax Credits (LIHTCs). Because many of these properties are near the end of LIHTC compliance, they were potentially at risk of losing affordability restrictions.
“Buyers competing with us could have viewed this portfolio as an opportunity to acquire these properties and simply wait until the affordability restrictions expired, in which case, affordability would be lost,” says Michael Lear, CDT’s chief business development officer and the REIT’s lead executive on the transaction.
“We considered the risk of losing this critical affordable housing to be extremely urgent,” Lear adds. “The nation has lost an enormous number of affordable units over the last decade, and the need is at an all-time high. From an execution perspective, there is almost never a deal that we invest in that doesn't have a waiting list before we acquire it.”
The supply of low-cost rentals dropped by 3.9 million units over the last decade, according to the Joint Center for Housing Studies’ State of the Nation’s Housing report. The supply of low-cost rentals fell in every state, leaving lower- and middle-income renters with even fewer affordable housing options.
Occupancy in the EHIP portfolio is in the mid-90% range. Capital upgrades are planned, and the joint venture intends to implement social services like financial literacy and after-school programming to support residents and discourage turnover.
“Everything that CDT invests in must achieve both our mission objectives and economic objectives,” Lear explains. “Preserving affordability across the portfolio, with our like-minded, long-term joint venture partners, easily checks the mission box. Additionally, we must always deliver a market-rate return to our investors, and we expect the risk-adjusted returns to meet that mark over the course of our investment.”
A deal of this magnitude would likely not have been possible if it weren’t for CDT’s roots dating back to a novel concept: exploring how Wall Street could be utilized to create and preserve affordable housing.
CDT’s predecessor organization, the Local Initiatives Managed Assets Corp. (LIMAC), was an affiliate of the community development organization Local Initiatives Support Corp. LIMAC acquired, repackaged, and sold loans from local community development groups, eventually securitizing the loans, and investing its own capital.
“LIMAC was a nonprofit running out of capital and looking to recapitalize,” says Brian Gallagher, senior vice president, multifamily debt program for CDT. “After a lot of exploration, we settled on using the REIT structure.” That was a first in the community development industry.
Operating as a nonprofit, there's a limit to how much capital you can raise, Reilly says. “The thought was if we do this in a different way, if we raise capital that expects a return, and we actually deliver on that return then we might be able to raise more capital and have more impact.”
After 25 years, “we can report that, yes, we’ve been able to raise additional capital,” Reilly says. “We've had a significant impact that might not otherwise have happened, because the decision was made by the LIMAC to move in this direction as an alternative to just doing the same thing they had done before. It was a novel idea, and we've demonstrated that it can expand the positive impact on residents of affordable housing.”
Additionally, CDT opted to create a hybrid REIT so it could run both equity and debt platforms to provide additional capital to the marketplace, but also diversify the capital from an investment standpoint.
“Having that hybrid model on a private basis has been a great platform for successful capital raises over the last 25 years,” Gallagher notes.
First Capital Raise
CDT closed its first offering in May 1999, with 18 investors for a capital raise of $32.5 million from a who’s who of influential leaders in affordable housing and community development.
Since the initial offering, CDT has raised $372 million in common and preferred stock, with common stock now valued at $335 million and preferred shares outstanding of $236 million. It has raised capital from more than 40 corporate investors and four Community Development Financial Institutions (CDFI). In 2002, CDT became a Certified CDFI.
CDT has demonstrated that affordable housing can be a very sound investment, according to Reilly.
“If you look at the risk-adjusted reward of investing in affordable housing, it can be a very stable investment, because there’s such demand for it and a shortage of supply,” he says. “It might not be as glamorous as high-end real estate, but it produces a solid return that's commensurate with the risk.”
Gallagher adds that affordable housing is also resilient. “That’s why a lot more attention is being paid by institutional players as they compare it with other asset classes and recognize it as a very steady, resilient, consistent, and also mission-focused investment product,” he notes.
Gallagher says CDT is a relatively small organization with fewer than 25 people, and he credits much of its success to its partnerships.
“We leverage great lending partnerships, development partnerships, managerial partnerships, and institutional partnerships,” he says. “The strength of those partnerships has allowed us to have the scale and impact that we’ve had. If anything, our future will be bright, largely because of the partnerships that we’ve cemented over the last 25 years.”
Maneuvering Challenging Market Conditions
While CDT is in a solid position today, given its strong partnerships and success in raising capital, it still has to contend with ongoing economic uncertainty and market volatility, including higher interest rates and insurance costs, Reilly explains.
“Market dynamics are very impactful as we make decisions going forward, and we watch them closely,” Reilly notes. “It can slow us to some extent, but that’s consistent with our objective to grow responsibly. It may not be the right time to expand even further right now as we absorb this portfolio. We will be cautious, selective, and look for the right opportunity.”
Lear points out that a unique strength of CDT is that in times of uncertainty, it has complementary income streams through its debt and equity platforms.
“With a long-term view on both of those businesses, we're long-term owners and we’re long-term lenders,” he says. “We both utilize and make long-term fixed rate debt instruments. We don't expose ourselves unnecessarily to short-term fluctuations in interest rates or heavy exposure to fluctuations in the capital markets. While that helps us grow responsibly, it also helps us thrive in times of volatility.”
Hall of Fame
Recognizing his 45-year career in affordable housing, Reilly was recently inducted into the Affordable Housing Finance Hall of Fame. Reilly’s career began as a community organizer in New York City. At 19, he helped improve housing conditions and tackled other neighborhood issues in the Bronx.
He went on to work for the New York City Department of Housing Preservation and Development and JPMorgan Chase as national manager for community development real estate. Reilly says each role helped prepare him to lead CDT, where he took the helm in 2007. The work he has done has positively impacted thousands of people’s lives.
“Over the years, I went from community organizer to New York City government to a large financial institution to CDT, so I had an opportunity to look at this work from a variety of perspectives,” Reilly says. “The perspectives I gained from the first three opportunities have been foundational in terms of how I look at the work at CDT. I'm very fortunate and proud of what we've accomplished, but I'm also proud of the entire body of work over the years.
“Keep in mind that no one accomplishes this type of success without being surrounded by good people,” he adds. “Affordable housing is a complicated field, and you need a good team. I feel fortunate to have had the opportunity to work with a lot of really good people over the past 45 years, and it all builds to where we are today at CDT.”