TIAA-CREF and Jonathan Rose Cos. have launched a new $51.6 million fund to preserve and “green” affordable housing across the nation. The Rose Affordable Housing Preservation Fund LLC will acquire affordable and mixed-income multifamily housing in the Washington, D.C.-to-Boston corridor, Chicago, Denver, Los Angeles, San Francisco, Portland, Ore., and Seattle markets.
The fund, which will be managed by Jonathan Rose Cos., combines solid, risk-adjusted return potential with an integrated social and environmental mission, according to Nathan D. Taft, director of acquisitions for Jonathan Rose Companies. He says the fund is targeting a net leveraged IRR in the range of 10 percent to 12 percent.
“In many urban markets, the stock of existing affordable housing is dwindling from year to year as tax credits burn off and subsidies sunset,” Taft says. “That’s when we can intervene and preserve the affordable housing for the community.
The fund is pinpointing projects and portfolios from $25 to $50 million of total capitalization, with a special focus on mixed-income properties, Low Income Housing Tax Credit and Section 8 properties, as well as other properties with expiring affordability restrictions.
TIAA-CREF made the investment through its Social Impact Portfolio. From 2013 to 2015, the institution has allocated $100 million annually toward impact investments, according to Rekha Unnithan, director within the TIAA’s Responsible Investment-Impact Investing team.
At the end of 2013, the institution’s Social Impact Portfolio included $700 million in commitments. “We describe impact investing as products and services that serve low- or moderate-income communities across the globe,” Unnithan explains.
Unnithan points out that TIAA’s investment with Jonathan Rose Cos. represents a “pretty significant” part of the institution’s overall investments. “Given our confidence in Jonathan Rose Cos., it made sense for us to invest at this level,” she says.
This isn’t the first time TIAA has invested with Jonathan Rose Companies Inc., which was one of the first commercial real estate developers to launch a green private equity fund. “The affordable housing space requires a lot of expertise, and that expertise is few and far between,” Unnithan says. “We picked the Rose Cos. fund because we have confidence in the team’s ability to execute on affordability preservation.”
Real estate is a significant portion of TIAA’s responsible investment-impact investment strategy globally, although it invests in companies as well, Unnithan says. “In the U.S., we have been more real estate-focused, and a big part of our strategy is investing in affordable housing, both with debt and equity,” she notes.
Unnithan points out that TIAA-CREF’s mortgage group lends to affordable housing projects nationally, supporting the development of affordable housing to increase inventory. On the equity side, the institution provides non-tax credit equity to recapitalize affordable housing properties and keep them affordable.
Taft says the fund should be fully invested within two years. “We have a strong pipeline, but it may go much faster,” he notes. The fund’s average hold period is 10 years, but Jonathan Rose Cos. may underwrite shorter-term holds depending on the investment.
The green approach
When it comes to sustainability, Jonathan Rose Cos. is a big believer in third-party verification, following the guidelines from Enterprise Foundation’s Green Communities program, according to Taft. The firm also uses software to benchmark its green initiatives.
The firm has a long list of “greening” tools in its toolbox. It often reduces solar gain with shading strategies, minimizes electrical consumption by replacing older appliances and HVAC systems with newer, more energy efficient models, and secures the building envelope with new windows.
“Our approach is very practical and quantitative,” Taft says. “We put in money that can drive investment returns … that has a payback. We look holistically at assets, taking into account the health and wellbeing of the tenants, and then formulate the best strategy we can.”