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Novogradac Journal of Tax Credits

Industry Profile

by Jennifer Dockery, Staff Writer, Novogradac & Company LLP

For many affordable housing developers, foreclosure on 275 properties would be the end of the story. For Michael Costa, president and chief executive offi cer of Highridge Costa Housing Partners LLC (HCHP) and Highridge Costa Investors LLC (HCI), Citi Community Capital’s foreclosure on the portfolio merely opened the next chapter of a career spanning more than 30 years. In October, the veteran affordable housing developer partnered with Citi and real estate investment company Highridge Partners to preserve a nearly 27,000-unit portfolio that Costa has been building since 1994.

“Citibank basically converted from being a lender to being an owner,” Costa said of Citi’s new role in HCI. “[Citi] realized the value in it. They could see the long-term value benefi ts of the portfolio’s returns.”

Beginning his career with Calmark Multi-Homes Inc. in 1979, Costa spent years working with tax-exempt bonds (TEBs), U.S. Department of Housing and Urban Development programs and Fannie Mae/Freddie Mac programs before developing his fi rst low-income housing tax credit (LIHTC) property in 1994. That same year, he founded Kaufman and Broad’s multifamily division and began building the portfolio, each year developing 10 to 15 properties and fi nancing 20 to 25 properties for third-party developers. He continued adding properties at this rate when Kaufman and Broad Multi-Housing Inc. transferred the portfolio to Simpson Housing Solutions in 2000. In April 2008, he formed MacFarlane Costa Housing Partners and used a loan from Citi to acquire the Simpson $3.4 billion portfolio. Market fl uctuations resulted in Citi acquiring the portfolio through a negotiated foreclosure a year later.

Under the foreclosure agreement, Costa continued operating and managing the company for Citi. The foreclosure agreement provided Costa and Highridge exclusive buy back rights.

“It shows that there’s good value in these communities. More importantly, it shows there’s good value in these portfolios,” Costa said.

Building on a previous partnership, Costa and Highridge Partners in 2009 proposed a plan to Citi that would result in Costa regaining partial ownership of the portfolio. Citi liked the idea. As HCHP, Costa, Highridge and Citi share ownership of the portfolio. HCI plans to modernize its California properties and a portion of its New Mexico, Arizona and Colorado properties using 4 percent LIHTCs and TEBs and transfer them to an HCHPsponsored limited partnership. HCI will sell the remaining properties, including those located in 30 additional states and Puerto Rico, and use the proceeds to repay Citi. Costa anticipates repaying Citi’s investment in four to fi ve years.

“It will allow us to maintain affordability for the long term,” Costa said of the renovations. “The ownership structure with Highridge and Citi creates a company with a very strong balance sheet and a very strong net worth with no debt.”

The first two properties that HCHP will seek funding for are 108-unit family property in Fullerton, Calif. and a senior 188-unit property in Valley Village, Calif. Both are approaching the end of their LIHTC compliance periods.

There’s an increasing interest in affordable housing communities that were fi nanced with LIHTCs from experienced and new investors, including real estate investor trusts, Costa said. He attributes the renewed interest to good returns, and the stability and predictability of tax credit properties.

download NovoJTC2010-12.pdf