Tax Credit Advisor
Structuring the Deal (Every Dollar Counts)
Priming the Pump
Michael Costa’s Big Transaction to Create New LIHTC Deals for Years to Come
You can’t accuse Michael Costa of thinking small. The housing veteran is sifting through a $3.4 billion portfolio of 276 low-income housing tax credit projects in 33 states and Puerto Rico to create a stream of new tax credit development deals – for years to come.
The third-generation Californian is rounding up consents from investors and lenders associated with the properties in the portfolio, which is under contract to be purchased from Citibank.
Costa, president and CEO of MacFarlane Costa Housing Partners (MCA), Gardena, Calif., is also president, CEO, and managing member of two other new companies – Highridge Costa Investors, LLC (HCI) and Highridge Costa Housing Partners, LLC (HCP). Costa expects HCI to close its purchase of the portfolio from Citibank within the next few months.
A Pipeline of Deals
Once the transaction closes, future plans for the 276 properties, according to Costa, are “to consolidate most of our activities to the western United States and focus on the West. So what we’re looking at doing is taking all of our California properties, and most likely the ones in Colorado, Arizona, and Nevada, which are just now starting to hit their 15th year, and rolling those into new affordable partnerships utilizing tax-exempt bond financing and 4 percent credits.” HCI will own the general partner positions in the current partnerships, while HCP will be the GP in the new investment funds formed to raise the tax credit equity.
“Right now it looks like we’ll have about 15,000 units that we’re targeting to keep and roll over with the new partnerships,” Costa says.
As for the properties outside the West that aren’t retained and redeveloped, containing 11,000-12,000 units, “we’re going to let them go their normal course,” he adds. “Most likely they’ll be sold or purchased by some of the existing developers that we’ve worked with to develop those properties.”
About 130 of the 276 properties were developed solely by MCA and its predecessor companies. About 130 properties are in California.
The retained properties will provide a pipeline of new tax credit deals for years, with HCP setting up new partnerships, raising equity from investors, and refinancing and renovating the properties. Costa estimated that only two or three properties will reach Year 15 of the LIHTC compliance period in 2012, six or seven the following year, and then an average 30 or so properties a year after that for five to six years.
Costa, a member for years of the National Housing & Rehabilitation Association, also expects to install solar photovoltaic systems on each of the redeveloped properties.
Long Development Career
Born and raised near Los Angeles, Costa started in the affordable housing business right after graduating in 1979 from Cal Poly San Luis Obispo, where he received a B.S. degree in engineering. He joined a company called Calmark, which had created a program to develop affordable senior housing apartments. “We did it through design primarily – designing a smaller unit, reducing the parking to only what was needed. It was more or less a no-frills program, to bring the costs of the housing down so we could then bring the rents down.”
By 1985 Costa ran the company’s multifamily development operation. “We developed about 10,000 units of affordable senior apartments,” he says.
During this period Costa reached out to local governments. “In 1981, I ran my first ad in the California League of Cities’ magazine. It looked like an old western wanted sign… It said, ‘Wanted: Cities That Are Looking for Affordable Senior Housing – Without HUD.’ ”
The carrot was to offer to develop affordable senior apartment communities for cities without the design and other restrictions mandated for HUD-related projects. “We could design a new community for them without any of those restrictions,” recalls Costa. “And it worked out really well. I got tons of calls and started meeting with cities throughout California.”
In 1994, Costa was recruited by major Los Angelesbased home builder Kaufman and Broad to start up a new multifamily housing development arm. The unit, Kaufman and Broad Multi Housing Group, began developing LIHTC projects. Costa raised tax credit equity directly, the first LIHTC developer to do so. Its first investor, in 1995, was First Chicago Bank. That model – establishing investment partnerships with one investor and multiple LIHTC projects – has been continued since. The 276 LIHTC projects have had equity from just seven investors, the primary ones being JPMorgan Chase, Bank of America, Union Bank, and Fannie Mae.
In 2000, Kaufman and Broad’s multifamily unit with its portfolio was sold to Simpson Housing, where Costa continued as the president and CEO. The Denverbased market-rate apartment developer expanded into affordable housing. Costa oversaw the development of 10,000 units, boosting the total portfolio to about 26,000 units. In 2007, when founder Don Simpson retired, Costa and a financial partner – Victor MacFarlane – bought the company and renamed it MCA.
After an attempted sale of the portfolio fell through, the company was split in two: the portfolio and the operating company that continued to develop LIHTC properties and syndicate the tax credits. The portfolio was eventually surrendered to Citibank, which had provided some debt, in a “friendly foreclosure.” Costa continued to manage the company’s business for Citibank and HCI ultimately entered into the current contract to acquire the portfolio.
Costa continues, at MCA, to develop LIHTC projects. A recent example is Oakwood Family Apartments, a 240-unit development in Moreno Valley near Riverside, funded in part with 4% housing credits. “We started lease-up in November, and before April 1 we were 100% leased with a waiting list,” says Costa. “We had projected a lease-up in the 15 to 20 unit a month range, yet it achieved an astonishing 60 units per month!”