BH Properties LLC is redefining its investment strategy with a plan to create a $1 billion portfolio of affordable housing assets. The Sawtelle-based commercial real estate firm will branch out from its portfolio’s current concentration on industrial and retail properties into the sector. BH currently manages $2 billion of assets, with a focus on value-add acquisitions, distressed debt investments and gap financing.

BH, which was founded in 1994, is staking its new investment strategy on Low-Income Housing Tax Credit, Section 8 and age-restricted affordable housing properties. The initiative will be led by Bill Stoll, a former executive at Irvine-based Steadfast Cos., who recently joined BH as managing director for the new portfolio.

“Over the last 10 years or so we’ve acquired over 3,000 multifamily units … and we’ve always catered to a lower-income demographic,” BH senior managing director of investments Andrew Van Tuyle said. “But as far as investing in actual affordable housing where there are the LIHTC components to it and things along those lines, this is a new venture for us.”

Manageable income

The company’s strategy is not driven by the assumption of tax credits, but the “durable and manageable” income stream that affordable housing assets can provide. The new portfolio will target properties at the end of their 15-year LIHTC compliance period.

To qualify for a LIHTC, owners must acquire or construct affordable housing and keep it income and rent restricted for a set period of time. While the number of years stipulated varies, LIHTC properties generally must agree to maintain affordability for 30 years, and to uphold affordability provisions for the first 15 years in a compliance period. The tax credits can be sold to investors to obtain equity for projects. 

The strategy of adding this type of asset into a portfolio has been used by other firms, according to Kitty Wallace, a senior executive vice president of Colliers International. While office and industrial properties are still profitable if handled properly, affordable housing provides a more consistent and reliable revenue stream, she said.

“There’s always a need for affording housing, there’s always a tenant base that needs that,” Wallace said. “What BH Properties is doing is comboing up … getting kind of a consistent yield in a market when, (with) some other product types, the yield isn’t so structured, then you also get the opportunity to add value to renovate some of these older properties.”

Van Tuyle said as BH takes on more risky investments, such as industrial or office buildings, affordable housing assets offer a more immediate, annuity-like revenue stream that can help “prop up” the negative returns associated with the higher-risk assets. He expects a quick revenue turnaround, since the properties are not vacant when they are purchased and provide cash flow from day one.

“That sort of consistent demand to remain occupied is very different than buying a vacant building and sort of hoping that you can find a tenant in the near future,” Van Tuyle said.

Other assets

Wallace said that although office assets, in which BH also invests, are a difficult product right now, there is still lots of opportunity with them. Van Tuyle agreed that retail and office are risky at the moment, but that having those properties at the right place and at the right time can provide a big payoff.

“People who’ve historically owned office (are) looking at multifamily and others because with office … you make a lot of money, then you can lose a lot of money,” Wallace said. “It’s a big up and down versus multifamily … your risk is spread out, you’ve got many more units.”

She has seen more institutions look to enter the affordable housing realm in part because they can get a preferred rate on agency debt options if they possess affordable housing. She also pointed out that the tenants in affordable housing received rent support from the government during the pandemic, which made those assets a stable source of income for owners.

Future plans

BH president Jim Brooks said that the new portfolio’s long-term goal is to collect $1 billion in affordable housing assets. It expects to amass about $100 million in the portfolio’s first year, and around $250 million the second year. The initiative is less than two weeks old, and the company has yet to purchase any affordable housing assets. Brooks pointed to BH’s status as a private company to explain its decision to aim for such a large portfolio in a previously untouched territory.

“We don’t have any third-party investors, we have no limited partners, so our ability to move quickly, pivot and turn is really unmatched,” Brooks said. “That’s really one of our big hallmarks … no niche focus leaves a lot of paths open to pursue, and that’s really how the firm operates. It moves very quickly, very opportunistic, without a single set of focus.”

Wallace said that BH’s profit expectations seem feasible with its existing capital and focused business plan. She also highlighted Stoll’s leadership on the new portfolio effort: at Steadfast, he assisted in the growth of its LIHTC properties, ran dispositions of its affordable housing assets and sold multiple LIHTC properties.

Stoll said that BH’s strategy is to hold the properties for about 10 years, with a few options to exit after that.

“There are four options,” Stoll wrote. “Sell as a yield play to a new buyer, sell to a new buyer to put new tax credits on the property, re-syndicate the property and hold or bring the property to market rate rents if the (LIHTC land use restriction agreement) has expired. The 10-year hold is necessary for an owner to re-syndicate or sell to a buyer who wants to put new tax credits on the property.”

BH will target several states with its new investments such as Texas, Arizona and California.

“The hope is that you can go into certain submarkets where there’s not an overabundance of supply, that you have a consistent amount of demand, and also a big spread between where the affordable rents are and where the market rents are,” Van Tuyle said.