Stratford Partners Real Estate LLC sold a 126-unit multifamily complex in Rowland Heights to Community HousingWorks for $38.3 million in a transaction that will convert the building into an affordable housing community.

Currently, rents at the NOVA Apartments, located at 1940 Fullerton Road, are naturally in line with L.A. County’s housing cost limits for those making 80% of the area median income, or AMI. This means $1,279 for one-bedroom apartments with two occupants and $1,439 for two-bedroom apartments with three occupants, according to the Department of Regional Planning.

Northmarq completed the sale and acquisition financing in the deal, providing a 10-year, fixed term $24.9 million loan to San Diego-based nonprofit Community HousingWorks with a debt service coverage ratio of 1.2 times. The loan, which has a 35-year amortization schedule, was made through Freddie Mac’s Targeted Affordable Housing program.

Because the property had a land-use regulatory agreement, or LURA, recorded at close, Northmarq was able to underwrite the tax abatement at 50%, said Brendan Golding, a vice president in Northmarq’s Newport Beach office.

The LURA, which will be in place for 10 years, mandates that 90% of the property’s rents stay at 80% AMI and the remaining 10% be restricted to 50% AMI. This means NOVA Apartments will have to lower 10% of its rents to meet the new designation.

“This restriction is coterminous with the loan that we place on the property, which enables (the buyer) at loan maturity to have the flexibility to either refinance or sell,” Golding said. “Then they could potentially sell to an affordable group or a market rate group, because at that point there won’t be any restrictions on the property.”

While Northmarq also considered financing through Fannie Mae, Golding said Freddie Mac offered “the most aggressive pricing, as well as … the highest leverage possible.”

No tenants will be evicted as a result of the conversion, but going forward, new tenants will need to meet the 50% or 80% AMI requirements. For a two-person household, this means having a combined annual income of $60,600 or $96,950, respectively.

‘Market leader’

With the new ownership, there are no plans for renovations at this point, given that most units and common areas were recently renovated, said Vince Norris, Northmarq’s regional managing director for West Coast sales. If tenants who have been in the building for 10 years or longer voluntarily vacate, there will likely be renovations to those units to match up with the others.

Norris identified Northmarq as a “market leader” in the market rate to affordable conversion space, citing the firm’s conversion of 1,200 units with over $350 million in transaction volume in the Southern California region.

“Working with (Norris) and his investment sales team, we saw a market trend and this sector growing, and therefore, (we) really made it a point to focus on affordable financing programs and put a lot of emphasis within the agency lenders – Fannie Mae and Freddie Mac – to understand how it works and become an expert in that space,” said Scott Botsford, a senior vice president and senior director in Northmarq’s Newport Beach office.

In seeking projects, Norris said the firm looks for “high-resource areas” designated by the California Tax Credit Allocation Committee and the California Department of Housing and Community Development. The goal is to incorporate affordable housing in areas with high quality schools and strong economic landscapes to promote integration of low-income residents.