Waterford Property Co., a diversified real estate investment and development company based in California, has been at the forefront of a new financing source in the state. Last year, the firm partnered with the California Statewide Community Development Authority (CSCDA), a joint powers authority, to issue tax-exempt social impact bonds to acquire and convert market-rate multifamily communities into middle-income housing that is income restricted to households making between 60% and 120% of the AMI and capped at 30% of a tenant’s monthly income.
“This allowed us to partner with local governments and issue tax-exempt bonds to acquire and income-restrict these properties,” Sean Rawson, co-founder of Waterford, which has a portfolio of 6,500 multifamily units, a mix of market-rate, capital A affordable, and essential housing. “This was a new form of financing that had never been done before and showed the power of innovative financing tools in the housing sector.”
He notes that finding innovative financing structures like this and increasing the investor pool is a key function to being able to provide more housing. “We took an investor base that typically would invest in traditional muni bonds issued by local governments and brought them into the affordable housing space, which is significant because it has grown the investor base,” he says. “We issued muni bonds, but for the creation of essential housing.”
In 2021, Waterford issued over $2.5 billion in bonds and acquired and converted 15 communities with over 4,000 units to essential housing. Waterford hasn’t done any of these transactions this year, citing a large dislocation in the bond market. But Rawson says he expects the bond markets to jump back next year and that the model will be accepted by other states.
One of the 15 communities acquired is Oceanaire, a luxury multifamily development built in 2019 in downtown Long Beach. Waterford was already working in Long Beach, redeveloping a defunct retail center into 1,000 market-rate units and repositioning the retail. City leaders came to the firm seeking innovative ways to help make up its gap of providing moderate-income housing.
“We pride ourselves on working with local governments to come up with the best housing solutions based on the needs of their community,” Rawson says.
The city approved the bond issuance in January 2021, and the deal closed two months later in March. Oceanaire was acquired using CSCDA’s Workforce Housing program, raising financing from major institutional bond investors. The only soft financing on the project is a property tax exemption.
In 18 months, Waterford has turned over 161 of the 216 units to target middle-income households. “When you’re buying a market-rate asset, the conversion to income-restricted is about a two- to three-year process. As market-rate tenants leave, all new tenants are income-restricted. If there are tenants when we acquire that qualify for income-restricted, they transition to those units. Households in excess of 120% of the AMI don’t get the rent discounts, but once they leave, that unit will convert to income-restricted,” Rawson says.
Another key factor for Waterford is to have regulatory agreements for 35 years recorded on all its units that restrict household incomes to 60% to 120% of the AMI to provide additional housing certainty for residents.
“What we have been able to do in our essential housing portfolio is to provide monthly savings for residents,” he says. “For a household that makes $60,000 to $90,000 a year, we are providing $650 in monthly savings. Look at that over a year, and we’re providing anywhere from $7,000 to $8,000 in annual rental savings.”