In November, Cypress Equity Investments, which has amassed a portfolio and pipeline of over 21,000 multifamily units, joined the ranks of investors launching institutional-grade affordable housing platforms.
The Los Angeles-based developer, with an unnamed Florida-based investment firm with more than $50 billion in assets under management, plans to deploy significant capital to acquire and develop affordable housing, including low-income housing tax credit properties, across the United States.
The venture has an initial pipeline of 11 ground-up development sites already under control in Northern and Southern California and South Florida. It will target markets in South and North Carolina, Tennessee, Texas, the Northeast and other high-opportunity regions, with plans to scale quickly.
“There is just a huge, huge undersupply of affordable housing, especially on the LIHTC side,” Michael Sorochinsky, founder and CEO of Cypress Equity Investments, told Multifamily Dive.
While a lot of luxury housing has been built in markets like Dallas, Denver and Austin, Texas, it isn’t meeting the needs of many of today’s renters, according to Sorochinsky.
“What hasn't been addressed is the affordability issue,” Sorochinsky said. “Rents were going up double digits until recently, and now they're backsliding. But the luxury housing is still not affordable for the typical person, and so we're seeing quite a bit of headwind in the luxury housing space.”
On the other hand, the lack of affordable product means there’s “a lot of tailwind in the LIHTC space,” according to Sorochinsky.
“The demand is off the charts,” Sorochinsky said. “Our labor markets are weak at this point, and we'll see what happens with layoffs, artificial intelligence and all of the things that we worry about. People need an affordable, clean, safe place to live, and through this LIHTC expansion, I think we could play a big role in that.”
Here, Sorochinsky talks with Multifamily Dive about Cypress’ affordable housing track record, its aggressive plan for growth and the sellers in the LIHTC space.
This interview has been edited for brevity and clarity.
MULTIFAMILY DIVE: What is Cypress’ background in affordable housing?
MICHAEL SOROCHINSKY: We've been involved in affordable housing for about a decade now. We've been involved in LIHTC housing, which is capital A affordable housing with 4% tax credits. We’ve done about a dozen deals in that space and have been very successful. We saw an opportunity to expand our investment and footprint in the affordable space with the LIHTC component.
Over the years — the company turns 25 years old in January — we've also done quite a bit of naturally occurring affordable housing. So that's rent control, older product and more workforce-type housing around Los Angeles and other parts of the country,
What is your role with the new 11 affordable projects?
We're the developer and investor on all of the deals. We backstop them all with guarantees, and then we outsource general contracting services to the properties. We generally handle construction management in-house. We've worked over the last 12-plus months to secure all of these sites.
After putting this together for over a year, what made last November the right time to announce the venture?
We built up an internal expertise. We hired some great folks who have been in the LIHTC space for many years and, with them, we're able to go out and properly analyze and secure the sites.
Then we went out and raised quite a bit of capital to work through the sites. Also, we're looking to expand outside California through either acquiring existing LIHTC deals or through potentially acquiring companies that will allow us to expand and put boots on the ground. We may also open offices in strategic areas around the country. We're really looking to go big and become a leading national LIHTC investor and developer.
Are you primarily eyeing metros with a large gap between market-rate rents and what renters can afford?
I think that's a very important driver. We're also looking at population growth and job growth — all the things that you would look at in a market-rate deal. But certainly, we want to be in places where there's a substantial gap between luxury rents, class A rents and affordable rents.
Are you seeking properties that are still in their LIHTC compliance period, or are you looking at properties where that has expired?
We're looking to buy both. We're looking to acquire affordable properties that are early in their compliance period, and we'll keep them through the compliance period with the goal of resyndicating them and keeping them as LIHTC properties on a go-forward basis.
There's also an acquisition rehab plan where we can purchase LIHTC properties toward the end of their compliance period, reinvest capital in them, upgrade them, make them clean and secure again and resyndicate the tax credits for the next 15 years of the compliance period.
Where are the opportunities to buy these affordable properties originating from?
You've got some succession planning going on in firms that have been in the LIHTC space for a long time. The principals are in their 70s and 80s and want to monetize their life's effort. They're looking to exit, maybe it's a structured exit or maybe just an outright sale.
A lot of them are also looking to potentially have a succession plan for the operating companies. So we're out there talking to a number of folks about their current pipelines that we can potentially monetize for them and also to help them transition, where we can buy into or JV with the operating companies and continue building and investing in more LIHTC product through those companies.
Click here to sign up to receive multifamily and apartment news like this article in your inbox every weekday.
