Alliant Capital is tapping the securitization market to borrow against its interest in multifamily properties that are eligible for low-income housing tax credits.
The LIHTC gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing. Rather than put up all of the money for affordable housing themselves, many developers rely on firms like Alliant to pool money from multiple investors by selling equity interests in low-income tax credit funds. These funds purchase interests in multiple properties, each of which is held through an interest in a special purpose vehicle. The developer uses this money, along with a first mortgage, to build or renovate properties that are rented at below-market rates; fund shareholders get the tax credits.
Now Alliant is proposing to borrow against its share of the income left over after servicing the senior mortgages on 783 LIHTC properties held through 73 investment funds. In order to do this, the firm has created a securitization trust called AFAH Funding that will sell $200 million of bonds to capital markets investors; proceeds from these bonds will be used to purchase mezzanine interests in cash flow generated by properties owned by the LIHTC funds.
Moody’s describes AFAH Funding as a commercial real estate collateralized loan obligation, though it notes that the deal differs from typical CRE CLOs in several ways. First and perhaps foremost, none of the collateral represents a senior interest, let alone a controlling interest, in a property. Since the financial crisis, CRE CLO have rarely, if ever, been backed by mezzanine debt. And with some notable exceptions, all post-crisis deals have been backed primarily by controlling interests in properties. The exceptions were deals by several large private equity firms that securitized a portion of multiple senior mortgages on loans in their portfolios, none of which represented controlling interests.
Another distinction of Alliant’s CRE CLO is the tenor of the collateral. CRE CLOs typically finance transitional lending and the loans they acquire have initial terms of two or three years, though they can often be extended for several years. By comparison, the mezzanine interests backing AFAH do not have stated maturities, per Moody’s. However, LIHTC properties are typically sold at the end of a 15-year compliance period, and the 783 properties in the collateral pool have remaining compliance periods ranging from less than one year to 15 years, with a weighted average life of nine years.
The transaction is static, so proceeds from the sale of properties cannot be used to purchase mezzanine interests in new properties.
A third distinction is the credit quality of the underlying properties. In its presale report, Moody's notes that 33.3% of the collateral pool is credit assessed at Baa3 or above – in other words, investment grade. By comparison, recent Moody's-rated CRE CLOs have a weighted average ratings factor of 2406, equivalent to a Moody's rating of B1/B2.
The collateral for AFAH is also more granular than that of a typical CRE CLO; most are backed by fewer than 100 loans or loan participations.
Nevertheless, Moody’s is not rating AFAH Funding as high as a more typical CRE CLO backed by senior mortgages. It expects to assign an A2 to the single tranche of notes to be issued in the transaction, compared with the Aaa ratings the senior tranches of most other CRE CLOs it has rated post-crisis.
Westwood Capital is the placement agent.
In its presale report, Moody's cited the risks due to defaults on the underlying properties, the transaction's legal structure and the characteristics of the underlying assets as its primary rating considerations.
The rating agency noted that the deal benefits from a high level of overcollateralization; the $200 million of notes being issued are backed by collateral with a par amount of over $408 million.
In addition, the federal tax benefits available to the sponsor of the properties create "a strong alignment of interest on maintaining property performance," the presale report states.
Alliant Capital, a wholly owned unit of the Alliant Co., specializes in financing the acquisition, development and rehabilitation of affordable multifamily housing benefiting from eligibility for LIHTC credits throughout the United States and its territories. The manager has syndicated 100 institutional tax credit funds that have raised over $7 billion in investor equity through June 2018, according to Moody’s. In aggregate, it has invested in more than 950 properties comprising approximately 95,000 LIHTC housing units.
