Fannie Mae holds quiet equity stake in $1B portfolio: sources

Advocates stunned by agency's undisclosed interest in Urban American's Putnam package

From left: Ric Clark, 3333 Broadway, the Heritage at 1295 Fifth Avenue and Philip Eisenberg
From left: Ric Clark, 3333 Broadway, the Heritage at 1295 Fifth Avenue and Philip Eisenberg

The government-sponsored enterprise Fannie Mae holds a confidential, $60 million equity stake in the 3,962-unit apartment portfolio that Urban American and other partners bought for $938 million in 2007, several sources told The Real Deal.

The stake remained under wraps even as housing advocates publicly pressured Fannie and the portfolio’s publicly-known owners, Urban American Management and the City Investment Fund, over what the advocates considered to be an overleveraged acquisition, during and after the prior real estate boom.

Fannie’s investment is only coming to light now because an affiliate of the global Toronto-based landlord Brookfield Asset Management is negotiating to buy a stake in the five parcel package, valued at just over $1 billion, sources said.

Housing advocates call the equity investment troubling because Fannie Mae’s stated mission through such equity investments was to “increase the supply of affordable housing,” according to its 2007 annual filing with the U.S. Securities and Exchange Commission.

Indeed, not one of a half-dozen New York City housing advocates familiar with the project, knew that Fannie held an equity stake in the nearly $1 billion portfolio.

“It’s a contradiction of their affordable housing mission,” said Tom Waters, housing policy analyst with the Community Service Society,  on hearing of the equity stake.

The situation within the Putnam portfolio is complex, because the units are free market but about half the apartments are occupied by tenants with “enhanced” or “sticky” Section 8 vouchers, which provide them with a federally supported rent subsidy. The properties exited the state-subsidized Mitchell-Lama program in 2005, and as part of the deal nearly all the tenants were given the sticky Section 8 vouchers. By 2007, when Urban American led the acquisition, housing advocates estimated the number of Section 8 tenants had fallen to about 80 percent.

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A business plan created in 2007 to support the underwriting for the acquisition projected an 80 percent increase in net operating income by 2014, according to data reviewed by TRD. That rise — from under $40 million to about $70 million — was predicated on a 50 percent increase in revenues, information obtained by TRD revealed. Such a hike in revenue would be difficult without sharply increasing rents, which would cost the federal government millions of dollars. Alternately, Section 8 tenants could vacate, which would result in a loss of affordable units in the properties.

Because the Section 8 tenants’ rents are subsidized by the federal government, the bulk of any increase in rents from those tenants is paid for by the U.S. Treasury.

In addition to the equity, Fannie holds $800 million in debt on the properties.

The portfolio has multiple addresses including the 1,193-unit 3333 Broadway, the 1,003-unit Roosevelt Landings at 510-580 Main Street on Roosevelt Island; the 761-unit River Crossing at 1940-1966 First Avenue and 420 East 102nd Street; the 600-unit Heritage at 1295 Fifth Avenue, 1309 Fifth AvenueAnd 1660 Madison Avenue; and the Miles and the Parker at 1890 Lexington AvenueAnd 1990 Lexington Avenue, with a total of 405 units.

At this point, it appears Fannie is nearing a successful exit from its large equity and debt stakes in the city portfolio. Housing advocates say the solid financial gain is bittersweet, however, because it was achieved, they say, through a dramatic loss of affordable housing tenants living in the project.

Fannie publicly reported that is was investing in equity positions over the years, but did not reveal information about individual deals in New York City. A spokesperson for Fannie Mae did not confirm or deny the equity holding. Instead, the spokesperson commented on the debt interest the mortgage agency held as a note holder.

“During our tenure as note holder, the owner has made a significant investment in capital improvements to the properties while also maintaining affordability,” the statement said. “Over 50 percent of the units at the Putnam properties remain affordable to tenants [through] Section 8 rental assistance and the Landlord Assistance Program (LAP) as of [the fourth quarter of] 2013.”

An affiliate of Brookfield Property Group, headed by CEO Ric Clark, has signed a letter of intent in recent weeks to purchase the portfolio for approximately $1.05 billion, several sources said. The firm declined to comment. Brookfield owns 25,500 rental units through its investment funds, according to the company website.