The power of stenography: industry publications repeat Avanath p.r. about buying 38 Sixth/535 Carlton with "market-rate" units. (Though there's a kernel of truth.)

One of my Atlantic Yards mantras (borrowed from megaproject maven Bent Flyvbjerg) is "Power defines reality" or, in this case, "the power to issue a press release to stenographic publications defines reality."

Which is how we get two Atlantic Yards/Pacific Park "100% affordable" buildings, last month acquired by Avanath Capital, described as "market-rate" and one of them, 535 Carlton, described as "adjacent to Barclays Center," though it's more than a block away.

From Globe Street, 5/26/22, Avanath Buys Brooklyn Multifamily Portfolio for $315M:

Avanath Capital Management has acquired a mixed-use portfolio containing two multifamily properties with ground-floor retail space in Brooklyn, for $315 million. The portfolio consists of 601 affordable and market-rate residential and commercial units and qualifies for New York City’s Rent Stabilization program.

Similarly in Multifamily Executive, 5/25/22, Avanath Capital Management Acquires 100th Asset; Multi-Housing News, 5/24/22, Avanath Buys Brooklyn Portfolio for $315M; and Real Estate Weekly, 5/28/22, Avanath Capital Management Acquires 100th Asset. 

And let's not forget R.E. Business Online, 5/24/22. Avanath Capital Acquires Two Multifamily Communities in Brooklyn for $315M:

Located at 38 6th Ave. and 535 Carlton Ave., the two communities are situated adjacent to Barclays Center, the home arena of the Brooklyn Nets NBA franchise.

The press release

This all came from the 5/23/22 press release, AVANATH CAPITAL MANAGEMENT ACQUIRES 100th ASSET: A MIXED-USE RENT-STABILIZED PORTFOLIO IN BROOKLYN, NEW YORK, FOR $315 MILLION; EXPANDS PROPERTY MANAGEMENT PRESENCE TO BROOKLYN:

Avanath Capital Management, LLC, a private real estate investment manager and Registered Investment Adviser, has acquired its 100th asset: a mixed-use portfolio containing two multifamily properties with ground-floor retail space in Brooklyn, New York, for $315 million. The portfolio, comprising 601 Affordable and market-rate residential and commercial units, qualifies for New York City’s Rent Stabilization program.

(Emphasis added)

Looking at the language

The buildings have long been described as "100% affordable," which in the New York City context means "income-targeted" and (usually) below-market, with rents aimed at approximately 30% of household income, including low-, moderate-, and middle-income units.

That doesn't make them market-rate. 

Indeed, the mayoral press release for 535 Carlton called it a "100% affordable" building. 

Here are the Housing Lottery ads, describing each building as "affordable": 535 Carlton & 38 Sixth. Also see screenshot above right.

That designation still applies, given the loose definition in New York City, to the majority middle-income units in each building: 50% of the units were for households earning up to 165% of Area Median Income (AMI) and 15% were for those earning up to 145% of AMI.

Querying Avanath

Does Avanath think differently? I asked the company's p.r. firm: why does Avanath describe these buildings as having "market-rate" units?

From Avanath

I never got an answer, perhaps because they don't want to bother correcting that press release. 

Nor has Avanath, a month later, bothered to update its website, where the 38 Sixth and 535 Carlton are known, respectively, as Barclays I and Barclays II.

They're said to be situated in "Brooklyn’s desirable Pacific Heights neighborhood," which I guess is a mistaken mash-up of Prospect Heights (the neighborhood) and Pacific Park (the project).

Moreover, as shown in the screenshot at right, the page for 535 Carlton still uses apparently transposed placeholder text identifying the building as 38 Sixth. 

Let's hope the company's response to, say, tenant concerns is more timely.

I then tried to contact both the company and individual executives on Twitter, but didn't get a response.

NYC calls them "100% affordable," tho better described as income-targeted
See mayoral press release4 #535Carlton @pacificparkbkhttps://t.co/CkaXA7tKZ1
Includes low-, moderate-, & middle-income units
I know that in 2020 you proposed a new REIT that offered these definitions 2/

— Norman Oder (@AYReport) June 6, 2022

Some logic behind it?

So I can only speculate that middle-income units in New York City described as "affordable" may be outside Avanath's wheelhouse.

After all, when the company in 2020 proposed co-founding a publicly traded real estate investment trust (REIT) focused on affordable housing, the 11/12/20 preliminary prospectus for Aspire Real Estate Investors, offered the following definitions:

• "affordable housing" is defined by us to mean housing that is generally not leased to households earning more than 60% of AMI.
• "workforce housing" means housing that is generally leased to households earning between 60% and 120% of AMI.
• "market-rate" means housing that is not subject to rent restrictions.

So the majority of units at 535 Carlton and 38 Sixth qualify neither as "affordable housing" nor "workforce housing." 

But they are still subject to rent restrictions--they're rent-stabilized, so rent levels are governed by the Rent Guidelines Board-- so they're not "market-rate."

Perhaps the term "market-rate" is a signal to Avanath's investors and the company's peers that the rents remain pretty high. And if you take the long-term view, those apartment may become market-rate; the middle-income units may exit rent stabilization in 30-plus  years, when the tax-exempt bonds expire.

Middle-income  units (165% of AMI), from 2017 NYC Housing Connect (lottery) ad for 38 Sixth Ave.

So a long-term investor may ultimately take advantage of even higher rents. That doesn't make them market-rate, however.

More on Avanath

That preliminary prospectus, by the way, described Avanath thusly:

Avanath's primary strategy is to invest in high-quality multifamily apartment communities in established residential neighborhoods in markets with high income growth and a significant supply/demand imbalance.

Also from the prospectus, regarding the REIT (which never came to fruition):

Attractive Risk-Adjusted Returns Supported by Strong Long-Term Market Dynamics

We believe attractive risk-adjusted returns in affordable and workforce housing can be achieved by: (i) investing in vibrant markets with high income growth; (ii) targeting acquisition of properties on an off-market basis through existing relationships; and (iii) implementing operational improvements through expense management and providing community-based services and activities that enhance the lifestyle of our residents. Capitalization rates for stabilized, higher quality affordable and workforce housing assets generally trade in the range of 4.0% to 5.5% depending on market, age of the property, unit mix, nature and timing of any rent restrictions and economic and market conditions. Market-rate assets in our target markets generally trade for capitalization rates in the range of 3.75% to 5.0%. For our redevelopment and development investments, we intend to undertake projects which underwrite to approximately 50 to 150 basis points of additional yield on cost upon stabilization compared to acquisitions of stabilized properties in the same market.

Given the scarcity of available units in affordable and workforce housing, lease up of new units tends to be faster and more predictable and tenants tend to reside in their units longer, resulting in less volatility in occupancy and reduced unit turnover costs (i.e., lower ongoing capital expenditure requirements) as compared to the market-rate segment of the multifamily market, with rent growth in line with market-rate units.... 

Moreover, the demand for affordable and workforce housing is very strong, as a high percentage of renters in the United States spend more than 30% of their household income on housing, including rent and utilities. Additionally, most of the new supply in the multifamily sector over the last several years has been focused on higher rent product and often specific submarkets catering to higher earning millennials.

(Emphases added)

This, presumably also reflects Avanath's strategies. Let's look at 535 Carlton and 38 Sixth in that light:

1. investing in vibrant markets with high income growth; I'm not sure that applies, given rent stabilization
2. targeting acquisition of properties on an off-market basis through existing relationships; that might well have happened in this case
3. implementing operational improvements through expense management and providing community-based services and activities that enhance the lifestyle of our residents; we'll see

Perhaps it's simply that Avanath got the buildings for $315 million, well less than the $370.8 million cost of construction, and Greenland Forest City Partners needed the cash.

Aspire Real Estate Investors never came to be. According to an 11/25/20 statement, "The Company has determined not to proceed with its proposed initial public offering at this time due to market conditions."