Longtime LIHTC Investor Adds Focus on Multifamily Property in OZs

Published by Brad Stanhope on Thursday, January 2, 2020
Thumbnail cover January 2020

An organization with a longtime record of low-income housing tax credit (LIHTC) transactions is diving into the opportunity zones (OZ) incentive.

Aegon Real Assets US announced Nov. 4, 2019, that it closed its first multifamily residential real estate development inside an OZ: a $60 million joint venture between Aegon RA and a subsidiary of Kemper Corporation in Sacramento, Calif.

Sacramento is one of 34 target metro areas that Aegon RA has deemed to be an attractive OZ market.

Aegon has invested in LIHTCs for more than 30 years and has been a LIHTC syndicator for more than 16 years, but this is not the start of a LIHTC-OZ twinning trend for Aegon. There is no LIHTC equity involved–although there is a LIHTC influence.

“Approximately 25 percent of our LIHTC portfolio is invested in opportunity zones nationwide,” said Lynn Ambrosy, managing director of institutional investments at Aegon RA. “We didn’t acquire those investments with an opportunity zones motivation, but it’s notable that we are already in those locations.”

Aegon has more than $4.8 billion of LIHTC equity investments since 1987 and has created more than 120,000 units of affordable housing in all 50 states. This time, Aegon’s focus is market-rate multifamily homes as it moves into investing in OZs.

“When the opportunity zones legislation passed in late 2017, there were still a lot of questions. We were interested, but we weren’t ready to formally deploy a strategy,” said Ambrosy. “As we studied the legislation and many questions were answered along the way, we were ready to add the strategy to our product offerings in the first quarter of 2019.”

Aegon’s Approach

Aegon moved into OZs strategically.

“As we enter into any new strategy, we like it to be an extension of our existing products and areas of expertise,” Ambrosy said. “The opportunity zones are a sister strategy to our LIHTC platform. The primary drivers for the LIHTC are also very relevant to how we analyze potential opportunity zones investments.”

Aegon used a proprietary quantitative strategy to identify markets that are best positioned for growth during the life of the investment. The 34 markets have at least 250,000 residents and were screened based on metrics such as employment growth, overall and millennial population growth, single-family home affordability, expected effective rent growth and transaction volume.

“These markets have the most potential to meet our parameters,” Ambrosy said. “As we approach the space, the real estate has to work. On any funding, if the underlying investment doesn’t work, the rest doesn’t work.”

Multifamily, but not ‘Affordable’

Ambrosy emphasized Aegon’s history in multifamily development.

“We’ve invested in LIHTCs since 1987 and have a workforce housing equity program,” he said. “We think multifamily is a very attractive sector, especially when considering the 10-year hold requirement (in OZs) to maximize tax benefits.”

Moving into multifamily housing in OZs was a natural move.

“We’ve got the machine built, with the acquisitions and asset management staff, a distribution team and all other supporting functions already in-house,” Ambrosy said. “We didn’t have to create it from scratch and we launched it in a way that was consistent with our culture.”

Twinning Incentives Not Easy

While Aegon isn’t currently pairing LIHTCs with the OZ incentive, Ambrosy wouldn’t rule it out in the future. He just doesn’t think it’s a perfect fit–and he’s not alone.

The biggest hurdles for aligning the LIHTC and OZ incentive are timing and the fact that the property generally doesn’t appreciate in value.

“We’ve been involved in the LIHTC since it became permanent in 1993, but there’s no clear economic benefit of pairing the incentives,” said Ambrosy.

John Wiechmann, president and CEO of Midwest Housing Equity Group, a nonprofit tax credit syndicator headquartered in Omaha, Neb., that often works with Aegon, agrees with Ambrosy–even after participating in a transaction that paired LIHTCs and OZ funds.

“We did one,” said Wiechmann. “It was a $20 million proprietary fund with a life insurance company, comprised of five LIHTC-OZ transactions.”

The first hurdle is often different types of investors.

“High-income individuals [who benefit from the OZ incentive] usually can’t generally use LIHTCs due to the passive activity loss rules and banks [the main LIHTC investors] don’t throw off a lot of capital gains on a regular basis,” Wiechmann said.

That means different investors and different needs–with different timelines.

“The challenge is lining up the gains with the timing of the capital needs,” Wiechmann said, pointing out that most LIHTC developments involve long-term planning, while OZ investors have a six-month window to invest capital gains after the creation event.

Another big hurdle is the fact that most LIHTC properties lose value during the first 10 years, negating one of the benefits of the OZ incentive, which allows investors to reset the base for their investment after a decade.

“To an equity investor, the LIHTC investment often has little to no residual value,” said Ambrosy. “However, there still may be some economic benefit, depending on the status of the investor capital account.”

That could create one window in which matching the OZ and LIHTC could make sense.

When Twinning Works

“If you look at the unrelated capital gains that you use to invest in the opportunity zones fund, you not only get to defer the payment of capital gains tax for federal income tax purposes, but you could also reduce your tax bill by 10 to 15 percent, depending on when you invest in an opportunity zones fund,” Ambrosy said. “In addition, investors could also eliminate capital gains tax on new gains generated by the investment in the opportunity zones fund if held for 10 years or longer. If you’re not investing in transactions that appreciate in value, you don’t get the true benefit of the step-up on your investment. But what about exit taxes? Can your investment benefit from exit taxes at the end of 10 years?”


However, the situation in which the pairing is most natural is impact investing, such as is often done by BRIDGE Housing, a nonprofit West Coast developer. BRIDGE expects to complete its first OZ-LIHTC twinning transaction soon, with many more to come.

“We’re bullish on it, but we’re still trying to crack that nut,” said Kimberly McKay, executive vice president at BRIDGE Housing. “Down the road, we have a project that we fully plan to do that. We expect to close our first deal in 2020.”

Many properties in BRIDGE’s pipeline are in OZs, so the developer can look to high-net-worth individuals who already support their developments for OZ funding.

“[Pairing is] not some huge benefit, but it brings another investor, if you can get a wealthy, socially-minded investor,” McKay said.

McKay acknowledged that the returns on LIHTC-OZ transactions are significantly lower than other OZ options. “It takes a motivated person,” McKay said.

Ambrosy agreed that pairing transactions will likely involve social-impact investment motivations.

“This ranks high on socially responsible investment standpoint,” Ambrosy said. “I think there is an opportunity to combine the benefits of the two incentives, but it’s not as widespread.”


As Aegon and other affordable housing developers and asset management firms move into the OZ space, the option to pair incentives continues.

Wiechmann believes the LIHTC-OZ pairing will come mostly thanks to luck, not as a long-term strategy.

“It seems to me that people are way too excited about twinning,” Wiechmann said. “It’s more serendipitous [when it works].”

McKay said when the pairing works, the infusion of OZ investment can make a significant difference.

“I think it’s best as a tool for acceleration,” McKay said. “You can get money during construction and decrease your interest or be timed with the permanent loan and reduce the risk. It provides some leverage to pull out to do service projects.”