From left: 548 Capital managing partner A.J. Patton, partner Erica Johnson and director of acquisitions Charles Cole (Credit: iStock)
A local investment group took a leap this month in its sweeping plan to update and preserve thousands of units of affordable housing in Opportunity Zones across the city’s South and West sides.
548 Capital closed on a $2 million capital infusion for its Solar Chicago Fund, which would pay to acquire some 3,300 units of subsidized homes and gut-renovate them during the next three years. The fund has “soft-circled” about $20 million in non-binding funding commitments, with a goal to raise up to $100 million by the end of the year, managing partner A.J. Patton told The Real Deal.
The first round of funding will back 548’s acquisition of four aging apartment complexes on the South Side.
It’s a rare venture going after Opportunity Zones in Chicago, where investors have complained the tax benefit mostly avoids fast-growing parts of the city in favor of the low-income census tracts the program was designed to target.
Redevelopment without gentrification
Instead of raising rents on apartments, the Solar Chicago Fund would yield returns through the long-term energy savings it anticipates from building rooftop solar panels, Patton said.
“We’re trying to show through our investment strategy that you can redevelop a community without gentrifying it,” Patton said. “Energy efficiency has always paid for itself, it’s just that no one has ever had the patience to make that commitment to low-income communities.”
548, named for the unit number in the Indiana housing complex where Patton spent his childhood, is under contract to buy two apartment buildings in South Shore and another two in Englewood, combining for 160 units, Patton said.
The group will join Power 52, a solar power developer co-founded by former Baltimore Ravens linebacker Ray Lewis, to install rooftop panels and build a 50-acre solar farm on an undetermined separate site. The new solar generation would be enough to power about 1,700 units in the planned portfolio, Patton said.
Once each building is acquired, it would undergo a wholesale renovation to replace the flooring, plumbing, heating and appliances. Most units would be kept affordable to renters earning less than 80 percent of area median income.
548 closed this month on its first round of funding from A&O Advisors, a boutique wealth management firm based in Chicago. A&O was looking for an Opportunity Fund to back before a potential recession, and 548 was one of the few local ventures that showed it could generate an annual return above 9 percent, A&O President Oliver Kupe said.
“It’s been a struggle for the past couple years for our clients to harvest their capital gains without tax consequences, and when we see where the market is heading, they want to move away from equities,” Kupe said. “So it’s a huge benefit for us to have Opportunity Zones to invest in.”
On top of 548’s “socially aware mission,” A&O was lured to the solar fund by its promise of “two streams of income” from annual rent and an internal rate of return that would generate a big windfall when investors cash out, Kupe added.
An accidental Opportunity Fund
Fund managers have raised billions of dollars to invest in Opportunity Zones since late 2017, when Congress created the incentive as part of a tax overhaul. The program allows investors to defer paying taxes on money they invest in high-poverty areas, with extra benefits for those who hold on to their stake for more than five years.
But many real estate industry players remain reluctant to chase Opportunity Zones, fazed by the program’s short timeline for investment and slow drip of federal regulations.
Observers have been especially cool on Chicago’s zones, with some high-profile exceptions, like the Michael Reese Hospital site and several tracts on the Near West Side. Chicago-based Origin Investments, which raised more than $100 million for its Opportunity Fund, is not targeting any zones in its home market, Principal David Scherer said.
Patton never envisioned the Solar Chicago Fund as an Opportunity Fund, but it became one when officials drew zone boundaries around most of the areas 548 was already targeting, he said.
A local touch
The finance industry veteran began assembling his team in 2016, when he was vice president of American investments for Hong Kong-based Equity First Holdings. When an investor asked him to consider a solar farm venture, he asked if the energy savings credits could be sold to multifamily building owners instead of large corporations.
“The economics are tough to go through an individual subscription model, where you have to strike a deal with each building owner,” Patton said. “So I said, ‘What if I own the building and the solar farm, and I was the off-taker of the farm?’”
He recruited construction consultant Erica Johnson to join as the venture’s partner and multifamily investor Charles Cole as its director of acquisitions. They were busy crafting their business strategy when Congress created the federal Opportunity Zones program, creating an extra incentive for investors to jump on.
The group joins a handful of other investment firms, like North Wells Capital and DAX Real Estate, that have looked for returns in South Side apartment renovations.
But in a part of the city facing high poverty and creeping fears of displacement, it takes a local touch to be able to pull off a venture that benefits investors and neighbors alike, Cole said. Patton’s mother is from Chatham, and Cole grew up in nearby Gary, Indiana. Both have worked on the South Side before.
“There are always going to be investors who want to buy a property with an attractive yield, but when you’re talking about vacant properties that are in bad shape, that will narrow the investor pool,” Cole said. “You’re going to need someone who knows local contractors, can get support from the community … and understands what needs to be done to make it vibrant again.”