03/26/2010

Berkshire, Carmel Buy B-Note on Starrett City

A joint venture between Berkshire Group and Carmel Partners has acquired the $52.9 million subordinate portion of a $528.9 million mortgage on the massive Starrett City housing complex in Brooklyn.

Wells Fargo originated the 10-year loan in December and sold it to Freddie Mac. Freddie securitized the $476 million senior portion on Feb. 25 via a two-class transaction underwritten by Citigroup and guaranteed by the agency (FREMF, 2010 K-SCT).

Freddie placed the junior portion, structured as an unrated and nonguaranteed class, with the Berkshire partnership. Market players said the partnership paid a discount to the face amount that translated into a yield in the mid-teens.

This is Berkshire's second transaction with Freddie in a few months. In October, the Boston investment firm, acting with an unidentified partner, acquired the unrated $80.6 million B-piece of a $1.1 billion Freddie offering backed by mortgages to multiple borrowers (FREMF, 2009-K4).

Starrett City was appraised at $770 million last May. That puts the loan-to-value ratio at 68.7%. The debt-service-coverage ratio is 1.14 to 1. The loan's original $531 million balance was paid down by $2.1 million by the time of the securitization.

Berkshire and San Francisco-based Carmel each took down half of the junior class. Berkshire placed its portion in its Berkshire Multifamily Value Fund 2, a $590 million vehicle that had its final close in 2008. The fund, which also acquired the Freddie B-piece in October, is run by the group's Berkshire Property Advisors arm. The vehicle primarily targets the acquisition of multi-family properties, but can plow up to one-third of its capital into multi-family debt plays.

Carmel is placing its share with its latest fund, Carmel Partners Investment Fund 3, which hadn't deployed any of its $700 million of equity as of earlier this year. The vehicle targets mostly property investments, but many operators have turned to debt acquisitions in the economic downturn.

The 5,881-unit Starrett City is the largest federally subsidized housing complex in the U.S. It has some 12,000 residents in 46 buildings spread over 140 acres, plus eight garages, a clubhouse and a power-generation plant. An entity headed by investor Disque Deane has owned the property since it was developed in the 1970s.

The complex, which overlooks Jamaica Bay, is a bastion of affordable-housing in New York. The complex falls under New York State's Mitchell-Lama program, which provides property owners with tax breaks, low-cost financing and other incentives in return for offering below-market rents to middle-income tenants. The project has received a large amount of federal, state and city funds for maintenance over the years. About 90% of the tenants receive rent subsidies.

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