Avanath Capital Management will be pursuing multifamily development for the first time with the launch of a new business line: Avanath Development.
The firm’s decision to launch the arm for development projects was driven by the US government’s introduction of the opportunity zone program, according to Avanath chief executive Daryl Carter. Like Avanath’s existing core business of rehabilitating and preserving existing affordable and workforce housing units, this new strategy will still focus on the same sector, albeit on the development side. However, the add-on business is expected to attract a different investor base and pursue ground-up development or significant redevelopment in designated opportunity zones.
While Avanath’s existing business counts the Michigan Department of Treasury, New York State Common Retirement Fund and Church Pension Group among its investors, the firm will target high-net-worth individuals to capitalize investments made by Avanath Development.
These investors, many of which will have capital gains to redeploy, will likely be interested in taking advantage of the tax benefits presented by the opportunity zone legislation, which are granted to those that make long-term investments in projects that substantially improve or create new real estate assets, according to Carter. These assets must be in designated opportunity zones – distressed communities that could benefit from the injection of private capital, as identified by the US government.
“Our business is really tied to the chronic need for affordable housing across the country,” Carter said. “This will give us some capabilities to add more units.”
The firm is currently pursuing a venture with an unnamed investment firm and is in the process of formalizing an opportunity zone fund, which will have an initial capitalization of $200 million in equity. Any opportunity zone development projects will be made through Avanath Development, according to Carter. Because ground-up development comes with a higher risk-reward and the opportunity zone legislation offers investors a chance to defer and reduce capital gains taxes, the Avanath Development investments will likely report higher returns than its core business, although a target internal rate of return has not yet been determined. Over the next few years, developments will likely account for less than 10 percent of Avanath’s overall business, although there is potential for more growth longer term, Carter said.
Along with the launch of Avanath Development, the firm has tapped Avanath chief operating officer Jun Sakumoto to lead the new business, promoting him to Avanath Development president.
“Jun’s one of those people that has a track record of taking a blank sheet of paper and turning it into something,” Carter said.
He credited Sakumoto as the architect behind Avanath’s Affordable Housing fund series and for building the Capri-CalPERS Urban Multifamily partnership at Carter’s previous firm, Capri Capital Finance. Transitioning to his new role, Sakumoto, who previously handled a broad range of duties including property management, capital improvement and compliance, will now focus solely on the new business line, Carter said. Malachi Mckinney, vice-president of asset management, will also be joining Sakumoto’s new team, and Avanath Development plans to add another one or two people to the business line this year.
Camille Logino, Avanath’s current chief financial officer, will be promoted to chief operating officer, replacing Sakumoto. Logino, who established the firm’s accounting and finance team, will now oversee Avanath property management, asset management, capital improvements, compliance and corporate services. Both Logino and Sakumoto will continue to serve on the Avanath investment committee.
The launch of Avanath Development and the series of promotions reflect the firm’s rapid expansion, according to Carter. Over the last five years, it has added 181 employees – growing from 28 members in 2014 to 209 today.
Avanath was founded in 2007 by Carter with a focus on improving the affordable and workforce housing sectors. The Irvine, California-based firm has closed on three value-add commingled funds in its Avanath Affordable Housing fund series, according to PERE data. Its most recent vehicle, Avanath Affordable Housing III fund, launched in April 2016 and closed on $300 million in January 2018. The firm currently holds $1.7 billion in assets under management.