How it Works
1. Entrepreneur identifies a building as an “underperforming or “underutilized” asset. This means that the income that the building produces is significantly lower than it could be – because people with low and moderate incomes are living there instead of people with higher incomes, who could pay higher rent.
2. Entrepreneur obtains “equity capital” by promising other investors a high rate of return – generally 20 percent a year. Investor then obtains “leverage” by borrowing more money – six to ten times more – from banks or other lenders.
3. Entrepreneur buys the building and begins working to increase its income. Often the entrepreneur and the equity investors are willing to see income go down – or even to lose money – for a few years before it actually goes up.
* In the case of a Mitchell-Lama buyout, this enables them to immediately suffer the loss of subsidies, along with huge interest payments on the borrowed money, while waiting for rental income to increase over a period of years as the original tenants move out and new tenants move in and begin paying higher rents.
4. If the entrepreneur is a private equity group, it will sell the building to a new investor after three to five years – as soon it can show that the property’s income is going up enough to justify a significantly increased price. Other entrepreneurs may prefer to sell or to continue to own and operate the building. Either way, many or most of the original tenants must be replaced with higher-income people by this point, or the investment will be judged a failure.