Advancing Affordability

By Sanyu Kyeyune

Avanath Capital Management CEO Daryl Carter does something few multifamily executives can match: He identifies capital-starved neighborhoods in high-cost-of-living areas, then recruits institutional partners willing to invest in them. In doing so, he not only expands the nation’s affordable housing stock, he designs communities where families and individuals can realize the American dream.

“To me, housing is one of the critical elements that is a cornerstone of success,” Carter said recently. “Along with education and health, safe, quality affordable housing is the key to upward mobility.”

For nearly a decade, as founder & CEO of Avanath Capital Management, Carter has championed workforce housing. Along the way, he has built one of nation’s largest affordable portfolios, comprising 40 properties valued at more than $1 billion. Key to this accomplishment has been Carter’s ability to gain buy-in from institutional financiers, many of whom shy away from the complexities of investing in affordable sites in under-resourced neighborhoods.

Friends and colleagues also attribute Carter’s success to a rare combination of intellect, integrity and exuberance. Equity Residential CEO David Neithercut met him in 1982, when they were lending officers at the now-defunct Continental Illinois Bank in Chicago. Neithercut recalls the time as lively, thanks to Carter’s upbeat, magnetic personality. “Daryl is a very fun person to be around,” he said. “I’m not surprised at all that he’s managed to attract capital and deploy it very profitably for his partners.”

Carter’s upbringing influenced his mindset. Having left Mississippi for opportunities in Detroit’s booming automobile industry, his parents were able to purchase a home on the city’s West Side in a working-class, African-American community. “That was a big deal for my parents,” neither of whom had completed high school, Carter said. Yet they cultivated a household where education and hard work were paramount, and encouraged their son to set his sights high.

Hints of Carter’s future profession emerged early. “When I was a kid, I could not pass by a construction site without stopping on my bike and watching all the action,” Carter recalled. “I was always very intrigued by that.” That fascination with construction blossomed into a love of architecture, which he studied at the University of Michigan (while also finding time to shoot hoops for the basketball team). After college, Carter headed east for Cambridge, Mass., earning a master’s degree in architecture and an MBA at the Massachusetts Institute of Technology.

Upon completing graduate work in 1981, Carter joined the commercial real estate lending group at Continental Illinois Bank. Starting his career during the early ’80s gave him insight into the nation’s escalating affordability problem. Inflation and interest rates were spiking, bringing the bank’s residential construction division, which financed large subdivisions and condominium projects, to a standstill. “When interest rates hit 20 percent, all of a sudden, nothing was selling in the way of housing,” he explained. “(The bank) evolved from a lending operation to a workout business.”

As a management trainee, Carter walked through and took inventory of 200 unsold condominium units. At the time, the condos could have fetched $50,000 to $150,000 each; today, they would go for more than $300,000, he estimates. The challenge of selling them was a formative experience, teaching Carter that market conditions can change drastically–sometimes with devastating effects. “You never lose that perspective,” he remarked.

Building bridges

“Some of the friends that I made (at the bank) have not only been lifelong friends but they’ve been important in my career for various reasons,” Carter said. Among those early mentors was Jim Harper, who ran Continental’s real estate department. Harper came to Carter’s aid after a client dropped some racially charged verbiage on a phone call.

“(Harper) told me, ‘Unfortunately, this is not the last time this will happen, but if you handle it with dignity and class like you handled this, then you’re going to be very successful in this business.’” The encouragement touched Carter; he says it gave him the strength to keep pushing “to make our industry more diverse in all aspects—gender, ethnicity, sexual orientation and the like.”

Carter’s contributions to the industrywide conversation about diversity also struck Jeffery Hayward, head of the multifamily mortgage business at Fannie Mae, which has financed a majority of the communities in Avanath’s portfolio: “(Carter) pushed the issue to a mostly majority audience. He spoke up and wrote editorials, and was not afraid to take a stand. He definitely made that a signature part of his tenure at the National Multifamily Housing Council,” which Carter chaired from 2014 to 2016.

When the two met more than a decade ago, Carter was a top executive at Centerline Capital Group, an investment banking firm specializing in the multifamily sector. Since then, Hayward has watched Carter move seamlessly across a variety of roles. “He’s the kind of person that can always reinvent himself,” Hayward observed. “He’s able to go back and forth in a lot of worlds and be completely comfortable.”

Hayward described Carter as equally at home chatting with a teenager on a basketball court and commanding the attention of a roomful of lawmakers, as he did in 2014 while testifying before a U.S. Senate committee on the urgent need for workforce housing investment.

Conceiving Capri

Seeking to rally institutional capital around urban communities of color, Carter and high school classmate Quintin Primo started their own company, Capri Capital Group, in 1992. At its apex, Capri (the corporate handle is a combination of their surnames) managed $8 billion in real estate debt and equity investments.

“It’s certainly hard starting another company when you’ve gone through knocking on all the doors for initial investors.” Carter admitted. “We were in our 30s when we did that. Starting another business in your 50s is still a challenge.”

Parting amicably, the two men sold the business’ debt and origination platform in 2005 to Related Cos. and Centerline, where Carter would lead the commercial real estate group as its executive managing director. Primo acquired his partner’s remaining interest in Capri Capital Advisors—the firm’s equity investment arm—and in 2008, Carter gathered his West Coast team to start Irvine, Calif.-based Avanath (this time, the company is named for his children, Ava and Nathan).

When Carter was laying the groundwork for the new firm, he “asked several of his good friends if they wanted to join him in launching his business, and I was one of those good friends,” recounted Swift Real Estate Partners Chairman Doug Abbey.

In 2011, Avanath bought several affordable housing communities in Oakland, Calif., including one that required creative financing. Carter’s solution called for prepaying the property’s onerous debt by asking the California state agency that held the debt to let Fannie Mae refinance the asset.

Because the agency held a significant portfolio of Fannie Mae bonds, it was able to leverage its close relationship with the government-sponsored enterprise, which was aiming for its own affordable housing goals. The result was, as Abbey put it, “an excellent investment.”

NMHC President Doug Bibby credits Carter with opening the eyes of institutions to the value of investing in affordable housing, a sector commonly seen as too complicated. “He’s very good at it because he’s incredibly substantive and has built a team with deep real estate knowledge. You can count on him to dedicate his time to get things done, and people like doing business with him.”

Bibby cited Carter’s contributions to NMHC, which included a joint public relations campaign of NMHC and the National Apartment Association that produced weareapartments.org, a website designed to explain multifamily operations. Carter also headed a strategic planning initiative that led to the creation of the NMHC Research Foundation, a nonprofit endowment.

Actualizing Avanath

Carter chose to focus Avanath on workforce housing, with the belief that he could take a fresh approach to the sector. Unlike many competitors who attempt to upgrade Class C assets to Class A, Avanath targets Class C properties and invests in improvements that are the most beneficial to residents. That strategy enables the firm to preserve affordability while also maintaining high occupancy. Of the company’s 8,000 units, half have waiting lists. At year-end 2016, the portfolio was 98 percent leased, with communities in California, Florida, Illinois, Maryland, Michigan, New York, North Carolina, Texas, Virginia and Washington.

“We are very metrics oriented. We try to understand who our resident is, where they work, what they do, how far they travel,” Carter explained. “Of course, people do that in the higher-end segment, but not so much in the affordable segment.”

From a value-engineering standpoint, Carter has opted for holistic amenities rather than purely cosmetic ones. Instead of marble countertops, Avanath communities are more likely to have in-unit washers and dryers, which enable parents to do laundry at home and save on childcare costs. Instead of replacing cabinets, Carter’s construction teams resurface them, sparing residents a monthly rent premium of $10 to $15. “Incrementally, everything you do has to be of value to your residents,” he said.

Promoting stability, while difficult, is another priority. Rather than relying on turnover to bump rents, Avanath prides itself on strong retention. “One of the things that breeds safety and security is for residents to know their neighbors,” Carter observed.

To further a sense of unity, he routinely invites local officials to speak in Avanath’s communities, simultaneously engaging residents and putting policymakers face-to-face with their constituents. After-school and adult learning programs are trademark amenities; by sponsoring them, Carter explained, “you’re investing in the future of your residents by doing things that support their dreams and their visions.”

In addition to serving communities, Carter continues seeking ways to deliver double-bottom-line returns to his investors, including evaluating the impact of Avanath’s community programming on maintenance costs and reporting academic progress of school-age residents. In 2017, Avanath released a+, a mobile application that enables residents to submit maintenance requests and manage their rent and utility payments; according to Carter, users have responded favorably.

“Our company is highly diverse, and that’s why I think we’re good at serving the communities we serve,” noted Carter. “Because we understand them.”

Originally appearing in the May 2017 issue of MHN.