Waterford Property Co., based in Newport Beach, has acquired three Escondido apartment complexes for $157 million in partnership with the California Statewide Community Development Authority as part of a program to provide stable housing for middle-income renters.
The formerly market-rate apartment complexes were sold by Lyon Living based in Newport Beach. The monthly rents of most of the existing tenants in the three complexes acquired by Waterford and the Development Authority will be reduced by a range of about 6.5% to 22% when their leases expire, depending on their income, said Sean Rawson, co-founder of Waterford Property Group.
The lower rents also will be in effect for new tenants who meet the income limits.
Rent Caps for 35 Years
Under new deed restrictions, monthly rents will be capped for the next 35 years so that they increase by no more than 4% a year or an amount equal to the annual increase in the area median income, whichever is lower, Rawson said.
“These are private transactions that effectively now allow for a form of rent control because we, the buyer, are entering into rent restrictions,” Rawson said. “You cap your rent growth. As market rents continue to grow, those rent discounts start to grow exponentially.”
Of late, monthly rents in San Diego County have been rising 7.5% annually, Rawson said. “In certain parts of San Diego County, it well exceeds that.”
Historically, the area median income has risen by 2.6% on average over the past 10 years, he said.
Waterford bought Rowan Apartments, 700 W. Grand Ave. for $65.6 million, Alcove Apartments, 650 Centre City Parkway for $55 million, and Haven 76 Apartments, 2414 Escondido Blvd., for $36.4 million.
Rowan Apartments was built in 2021 and has 126 apartments, Alcove Apartments was built in 2019 and has 112 apartments, and Haven 76 Apartments was built in 2014 and has 76 apartments.
The apartments are for tenants with annual incomes between 60% and 120% of the area median income for San Diego County. For a family of four, that would be from $72,720 to $114,120.
Monthly rents will be based on income.
“This program spawned from our involvement in the traditional affordable housing space,” Rawson said. “What we saw was there was a real need and a lack of financing resources to provide housing to the middle income space. If they were to have to rent market-rate apartment units, it would have an inordinate amount of their monthly income going toward their monthly housing costs.”
Traditional affordable housing programs target very low to low-income renters with annual incomes of 50% to 60% of the area median income, Rawson said.
“The state is issuing tax-exempt bonds to acquire multi-family properties where they can preserve or lower rents to a level that serves the forgotten middle – the first responders, teachers, and other professions that provide a critical backbone to our communities,” said Kyle Pinkalla, San Diego managing director of the commercial brokerage Northmarq.
Pinkalla and Erik Anderson, associate vice president of Northmarq in San Diego, brokered the deal on behalf of Lyon Living. To distinguish projects acquired under the program, they’ve been called essential housing instead of affordable housing.
“This is a new type of housing. There was no way to finance it two years ago so these type of transactions didn’t exist,” Rawson said.
The arrangement has since become fairly common elsewhere in California but is new to San Diego County, with Escondido the first city to take advantage of it.
Expanding Essential Housing
“The cities have to opt into the program,” Rawson said.
Three other Escondido complexes were recently acquired under a similar plan with private companies working through the California Municipal Finance Authority.
“We’ve been extremely active in the essential housing space,” Rawson said. In 2021, Waterford has spent about $2.4 billion to acquire market-rate apartments and convert them to deed-restricted essential housing.
“With the Escondido portfolio, we’ve acquired 4,200 units in this space where we’re acquiring market rate then deed restricting them for essential housing households,” Rawson added.
Moving into 2022, he said Waterford is “hopeful to move forward in the near term with the City of San Diego.”
Waterford Property Company
Co-founders: Sean Rawson and John Drachman
Headquarters: Newport Beach
Business: real estate investment and development company
Assets under management: $2.8 billion
Notable: The company owns about 7,000 apartments.