Talking Heads: Michael Costa, Highridge Costa Housing Companies: From Ballplayer to Developer

8 min read

If Michael Costa hadn’t become a successful real estate developer, he might have played Major League Baseball.

Costa received a baseball scholarship to California Polytechnic State University at San Luis Obispo where he played alongside Hall of Fame shortstop Ozzie Smith. Because he also played shortstop, Costa switched to playing in the outfield. “Ozzie was amazing to watch even in college,” Costa recalls.

While still in college, Costa was offered minor league contracts from three professional teams, including the Los Angeles Dodgers. For personal reasons, he walked away from the game, graduated with an engineering degree, and began a career in real estate development that has now lasted over three decades.

Costa’s company, Highridge Costa Housing Companies (Gardena, CA), created a portfolio of 27,000 housing units in more than 275 communities throughout the U.S. and Puerto Rico. Through his extensive utilization of both federal and various state tax credit programs, Costa has gained a wealth of specialized knowledge of the intricacies of tax credit financing and syndication. He is considered an industry expert in tax credit-based development and asset management, including the myriad of compliance issues associated with managing tax credit properties.

Tax Credit Advisor sat down with Costa to discuss his current passions and priorities.

TCA: What are the biggest challenges facing the affordable housing industry?
Costa: Our biggest challenge is financing. Like everyone else, we rely on “gap” financing, because tax credit equity and debt alone won’t finance a project. We’re constantly talking to state and federal lawmakers about the need for more funds, because gap financing determines a project’s feasibility. The second issue is tax reform. The good news is that we have support from both major political parties. However, as an example, if anyone proposed something as simple as lowering the corporate tax rate, it would have a drastic effect on our business and further diminish the value of tax credits. The last issue focuses on rising operational costs, such as utilities and insurance. Rents are tied to area median incomes, which have been lagging as operating costs have risen. It’s turning some properties upside down as expenses have been increasing at a much faster rate than rents.

TCA: Is the water crisis exacerbating this issue?
Costa: Yes, and as a result we have been incorporating zero-scape landscaping in many of our communities. People like green grass, because it looks nice. But irrigating these areas is expensive. We have been converting those areas to more of a desert, zero-scape landscaping that eliminates the need for irrigation. We have received many positive comments from the residents as well. We have a lot of properties that are turning 15, and we know we are going to continue operating them, so as we choose to rehabilitate them, we are “greening” them up, which includes taking out the heavy grass areas and converting to more water tolerant landscaping, which in turn reduces our maintenance costs.

TCA: Despite these challenges, what do you think is the biggest opportunity for developers?
Costa: We know that the demand for affordable housing increases every year and far exceeds our ability to keep pace with the current financing programs we have. We’re seeing more developers rehabilitating and keeping their communities affordable. In our case, we’re doing a lot of acquisition/rehabs, which creates opportunities for earning developer fees, syndication fees, and keeping the fee based opportunities related to asset management. I’m also seeing more conversions of older market rate properties into affordable. We can’t build a new unit for less than $200,000, but if we can purchase an older property for $100,000 a unit, then we are ahead of the game as we begin to acquire, rehab and convert it to affordable housing.

TCA: How you are positioning your company for the future and distinguishing yourself from your competitors?
Costa: We are one of the few developers that is also a syndicator. It began 22 years ago, after starting the multifamily division at Kaufman & Broad, one of the top single family home builders in the country. K&B was already buying low-income housing tax credits for philanthropic reasons. Having been a developer/syndicator prior to starting the company, I convinced Bruce Karatz, the chairman, that we should syndicate our own deals and cut out the middle man. It created an additional new profit center for the company and also added more fee based work because we had to form an asset management group and a compliance group to manage the investments.

TCA: Do you offer similar syndication services to other developers?
Costa: Yes, we positioned ourselves to work with third-party developers, acquire their credits and resell them, but we also did things a little differently. We have a lot of in-house capabilities beyond what most syndication companies had, including in-house construction, financing and architectural services. For smaller developers who are under-capitalized, we were able to offer a plate of in-house expertise. We would tell them, “as a partner, you can tap into our architecture, into our finance group, and you can obviously tap into our credit re-sell group, because we’re going to sell those credits for you.” It gave them an opportunity during their pre-development phases to underwrite, and have access to great architectural services, without having to spend a lot of money. It helped us because we are concerned about the design of the product. This approach allowed us to create investor funds with a mix of out-of-state third-party developments, with California developments that we were sponsoring ourselves, allowing us to really accelerate the growth of our portfolio.

TCA: What differentiates your communities?
Costa: We build to market-rate quality standards, with select materials, designs and amenities, so that if tomorrow the property needs to compete with market rate product it can easily do so. We have always had a long-term view for each community. If we’re going to own it after 15 years, we want to make sure it was originally built to last. We don’t skimp on amenities, especially community based amenities. Almost all of our communities have club-house facilities, swimming pools, patio and BBQ areas, gyms, and walk-ways with seating areas, everything you would expect to find in the market-rate community next door. Even in our senior communities – and we have one of the largest portfolios in the nation of independent senior apartments (9,000 units) – are garden-style apartments with swimming pools and large community rooms. They are designed to fit the neighborhood and not look “institutional,” in fact if you were to drive by one of our senior properties, until you look closely at the residents you wouldn’t recognize as being senior housing.

TCA: What services do you offer to your elderly residents to ensure they receive access to the best possible healthcare, so that hospital revisits can be avoided?
Costa: We have been looking at this and the real answer is we need to find a way to develop affordable assisted-living communities. In some Midwest states, like Ohio and Michigan, the Medicare groups are already allocating funds for assisted-living communities where they can retain and take care of the people who are healthy for a longer period of time, so they don’t wind up in a hospital. The problem we have on the west coast is that we haven’t been able to tap the Medicare and MediCal programs to allow us use of their funds to assist residents allowing them to reside in what we’ll call an affordable assisted living community. Current market rate assisted living rents are $3,500 to $5,000 a month. We believe we can create an affordable model using tax credits as part of the subsidy and combined with help from the Medicare/MediCal program, we can perhaps reduce that monthly total down to $1,500 to $2,000. This still sounds high, but not when you compare it to $3,500 to $5,000. It would be an affordable place to live and residents would have two meals a day, linen service, various activities and access to visiting doctors.

TCA: What important trends are you seeing in the LIHTC investor market?
Costa: The dominant investors continue to be financial institutions, primarily because they are driven by CRA requirements. This is starting to create a problem, because banks are required to invest in the markets where they have branches and where they do business. The largest banks in the U.S. operate mostly in large urban areas, like Chicago, New York, Los Angeles and San Francisco, so the majority of the large banking institutions are battling one another to get the next deal in our nation’s urban areas. So where a normal investment yield would be X percent, they drive the yield down by as much as 300 basis points competing for the purchase of the tax credits. This is great for developers in those markets, but it’s creating an imbalance of pricing to large urban areas versus suburban and rural areas where affordable housing is equally needed. Even though our industry is capturing other investors such as insurance companies and the Googles of the world, they have different yield requirements and are not the only answer to the problem. I think we need to rethink CRA. Its creation was well-intended, and it has helped us tremendously, but I think we need to revamp CRA requirements and establish an equality of equity and pricing because Middle America and suburban and rural areas throughout the U.S. are not getting the same attention.

Darryl Hicks is vice president, communications for the National Reverse Mortgage Lenders Association and a 24-year veteran of associations managed by Dworbell, Inc., the management company of NH&RA.