How Two High School Buddies Got Into Real Estate by Taking On Affordable Housing
With the pandemic in full effect about two years ago, two buddies since high school decided to cut their teeth on real estate development by taking on an affordable housing project, a complex property niche that even seasoned veterans tend to avoid.
Richard Taylor and Kyle Cleland learned real estate lessons as they navigated the world of raising funds to convert a vacant apartment building in an Atlanta neighborhood full of dilapidated structures and high crime rates into a fully furnished affordable housing micro-unit development.
While politicians and civic leaders express the need for affordable housing, financing those projects isn't as simple as putting up a certain percentage of equity and a single bank lending the rest. Such deals don't generate the returns typical investors want because the projects don't command market-rate rents that rise easily over time.
Oftentimes, developers of affordable housing units need government help in the form of low-income tax credits or grants to make projects financially feasible. Taylor and Cleland managed to put together a deal without using government subsidies to buy the property at 1200 Mobile St. in Atlanta and transform it into an affordable housing development. The $4 million conversion into what is now called 12Hundred Studios opened for leasing in early May and marked the first commercial real estate deal for Taylor and Cleland.
The 12Hundred Studios redevelopment is small by comparison to many real estate deals, even affordable housing, but that was by design. Tai Cohen, a friend of Cleland’s who works in commercial real estate at Cushman & Wakefield in Charleston, South Carolina, suggested they start small so that any mistakes that were likely to be made were also small.
And they made mistakes, but those errors cost thousands of dollars instead of millions of dollars, which was “much more palatable,” Taylor said. The project finished ahead of schedule and under budget, he said. The deal won a 2022 CoStar Impact Award in Atlanta.
Taylor and Cleland, who are both 32, became friends at St. Pius High School, a Catholic school in Atlanta where they played varsity football together.
After high school, Taylor went to Clemson University in South Carolina and then Vanderbilt University in Nashville, Tennessee, for a master’s degree in finance. He landed in Chicago to work in private equity and investment banking. Cleland attended the University of Tennessee at Chattanooga and finished at the University of North Carolina at Wilmington before working his way back to Atlanta to become a residential real estate agent.
Taylor said he had something of a mid-20s life crisis when he left his private equity job and backpacked through mostly Third World countries to see what poverty looked like. He slept on floors with locals in Bangladesh and met people in that part of the world who had escaped genocide. “I learned what it’s like getting outside my bubble,” he said. “I loved staying in these grimy youth hostels.”
Taylor’s life took another pivotal turn when his mother died in 2019 after a long battle with ovarian cancer. He came back to Atlanta and decided to get into real estate by founding ARRC Capital Partners to buy and renovate apartments.
Their First Deal
Cleland, a Realtor with Atlanta-based EXP Realty, saw the apartment building that had been vacant for roughly 20 years on Atlanta’s Westside hit the multiple listing service in August 2020. He tracked it for six months, but it wasn’t selling, so he showed it to Taylor after learning his high school buddy wanted to get into real estate.
“It was kind of cosmic,” Cleland said of the timing.
The hurdle was the $1.55 million price tag, which was "way too high for the area,” Taylor said.
The property sits in Hunter Hills, a neighborhood west of downtown Atlanta that was built in the 1940s and 1950s. The area full of vacant buildings has been dealing with crime for years but is slowly beginning to transition because of its proximity to the Beltline, a bike and walking trail that will encircle much of Atlanta on former railroad beds.
They pressed forward with Taylor in the lead. He crunched the numbers for renovating the 20 units and went searching for money to finance the project. His first stop was the Atlanta Affordable Housing Fund, an organization formed in 2020 by seasoned real estate professionals to provide low-interest financing to developers of affordable housing in Atlanta.
Ashani O’Mard, the fund’s former executive director, said Taylor was "too green” and the fund told him to find a partner. He left and came back with Atlanta-based investment firm Tenth Street Ventures in tow, helping the fund’s board feel more confident about the deal, O’Mard said. Tenth Street Ventures suggested that to make the units affordable but still profitable, the developers needed to split the building’s 20 units to create 40 micro-units, which doubled the density of the property.
Alexander Goshen, a Florida investment firm, joined the deal along with the American South Real Estate Fund, which invests in projects in underserved areas that could help set off further economic revival. All told, the deal has a financial structure of a senior loan, common equity and preferred equity, which is a form of debt. Family and friends are part of the common equity.
Taylor said he was familiar with the complexity because it was in line with what he had done when working with private equity in Chicago. The loan and preferred equity came at below-market rates, which is common in affordable housing deals to help make them work. The venture closed on the property in 2021 and started the renovations.
In a move that resembles a technology startup more than a real estate deal, Taylor used business credit cards to buy the appliances for the units rather than relying on the contractor. He used savings from discounts and incentives from the credit cards toward the project. During the process, Taylor and Cleland learned how the local political process worked. Building permits, for example, were delayed last summer for unknown reasons. “I started beating doors at city hall or talking to whoever I could find,” Taylor said.
Unbeknownst to them, former Atlanta Mayor Keisha Lance Bottoms issued a press release in November touting her term's achievements that included the city waiving part of the land development code to allow the 12Hundred Studios project to move forward.
“This development represents our administration’s efforts to achieve true community revitalization and to meet our affordable housing goal,” Bottoms said in a statement last year.
The venture completed the project's transformation — including adding exterior murals and a reconstructed facade — just 10 months after buying the property. To help with crime in the area, the owners struck a deal with the Atlanta Police Department, and officers live in some of the units.
The project marks the first outside investment Hunter Hills has seen in decades and tests a new model of making affordable housing profitable for developers by using micro-units, which might help other cities across the country deal with a shortage of affordable housing.
Taylor said the lessons from the deal are still coming, and he's learning something new every day.
"We want to take this project and do the exact same thing to the next one" in the same neighborhood and "work with future sellers to help them understand we’re in it to build the community," he said.