The tax abatement, tied to an affordable housing pledge, played a key role in the investment group’s first-ever deal.
ROCKVILLE, MD- December 20, 2024
A joint venture has acquired a 1970s-era garden apartment complex in Burtonsville for nearly $63 million. It’s a deal of firsts, both for the recently formed company that spearheaded the deal and for the county.
A joint venture of Donaldson Impact Investments LLC, a for-profit company that spun out of Rockville-based The Donaldson Group last year, nonprofit developer Affordable Homes & Communities, investment firm Declaration Partners and New York Life bought the 312-unit Country Place Apartments at 3900 and 3918 Blackburn Lane for $62.65 million on Dec. 17. It’s Donaldson Impact’s first transaction ever.
It also marks the first time an entity has used Montgomery County’s by-right tax abatement program for affordable housing, but without additional public resources — which the buyers laud as a simpler, faster and more replicable alternative to the complex layer cake of financing such deals often require. In the affordable housing world, where making projects pencil out is even more difficult than usual, that’s a big deal.
The deal, which placed affordability covenants on more than half of Country Place’s units, will have a relatively immediate impact on the county’s shortfall of affordable housing Kevin Smith, Donaldson Impact’s managing partner, told me in an interview. He hopes to do two or three similar deals using the county’s tax abatement program in 2025, with the next one anticipated to begin capitalization during the first quarter.
The new owners have capped 55% of the units’ rents, most at levels deemed affordable for households earning up to 60% of the area’s median income, but some up to 50% of the median income. The other 45% of the community’s units will have market-rate rents.
Carlton Einsel and Smith, the CEO and the recently hired chief investment officer of The Donaldson Group, respectively, co-founded Donaldson
n Impact in 2023. Donaldson Impact, originally called Donaldson-KHS Impact Capital LLC but recently renamed, focuses on creating affordable and environmental efficient multifamily communities. Donaldson Impact is an independent venture, though it still partners with The Donaldson Group for management other services.
“Our focus is to lower operating costs, enhance the living experience for residents, and deliver value for our investors,” Smith said in a Dec. 19 press release. “But to make a profit while doing good by the residents, that’s a different story all together,” he told me subsequently.
The seller in this case was the Polinger Co. of Bethesda, which acquired Country Place for $57.3 million in 2014, according to property records.
In addition to being Donaldson Impact’s first, Country Place stands out for being the first to use Montgomery County’s recently established by-right payment in lieu of taxes (PILOT) program — awarded ministerially, requiring no discretionary approval or competitive process — and for involving no other public resources.
Country Place used only the PILOT — in this case, a subsidy worth about $650,000 per year in abated property taxes, or more than $16 million over its 25-year span, per the buyers — plus private capital from Declaration Partners and New York Life, and debt through Freddie Mac. Most affordable housing projects involve a far more complex patchwork of funding — frequently, low-income housing tax credits, a federal subsidy to investors, and below-market county gap financing — which are not guaranteed and can take a long time to procure.
That simplicity makes the mechanism not only relatively speedy, but easily replicable, Alan Goldstein, AHC’s vice president of real estate development, told me. As long as a deal meets the by-right PILOT’s eligibility requirements — substantial nonprofit ownership or control, and affordability covenants put on at least half the units — buyers don’t need to hunt and compete for half a dozen other funding sources.
From inception to closing, the Country Place transaction took seven months, while deals involving more puzzle pieces might take 12 to 18 months, Goldstein said.
PILOTs are not uncommon incentives for affordable housing or favored economic development projects, particularly in suburban Maryland. But local governments don’t always award them ministerially, by-right. “By right” generally carries a lot of value in the real estate world. Having to meet established criteria only, but not having to obtain lawmakers’ or regulators’ discretionary approval — for PILOTs, site plans or whatever — saves times, and thus carrying costs, and reduces the uncertainty and risk that a gatekeeper will say no.
The county’s by right PILOT abates all county property taxes for 15 years for rental properties that are controlled or at least half-owned by a nonprofit, and where at least half of the units are leased to households with incomes no greater than 60% of the area median income. The Donaldson Impact/AHC JV got a longer term — 25 years — in exchange for exceeding the unit minimum and setting aside some units for lower incomes.
Another unique thing about Country Place, both Smith and Goldstein said, is the services it’ll offer residents, overseen by a full-time AHC staff person, for which funding is already built into the operation budget. Those could include financial literacy classes and health and wellness programs, though the programming isn’t yet worked out.
Editor’s note: An earlier version of this article incorrectly stated the PILOT was worth $3 million per year to the buyers, based on information provided by the county Dec. 19. The county corrected the amount Dec. 20.