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US Military’s Housing Partners Mobilize Institutional Investors To Finance Billions in Improvements

Lendlease Communities Raises $1.1 Billion From Guggenheim Investments, Reflecting Renovation Demand
A capital infusion from Guggenheim Investments is expected to help Lendlease fund $420 million in new and renovated housing at Fort Hood, Texas, for service members and their families. (Lendlease)
A capital infusion from Guggenheim Investments is expected to help Lendlease fund $420 million in new and renovated housing at Fort Hood, Texas, for service members and their families. (Lendlease)

Owners of privatized U.S. military housing, one of the oldest types of single-family rentals, are addressing a challenge that has arisen in recent years from scrutiny from the Department of Defense and Congress: the immediate need for billions of dollars in major property repairs.

Lendlease Communities, among the largest partners working with the DOD, has found financial support in recapitalizing the military’s housing portfolio from private institutional investors — in a new twist to undertaking upgrades. Lendlease now has over $1.7 billion in improvement and development projects scoped out across at least eight U.S. Army installations, renovations that had been originally planned over several years instead of all at once.

The Australia-based developer’s most recent financing arrangement was completed this spring. Lendlease brought in Guggenheim Investments as a passive financial partner to acquire a portion of its military housing business. The portfolio contains more than 40,000 residential units, 192 apartments and more than 12,000 hotel rooms.

Other private military housing owners could be on the hunt for institutional investors as well. All military departments have been ordered to complete inspections of their hundreds of thousands of units in coming years.

For Guggenheim, the investment allows clients to participate in a relatively steady, long-term income stream. Private owners of military housing own and operate the properties on land they lease from the DOD generally for 50-year terms and generally with one additional 25-year option period.

Addressing a need for continuous property improvements originally led the DOD from operating its own housing to outsourcing it to private owners in 1996, according to Patricia Coury, deputy assistant secretary of DOD housing, in testimony before a House committee earlier this year.

“The department had an estimated $20 billion maintenance backlog, which was projected to take 30-plus years to address using traditional military construction and operational funding programs,” Coury said. “These realizations, and our recognition that housing management was not a core DOD function, contributed to the department’s conclusion that leveraging private sector expertise and funding would improve housing quality much faster than we could provide by maintaining this housing as DOD-owned.”

The privatization operated somewhat unchecked until the summer of 2018, when Reuters began publishing articles chronicling health and safety issues experienced by military families living in privatized housing. Service members and their families reported experiencing mold exposure, rodent infestations, water leaks, smells, broken appliances, rude and dismissive housing management, and ineffective oversight of the program by the DOD.

Congress held hearings soon thereafter, which led it and the DOD to take key steps to remedy the crisis. Congress passed legislation as part of the 2020 National Defense Authorization Act that included a tenant bill of rights, which was designed to ensure service members and their families were given high-quality housing and responsive customer service.

Initial Meetings

Lendlease began its latest efforts to arrange the financing two years ago after the first set of hearings when Lendlease executives met with former Secretary of the Army Ryan McCarthy and Gen. Ed Daly, commander of Army Materiel Command, in a hotel near the Pentagon, according to Phillip Carpenter, chief operating officer of Lendlease, in an interview with CoStar News.

“We went over a rough estimate of what we thought we could do, and the secretary very quickly said, ‘Let’s make this happen.’ He was all in,” Carpenter said.

With the Army’s blessing, Lendlease went to market with a recapitalization plan and initially whittled down interested parties to five finalists, with Guggenheim coming out on top. The entire process to complete the $1.1 billion effort was pushed forward by five years because of the widespread criticism of privatized military housing that began in 2018, Carpenter said.

The capital infusion from Guggenheim on behalf of some of its clients is set to be used to renovate 12,000 existing homes and build 1,200 new homes specifically at five Army bases.

Approved work is set to begin this year and is expected to include about $80 million invested in the construction of more than 60 new homes at Fort Knox, Kentucky, as well as installation of more than 740 new heating, ventilation and air-conditioning systems and minor renovations to more than 570 homes. The $1.1 billion investment also includes $420 million at Fort Hood, Texas; $235 million at Fort Campbell, Kentucky; $45 million at Fort Drum, New York; and $30 million at Schofield Barracks and Wheeler Army Airfield in Hawaii.

Similar arrangements will probably be needed in the future, Carpenter said, as the reform efforts have continued this year with the office of the secretary of defense directing all military departments to complete inspections of their more than 205,000 privatized family housing units by October 2024.

In addition, Carpenter said, Lendlease projects have about $4.5 billion in cash flow from operation of the properties through their leases on the land with the DOD.

“That would allow us to take maybe another 25 years of no debt to a project and go out and capitalize that,” he said.

More Partners Possible

Other opportunities for private market sources to bolster military housing could be available from other DOD partners in need of improvement capital.

The House of Representatives held additional hearings in March, with testimony from Lendlease and other major military housing owners providing updates on their plans to improve their portfolios.

Richard Taylor, president of facility operations, renovations and construction for Philadelphia area-based Balfour Beatty Communities, reported spending $300 million in wide-ranging improvements to more than 40,000 homes and having more than $1 billion in housing and infrastructure improvements programmed through 2031.

“We are continuously evaluating opportunities to raise additional financing for our projects — whether through project refinancing in the form of follow-on equity or debt issuances or through securitization structures,” Taylor said at a hearing. “We have also developed several innovative ways to financially support our projects, including developing relationships with cell tower and solar operators to license unused land within our project footprints to construct cell towers and ground-mounted solar arrays.”

Philip Rizzo, CEO of Huntington Beach, California-based Liberty Military Housing, which manages 36,000 units, said his firm has been able to raise about $4 billion, much of which was for new construction.

Some of that money was earmarked for schools, parks, recreational facilities and other amenities. Liberty Military Housing currently has a five-year plan to reinvest $500 million more across its portfolio by 2027, with another $5 billion scheduled over the next 20 years.

And Brian Stann, president and CEO of El Paso, Texas-based Hunt Military Communities, outlined plans for $243 million in capital improvement projects ranging from whole house renovations to new HVAC systems.

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