Call it whatever you like, but bear in mind:
*It sold like hotcakes last week -- a record-setting $300 million to 15,000 buyers across the country in seven days.
*It's a new concept that could become one of the important tools for financing American housing, including communities for retirement-age couples and individuals.
It's a real-estate investment aimed at the general public, but it's not like ordinary Wall Street-marketed mutual funds or partnerships. It pays you four times a year with tax-free dollars, yielding an effective return that could well exceed 20 percent, depending on your tax bracket. Plus it provides a "piece of the upside action" on the sale of real estate in years to come.
What is this hot-selling, newfangled, but hard-to-name real-estate concept? Technically, it's a publicly offered limited partnership that invests in participating tax-exempt mortgage-revenue bonds. Since that makes most people's eyes glaze over, think of it as a housing fund. The fund specializes in construction of middle-income rental apartments and retirement complexes in geographically diverse locations.
The first of its type -- known as OTEF for Oxford Tax Exempt Fund -- was sold out in a flash here last week by Merrill Lynch. Additionally, similar housing offerings from Merrill and possibly other firms are likely in the future.
What's important about the new housing-fund concept is its creative mixture of benefits for ordinary investors, housing developers and families looking for moderately priced shelter. Devised by a major apartment developer, Maryland-based Oxford Development Corp., and Merrill Lynch, the $300 million fund that sold last week represented an ingenious way to quickly raise a huge pool of mortgage capital for upcoming apartment-development projects.
From the individual, small- to medium-scale investor's perspective, the fund also had significant attractions. For a minimum $5,000, a small investor could participate in a joint venture with a top developer on terms similar to those obtained by large institutional investors, such as insurance companies.
The Oxford deal works like this: Investors' dollars will be used this fall to purchase interests in a pool of tax-exempt bonds issued by local agencies in eight states (California, Connecticut, Florida, Illinois, Texas, Ohio, Maryland and Virginia). All payments on the bonds are exempt from federal taxation, thereby magnifying the value of interest payments to investors. An 8 percent return to a taxpayer in the 50 percent tax bracket, for example, is the equivalent of a 16 percent taxable interest rate. The same tax-exempt rate for an investor in the 35 percent bracket is the equivalent of an 11 percent return.
All the bonds will be used to finance garden-apartment and retirement-housing complexes to be constructed during the next two years by Oxford. The projects range from a 600-unit apartment development in Middletown, Conn., to a 144-unit retirement center outside Ocala, Fla.
The net proceeds of the bond issues will be used to make "participating" mortgage loans to Oxford, bearing interest rates of 16 percent. The "participation" feature is the key to the deal. Investors will receive tax-exempt quarterly interest payments during the first 24 months of 10 percent, plus the right to obtain up to an additional 6 percent in deferred "contingent interest" at a later date.
During the next 12 years, the base tax-exempt interest rate owed to investors will be 8 1/4 percent, but they will receive the right to obtain an additional 7 3/4 percent in deferred, tax-exempt interest.
The contingent interest will be payable out of available cash flow from the rental projects, and from potential profits on the sale of the buildings in years ahead. Though termed "contingent interest" to qualify under federal law as tax-exempt payments, the extra money intended to flow to investors is the equivalent of "having a piece of the deal" -- a slice of the ultimate equity value of the underlying housing.
If Oxford runs the properties profitably -- and it will be in its financial interests to do so -- the investors will receive more than the 8 1/4 percent tax-exempt interest they're owed. If the properties appreciate significantly because of inflation and higher rental income over the years, the investors will share in that growth up to an amount equivalent to a 16 percent tax-exempt return.
A 16 percent return tax free, you ask? That's the equivalent of 32 percent for 50 percent-bracket investors, and over 21 percent for 35 percent-bracket taxpayers. No wonder the $300 million issue sold quickly and no wonder thousands of units of American housing could be financed via this technique in coming years.