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MuniMae seeks profit in solving social problems

The Baltimore Sun

Millions live in South African shanty towns with no running water or electricity, a vestige of apartheid that has frustrated government officials, housing advocates and aid workers.

But the solution to this social ill might come from an unlikely place: Baltimore's Inner Harbor.

There, in the sleek offices of real estate financier MuniMae, deal-makers are pooling millions of dollars from investors to finance the building of 400-square-foot apartments, each with a sink, toilet and small shower, for lower-income families in Johannesburg.

MuniMae isn't doing this for the sake of altruism. Executives think there's a profit to be made from affordable housing in poorer countries, and they are looking to expand their current business in U.S. real estate. The company also is branching into financing alternative energy projects, where executives see more profits - and a better world.

"It's clear to us that there are these assets, whether it's a solar panel or a home, that the world really needs and which somebody's got to figure out how to finance," Chief Executive Officer Michael L. Falcone said. "There's just not enough charity in the world to solve some of these issues."

MuniMae is embarking on new ventures in "financing sustainability" - itself a nascent area of investment - even as it strains to cope with the complexity of its established businesses. The company uncovered a string of accounting problems in recent months and hasn't filed public financial statements in almost a year.

The accounting issues triggered an inquiry by the Securities and Exchange Commission and prompted warnings from the New York Stock Exchange that it could take the company's shares off the exchange. The situation could jeopardize the company's relationship with creditors and hinder its ability to raise money in public markets.

But for the company to retrench until the accounting is corrected would be a "disservice" to shareholders, said Timothy J. Lordan, vice president of investor relations. "You don't just shut down when you're fixing your accounting," he said.

MuniMae, shorthand for Municipal Mortgage & Equity LLC, has grown into a $1 billion company by acting as the middleman between investors and real estate developers, principally in affordable housing but also in commercial real estate. The company arranges financing and makes money from a range of fees, including for coordinating the transaction.

In the four years through 2005, the last year for which MuniMae reported financial results, profit tripled to $87 million on revenue that increased to $223 million.

MuniMae is a spinoff from the Shelter Group, a Baltimore-based real estate development company begun by Mark K. Joseph, a former Baltimore City housing official who is still MuniMae's chairman. Its predecessor was formed in the mid-1980s when U.S. policy was shifting from public housing projects - often troubled by poor construction and crime - to public-private partnerships. Tax breaks were extended, and states began issuing federal tax credits for the construction of affordable rental housing. MuniMae is now one of the largest syndicators of those tax credits.

Common thread

In that way, MuniMae's old and new ventures have something in common. Not only would the company be the financier, but the projects would have government backing. The overseas housing developments are expected to receive government subsidies, and renewable energy projects benefit from tax credits.

Gary Ran, head of Telemus Investment Management, a MuniMae shareholder, acknowledged that there are risks to being a pioneer but thinks that time will prove the company right. Telemus increased its holdings recently and owns more than 60,000 shares.

"We'll see three years from now; it may be that those businesses weren't a good idea," Ran said. "They could be wrong, or they might be really right."

MuniMae shares are down almost 20 percent this year, and to some extent, the company has suffered from confusion over its obscure business model. In one day in February, for instance, the stock fell 9 percent.

Investors apparently mistook MuniMae for a subprime mortgage lender on a day when shares of those lenders tumbled. Subprime lenders, who make loans to people with poor credit, have been troubled by defaults in recent months.

MuniMae executives scrambled to get a statement out, clarifying that the company is not a subprime lender and does not extend mortgages on single-family homes. The stock bounced back in after-market trading that day but continued its downward drift over the next few months.

Seed money

To finance affordable housing overseas, an affiliate of MuniMae has garnered $100 million in seed money from the Overseas Private Investment Corp., the federal agency that offers American companies loans and insurance for projects in developing countries. MuniMae plans to help raise another $200 million from institutional investors such as pension funds.

The goal is to build tens of thousands of affordable housing units in South Africa and Jordan and to boost those economies, OPIC spokesman Timothy Harwood said.

"Housing can stimulate development, not just with the building of the physical structures but also with the promotion of mortgage markets that create collateral for people to then build small businesses," he said.

When MuniMae's Falcone describes the company's plans, he sounds as if he hails from an aid organization, not corporate America.

"This is the kind of infrastructure you need to have a successful society," he said.

But when it comes to approaching investors, his pitch appeals to the profit motive. "You have to know your customers," he said.

He explained that MuniMae has identified who is willing to invest in real estate overseas, a caveat that whittles the field drastically, and who understands that affordable housing can be profitable.

Lisa Hall, director of lending at the nonprofit Calvert Foundation, which directs funding to groups that help underserved communities, said she isn't surprised that overseas housing could prove profitable. She said demand is acute in places like Africa and the Middle East, and that interest rates are higher than in the U.S.

MuniMae thinks a similar formula can work in financing renewable energy projects.

The company's strategy is to approach businesses with a deal: MuniMae finances the installation of a solar-power system on the premises at no upfront cost.

The draw: Businesses save money on their energy bills under long-term contracts.

The catch: MuniMae owns the system and makes its money back by taking some of the energy cost savings, or through tax benefits and fees.

So far, MuniMae has completed a solar facility for Fetzer Vineyards in California and solar panels on the roof of a manufacturing plant for Estee Lauder Cos. in New Jersey.

MuniMae also is financing what will be North America's largest solar system at Nellis Air Force Base in Nevada. Construction began in May on 140 acres. The system will supply more than one-fourth of the power used at the base.

Last month, MuniMae began financing energy-efficiency projects for companies, such as upgraded lighting or heating systems.

Matt Cheney, head of the renewable energy subsidiary, said it's akin to a neighbor offering to replace your 20-year-old air conditioner in exchange for half the savings on the electric bill.

Such financing is a growing trend, and Fortune 500 companies such as Honeywell Inc. are big players in energy-efficiency contracts. MuniMae's advantages, company officials say, are that it has extensive contacts with institutional investors and will take on smaller projects than its bigger competitors.

MuniMae plans to issue a progress report this summer in lieu of official financial statements that are expected in the fall. To get a handle on its finances, and to restate earnings going back four years, the company has beefed up its accounting unit. It also dismissed outside auditor PricewaterhouseCoopers LLP.

Inquiry 'informal'

Company executives stress that the SEC inquiry is "informal," which generally means regulators have asked for information but haven't used their subpoena power. The agency routinely initiates inquiries after companies announce earnings restatements.

The executives have won temporary reprieves from loan agreements that require regular financial reporting and plan to apply for an extension with the New York Stock Exchange to file financial statements.

Problems with MuniMae's books arose after accounting rules were overhauled in response to corporate scandals several years ago, making crunching its already dense numbers more complex. Further complicating the accounting, MuniMae made a series of acquisitions that added business lines as well as offices across the country.

One problem is the same faced by many real estate companies having to comply with what is known in the accounting world as FIN 46. That rule was aimed at limiting off-balance sheet arrangements of the kind that allowed Enron Corp. to hide its financial troubles. MuniMae officials determined that under the rule they must bring tax-credit investment vehicles onto the company's balance sheet, which it wasn't doing before.

While executives say they still don't know what impact the new accounting will have on earnings, they are confident enough in the underlying business to keep paying a quarterly cash distribution to shareholders - while moving forward with their ventures.

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