Hedge Fund out to slash tax load on Huber purchase

What are hedge funds?

Generally they are private partnerships that use a variety of investment strategies — including some that are very risky — with a goal of generating high returns. They are currently not regulated by the U.S. Securities and Exchange Commission, though large funds must register with the SEC and face certain other regulations. Unlike mutual funds, hedge fund managers are compensated as a percent of the returns they earn, creating an incentive to invest aggressively. As a result, hedge funds have often scored high returns for their very wealthy investors while incurring some spectacular losses.

Sources: Investopedia, BarclayHedge.com, SEC.com

Top property value reductions sought by Magnetar Capital LLC investors

Magnetar, an Illinois-based hedge fund, bought Huber Investment Corp. from Teresa Huber and is seeking reductions in property values to save on taxes in Montgomery County.

Magnetar Capital LLC property value appeals-By the numbers

Source: Montgomery County Auditor's Office

Magnetar Capital LLC, the Illinois hedge fund that quietly bought Teresa Huber’s vast rental home business this year and tried to get the property values cut in half to save on taxes, has scaled back its request as community officials decry the impact of the lost tax revenue.

“At a minimum it sure doesn’t sound very neighborly,” Huber Heights Vice Mayor Mark Campbell said. “I don’t mind some out of town folks coming in, purchasing property, promising to improve that property. But it sure doesn’t sound very neighborly to come in and cut our throats by 50 percent.”

Mike Carter, the hedge fund’s chief operating officer, said he understands that the loss of tax revenue will cause financial pain to the community. But he said the company has a right to seek corrected values on property it believes the auditor has overvalued.

“What we believe is our combined actions around this investment, (this) partnership long-term, will produce gains both to the community and to ourselves,” Carter said. “Ultimately we are going to be putting a lot of value back into the property, into the community.”

Funds managed by Magnetar are the main investors in the January purchase of 1,900 single- and multi-family residential units owned by Huber Investment Corp. and related companies. Nearly all of them are in Huber Heights, but a few are in Miamisburg, Trotwood, Columbus, Cincinnati, Indianapolis and Atlanta.

Teresa Huber, 55, is the widow of Huber Investment founder, Charles H. Huber, the developer of Huber Heights who died in 2003 at age 73.

“I think it was time for her, at least what she said to me, was it was time to move on and do something different,” said Dan Bathon Jr., whose VineBrook Homes Ohio is also an investor and the managing partner in the transaction.

Magnetar operates the company as Huber Home Rentals with Bathon as chief executive in charge of day-to-day operations in the Huber Heights headquarters. In buying the firm, Magnetar and VineBrook saw a 30-year-old company with a steady income located in a stable community. Carter said his fund specializes in stable investments that produce a long-term cash flow.

“The type of investors we have seek those type of returns,” Carter said. “If I gave you an analogy I would say people look for us to find investments that look and feel more like bonds.”

Terms confidential

Institutional investors are increasingly buying up residential properties — in part because of the foreclosure crisis and the low prices they can get, but also because of low interest rates, said Dick Dickerson, president of Miller-Valentine Gem Real Estate Group in Dayton. This month RealtyTrac reported that institutional investors account for 14 percent of all U.S. residential sales in September, the highest since the company began tracking it in 2011.

Carter said the Huber purchase is Magnetar’s first significant rental portfolio investment.

The terms of the Huber transaction are confidential, Carter said. According to a February filing with the U.S. Securities and Exchange Commission, Magnetar raised $71 million in a private placement for Huber Funding LLC, which was incorporated in Delaware.

A private placement is the private sale of bonds or other securities to investors to raise money. The $71 million could be what was paid to Huber, or it could include the cost of additional acquisitions or renovations, Dickerson said.

Teresa Huber’s attorney, Sam Warwar, said the sale was a private transaction and “she is very respectfully requesting not to comment on anything.”

Teresa Huber’s Jewel Heart LLC is now building what officials say will be one of the largest and most expensive homes in the county when it is finished in Washington Twp. R.A. Rhoads Inc. has begun building the 34,258 square foot, $6.5 million house at 1241 Forest Run, south of the NCR Country Club, said Ryan Lee, township zoning manager.

Charles Huber’s brother Donald Huber, 81, said the family wasn’t told in advance that Teresa Huber was selling the company and he is disappointed to see it go. After their father’s death in 1954, the Huber siblings split up portions of his housing construction and rental company. Donald Huber said the Huber family made a point of being a part of the community, including donating parks and fire trucks.

“From my standpoint the legacy of the family is ending here,” said Donald. “The only interest in the hedge funds is to make as much money as they can.”

Record-setting appeal

Huber Homes is the third largest non-governmental property owner in Montgomery County, after Dayton Power and Light and Miami Valley Hospital, according to the auditor. The purchase of the Huber properties means Magnetar’s investors own one in 11 of Huber Height’s residential units, according to U.S. Census data.

In March the company filed appeals with the Montgomery County Auditor to reduce by half the $91.3 million value of 818 properties, which Montgomery County Auditor Karl Keith said appeared to cover most of the 1,580 units the company bought in the county. The appeals also included Huber company headquarters and the Huber family home at the corner of Taylorsville Road and Old Troy Pike.

The batch of property value appeals was the most filed by a single company in county history and one of the larger ones in dollar amounts, according to Keith. He said the initial re-valuation request would have saved the company about $1.39 million annually on property tax levies and bonds that benefit Huber Heights schools, the city and county-wide levy recipients like libraries, human services agencies and Sinclair Community College.

The company has since withdrawn about a third of the appeals — including the one that included the Huber family estate — and increased the proposed valuation on most of the others, according to the auditor’s office.

With those changes Huber Homes now seeks a 29 percent valuation reduction that could save it as much as $524,668 in taxes on 485 properties the auditor currently values at nearly $53.6 million. All but a handful of the company’s cases have been heard by the three-person county Board of Revision, which began issuing decisions this week.

The board decreased the values by 49 percent in those 76 cases, granting Huber Homes about 94 percent of the re-valuation amounts it sought, according to a Dayton Daily News analysis.

Skeptical official

The remaining unheard cases will go before the board on Monday, including the 5550 Huber Road headquarters. The company initially sought an 87 percent decrease in the appraised value of that property — from $973,700 to $121,754 — but Bathon said he anticipates Huber Homes will amend that upward during the hearing.

The company can appeal whatever the board decides, but Bathon said he does not anticipate major appeals. The school district can also appeal the decisions.

Bathon said the initial appeals were filed quickly to meet the March deadline and were amended after the company’s subsequent property appraisals found values that were about two-thirds higher than the initial filing.

“One thing we want to make sure that everybody understands is that we intend to invest multiples of what we may accomplish in savings into the properties to improve them and help the community, the schools and everybody,” Bathon said.

The company has spent nearly $1 million this year updating the properties and “expects to have invested a total of $2 million by the end of 2014,” said Melinda McMullen, Magnetar spokeswoman. She said the plan is to upgrade the properties at about “three times the pace of the prior ownership.” Bathon said some rents are below market and are being raised.

Huber Heights Councilwoman Jan Vargo said upkeep of the Huber homes has declined in the last decade and she hopes the company will make good on its promise to make improvements.

But she remains skeptical. “I don’t believe for one minute that the money they save in taxes they’re going to put back into the properties,” Vargo said.

‘One more piece’

Under the latest auditor projections, Huber Heights Schools would be slammed the hardest if the company gets everything it is asking for. The adjustment would be a one-time loss to the schools and other recipients this year, and then tax rates would be adjusted upward in future years, shifting the tax burden for Huber Homes’ tax savings to property owners countywide.

The school district this year would need to return nearly $327,000 in taxes already received — the equivalent of about 6.5 teachers.

Huber Heights Superintendent Susan Gunnell said the schools can’t afford any more hits, as the district has already cut 30 percent of its staff in the last three years as voters repeatedly rejected levies.

“We are opposing it because of the loss of revenue to the district on top of other reductions,” Gunnell said. “One more piece that we have no control over.”

Bathon pledged to contribute $25,000 a year for two years to pay for community officers in the schools, an amount Campbell, the vice mayor, called unimpressive.

“They’re going to give a whopping $25,000,” he said sarcastically. “Us podunks down here ought to just appreciate what we got and just be satisfied with it.”