Transcription:
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Keeley Webster (00:04):
Hello, I am Keeley Webster. Welcome to another Bond Buyer podcast. The Governors of Oregon, California, Washington, and Hawaii, as well as some West Coast mayors have declared a state of emergency around homelessness and California. All levels of government have come at the issue so fast and furious with funding accountability programs and changes to zoning laws that it's hard to track. And many of these efforts have been funded by municipal bonds. Today we have with us Justin Cooper, a partner at Orrick. Justin is a member of the firm's board co-leads, its public finance department and its finance sector, and is chair of the firm's housing finance group. I'll be speaking with Justin today about how tax exempt bonds have helped to fund the programs western cities and states have created to help resolve their housing crises. So Justin, how much business of these efforts resulted in for oric by far the largest bond council firm in the west?
Justin Cooper (01:01):
Well, we've definitely had a busy few years, I would say between the great recession 2008 and 2016 or so, it was the affordable housing business was pretty steady, a steady incline or increase in the amount of work. And then it really shot upwards between 2016 and 2019. And we had a ton of work in 2019, 2021 and the first part of 2022, and it's cooled off a bit since then.
Keeley Webster (01:40):
So why do you think it's cooled off?
Justin Cooper (01:43):
Oh, it's cooled off because, well, I divide the market into, I guess what you'd call traditional affordable housing or capital A affordable housing, which is to say housing rent restricted multifamily housing that is targeted at households earning mostly at or below 60% of the area median income. And that's financed with primarily with low-income housing tax credits, and then to some extent, or to a great extent also with private activity bonds that receive an allocation of volume cap. That part has been pretty steady, just a steady growth in demand as the housing crisis has accelerated so that nothing has changed there other than we keep having more of it. Between 2020 and the second quarter of 2022, we also had a lot of a totally different, from a financial point of view, a different type of transaction that we did a lot of, which was publicly offered unrated bonds to finance middle income housing. And that's the part that's died off because the market has moved. There's been a selloff in the bond market, and interest rates have changed by, I don't know, 200 or more basis points to the negative from the point of view of borrowers.
Keeley Webster (03:00):
So how is that housing stock getting funded now if it's not through bond issuance,
Justin Cooper (03:06):
That middle income part of the market is still, that's still developing. So to be clear about what I mean there for a long, long time you had multifamily, you had affordable housing rental programs targeted at that 60% or maybe 80% of area median and below with tax credits and tax and bonds. And then the other major area of subsidy in the affordable housing world was first time home buyer programs. And those are targeted for kind of 80 or a hundred percent of area median and above. As housing costs have risen dramatically in the west, this kind of missing middle has been created where you have, and it's not just in the west where you have people who make too much money, households and individuals who make too much money to qualify for low income housing rental support, but they don't make enough money to buy a new house using these first time home buyer programs, nor do they often make enough money to really get nice family appropriate rental housing near their places of employment. So this middle income piece is what we really saw funded a lot with unrated bonds between 2020 and 2022, that's fallen away. And now I would say the market is working to adapt to try to find a new way to fund those projects.
Keeley Webster (04:26):
Do you know how much bond issuance the state of California and its major metros have done just to tackle homelessness roughly? Millions, billions?
Justin Cooper (04:36):
Oh, I think it's got to be in the, maybe not the billions plural. It sort of depends on what you mean by bond issuance. There are conduit bond issuances where, for example, the city of San Jose issues bonds with an allocation of volume cap and loans the proceeds to a developer, and it's just a pure project financing that's a big part of the affordable housing market. There are also voter approved general obligation bonds that are approved by counties like I believe Santa Clara County did one, Alameda County, San Francisco. Those from a project finance point of view actually come in almost like equity. So usually the Santa Clara County would issue $400 million or something of voter approved bonds, and then they use that money to make subordinate loans into projects. So I would say five or six counties I think have done big voter approved go bonds to subsidize affordable housing. And at the same time you have a couple billion dollars a year, probably a little over $2 billion a year, maybe more of conduit revenue bonds that are issued for affordable housing all around the state.
Keeley Webster (05:56):
Okay. I know the city of Los Angeles, I can't remember if it was five or six years ago, did a $1.2 billion bond measure that passed and then at the same time, or within three months, the county did a bond measure or went out for a bond measure for $300 million. So I mean, that alone puts us into the billions in addition to what the state has done. So when you're talking
Justin Cooper (06:21):
About that's the subsidy kind of thing. So I think one of those with HHH, that's the subsidy financing, that's also the state also does, and you're right now that you mentioned it, they've done billions of state voter approved geo bonds. The money goes to HCD, the Department of Housing Community Development, and then is loaned into projects as a subsidy. So just pure subsidy, it's got to be in the billions. You're right.
Keeley Webster (06:45):
So has this push created another category of bond issuance or resulted in the hiring of additional attorneys who specializes help create both temporary and permanent housing for the homeless as well as affordable housing?
Justin Cooper (06:59):
Yes. I think we have a whole new focus. It probably was always there, but certainly intensified and much more professionalized around chronically homeless, permanent supportive housing, not just the housing development part, but services. So there's a lot more focus now, I think, at least in what I see than there was 10, 15 years ago on people who earn 30% of area median income or less are chronically homeless, require a lot of services. So I would say at the lowest end of the income spectrum, there's a lot more focus there and there's also more focus, as I mentioned, on that kind of missing middle people who earn between 80 and maybe even up to 150% of area media income in high cost areas. So we've broadened the horizon from just sort of working low income people to include working middle income people and also lower extremely low income people who are unemployed or unable to work.
Keeley Webster (08:03):
So can you put a number on how many additional attorneys at Orrick are working in this sector compared to maybe 10 years ago?
Justin Cooper (08:10):
Oh, yeah. I remember after the ARRA [American Recovery and Reinvestment Act] and the HERA [Housing and Economic Recovery Act] after the Great Recession, I remember being on a conference call on a transaction and we had three or four people on the team and I made a mistake. I didn't remember something that had happened or I misstated something and I was like, oh, I'm losing it. I don't know enough. We don't have enough people here. I'm trying to do too many things. And we had like four people then and now we've got at least a dozen.
Keeley Webster (08:39):
Wow.
So it's not just California governors in Oregon, Washington and Hawaii that have also ramped up efforts. Washington governor Jay Insley included a 4 billion bond for homelessness in his proposed 20 23 25 biennium budget. And Oregon's governor Tina Kote pushed for a hundred million in funding for housing in her two year budget. So how much of that debt has ORIC been involved with, or is it too premature to talk about that? Are you guys going after that?
Justin Cooper (09:06):
Well, on the issuance side, I don't believe we were involved in the Washington issuance. I think we were for Oregon, and we also, we represent the state on all of its general obligation bonds. So you kind of have the borrowing side by the state and then the program side. So on the bond issuance side, we often are the bond council to the state, whether it's California or Oregon, but we wouldn't really notice the difference between or the people who work on California's general obligation bonds. The difference to them between bonds that are going to go for housing or parks or corrections or CSU or the UCs, it doesn't really make much difference. But then once the money is in the state treasury, then it goes over to the program side and gets put into individual affordable housing projects, which are often also financed with tax and bonds, and that's where that money affects the activities of our affordable housing group.
Keeley Webster (10:10):
Okay. So part of the problem, again, when I talk about just how vast this is, is in addition to the bond measures that, like you said, which are subsidies that are issued through conduits, and the state has had its own, it was tapping the millionaires tax to issue debt. So that was specific, but then the state also does these various purpose general bond issues that Orrick is involved in too, some of which that money can go towards housing. I mean, is that what you're talking about?
Justin Cooper (10:43):
Yeah, I can see now that you play it back to me, it's a little complicated. Let me see if this makes it a bit clearer. We'll start with where I start from in my world, which is if you're a developer or a local agency and you want to have a project built, an affordable housing project built, and let's say it's going to be a hundred units and it's going to cost $60 million to build, that's just made that up, you would go and you would probably try to get some low-income housing tax credits, which might pay for $20 million. And you would then also try to get a loan, a loan to be funded with conduit bonds. And let's say that pays for $30 million. So now you're 10 million short, you don't have enough money to build your project. So then you might go to the state or the county or the city and say, can you make me a $10 million subordinate loan? It's called a gap loan. It plugs the gap in the sources and that loan. There's a decent chance that that loan itself was also funded from the proceeds of general obligation bonds issued by the county or the state. So from a project point of view, the developers are trying to put together these different sources and multiple sources may come from different types of bonds. I don't know if that confused things or made it clearer.
Keeley Webster (12:06):
I think it made it clearer. Good. Okay. So now we will pause for a commercial break. Okay, we are back. So Justin, this is going back a bit, but I remember having a conversation with you, bond buyer, managing Editor Rich Saskal and Orrick's Roger Davis at one of the bond buyers California conferences several years ago about whether the push to resolve the state's housing crisis would result in bonds being issued. There was some back and forth given that affordable housing had traditionally been funded through private activity tax credits and some religious nonprofits like the Catholic Church's Mercy Housing. So my question for you, because I don't remember when we were having that discussion, but I remember that it seemed like it was like a majority opinion that this wasn't going to become a big sector for bonds. Do you remember that and whether you were on the site of yes, there will be a muni bond solution to this or no, it will be funded in other ways?
Justin Cooper (13:04):
Well, first of all, it's always lovely to run into you and Rich at the California Bond Buyer Conference and all listeners should sign up for and attend the California Bond Buyer Conference, one of our favorite events of the year. I do remember running into you and Rich and Roger and talking about that. I don't remember which side I was on, but just knowing my nature, I was probably on the side of saying, no, this isn't going to turn into much. And I think I was wrong about that because I never would've guessed four or five years ago that housing would just capture the zeitgeist or be part of the zeitgeist the way it is now. I spent most of my career going to conferences like the bond buyer, and I would say people say, what do you do? I'd say affordable housing. And they'd be like, oh, that's nice. And they'd just move on to the coffee bar and somebody more interesting. And now all of a sudden everybody wants to talk about housing.
Keeley Webster (13:56):
So now you're the most popular guy in the room.
Justin Cooper (13:58):
Yeah, I'm the bell of the ball. Nothing's changed. I'm just a little older.
Keeley Webster (14:02):
So how has the sector of munis transformed as the western states and Hawaii have looked to bonds to help lessen their housing crises and reduce the homeless population?
Justin Cooper (14:12):
We have a lot more state level funding for the kind of subsidy programs we've been talking about. That's one thing. We just have a lot more general awareness among policymakers and interest in affordable housing as a topic and specifically affordable housing finance, not just affordable housing. The whole thing's just leveled up and we have more focus on this missing middle workforce housing population, and most importantly, we have, or most significantly, and different people have different views on whether this is a good thing or a bad thing. The high yield unrated bond market has been opened up to taking real estate risk on rent restricted multifamily housing projects. For most of my career, you couldn't just go to the bond market and sell bonds backed by a mortgage and net operating income or net revenues or a pledge of net or gross revenues from gross revenues. It would be from an individual project. There just weren't buyers for that, and that has changed since 2020.
Keeley Webster (15:29):
So before it was kind of securitized and under a conduit where they would issue debt to back maybe like 15 or 20 projects. And now you're saying it's like individual projects and can get debt. Am I understanding that
Justin Cooper (15:45):
Sort of before 2008, there was a fair amount of pooled financing, like you just described, all of it in California through the California Housing Finance Agency. They stopped doing those pooled transactions around 2008. Between 2008 and 2020, there were really only private direct placements. What we now call in the rest of the muni market direct purchases or dpss, would we just call them private placements and affordable housing, but basically where a commercial bank would act as the lender and they would just buy all the bonds, so Citibank, BFA, chase, whoever, or a similar kind of thing where ultimately the debt would end up with Fannie Mae or Freddie Mac more often, Freddie Mac. And the only other type of deal was, which was rare, but still happened, was a deal where you had a bank letter of credit or some other form of credit enhancement that that credit enhancer took the project risk, the single asset project risk, and the bond market only took the risk of the credit enhancer. There were no deals realistic. There really were no deals where various bond investors, Vanguard, PIMCO, Oppenheimer, whoever were taking project risk.
Keeley Webster (17:10):
So is what you're saying is the biggest change is more unrated bonds in high yield, and that didn't used to be the case, they had to be investment grade if they were going to the market with them. Is that what you're saying?
Justin Cooper (17:24):
Yes.
Keeley Webster (17:25):
Okay.
Justin Cooper (17:26):
I would say it's the biggest change sitting in my seat. There are certainly people in the affordable housing industry who would not say that's the biggest change, but it has definitely been a meaningful change.
Keeley Webster (17:35):
So what are you seeing happening with that right now with the rise in interest rates? There's been a lot of talk this year about there being a flight to quality. Are those deals still moving forward this year, or has that kind of slowed down?
Justin Cooper (17:54):
It has definitely slowed down. Some of them are still getting done, but it's much harder than it was two years ago when not only were interest rates and credit spreads relatively low, but I remember at some point reading in the bond buyer that we'd had 38 straight weeks of inflows into muni funds. Well, that was a time when it was a lot easier to get those deals done than it's now.
Keeley Webster (18:22):
So how long do you think using long-term debt as a solution to the housing crisis will continue?
Justin Cooper (18:27):
I think there's almost unlimited demand for quality, rent restricted, affordable housing of various types. There's just so much demand in the west, and so I think we'll just continue to use every tool available. I think the financing, everybody knows where they want to end up. They want to end up with nice decent housing that is affordable to people in the communities we all live in, including low and middle income people. And so I think those of us on the finance side are just constantly tinkering and finding new ways to cobble together enough subsidy and support to make that happen.
Keeley Webster (19:09):
Do you think that, I mean, because the state has been, particularly in California, has been going full bore at this for several years with floating different bonds, that sort of thing. Do you feel like, are you seeing any sort of traction or progress in lessening this away from that major crisis point?
Justin Cooper (19:36):
Well, yes, in the sense that any individual project and I occasionally go to grand openings and groundbreakings and tour projects and so forth, any individual project is a major step forward for the households and individuals who move in there and live there. I mean, especially if it's nice, which I hope most of them are, as to whether all of these efforts are making a meaningful difference at a societal level. I think it's just, first of all, it's not a controlled experiment. And secondly, there are other things going on societally that I think kind of swamp the data.
Keeley Webster (20:18):
Okay. So do you think we will see more housing related bond measures around this issue during the 2025 presidential election?
Justin Cooper (20:26):
I don't see any sign of interest in this topic waning, so I wouldn't be surprised.
Keeley Webster (20:33):
Okay. Part of the reason I'm asking that is I know that a lot of the bond measures that were passed four or five years ago have been depleted. So they're at the point where if they're going to continue to finance this way, they need to go to voters again. So yes,
Justin Cooper (20:47):
I think it's clear that there will be another housing bond. I'll be interested to see if anything sort of changes on that, because I think people are realizing that something that was a little more permanent years ago, there was this quest for the permanent source, but it would be when you pass a bond and you deplete it, you pass the bond and you deplete it, you pass a bond, you deplete it. You just get on this kind of cycle, and you're not really accumulating wealth in a fund, and I don't know, but I'm curious to see if something will change at a policy level on that front.
Keeley Webster (21:25):
You think there might be a move to doing more of a revolving fund or something like that? Yeah,
Justin Cooper (21:29):
Revolving fund or a captive credit enhancer or something that could sort of build up its own equity and strength over time.
(21:39)
The other thing I'll mention that's interesting and we haven't seen the full effects of yet, is that you mentioned the presidential election is the IRAI can never, oh, inflation reduction act, it included changes to the tia, the eligibility of use of for use of funds of tia. I don't know if people know what TIA is. I don't know what it stands for, but the T is for transportation. It's probably the I and F for infrastructure anyway. TIA loans, which are cheap, favorable money from the federal government for transportation, can now be used for vertical construction, actual sticks and bricks on affordable housing built within half a mile of transit. So that could really change.
Keeley Webster (22:29):
Yeah. Do you know how much money was dedicated to that? Because there's so much, I mean, and that's in the IRA, not in the IJA.
Justin Cooper (22:39):
I think it's in the IRA, but if not somebody listening to this, we'll Google it and correct it quickly. I don't know how much it was. I know they don't have any of it out the door yet.
Keeley Webster (22:52):
Okay. Okay. So I think that's all we have time for too. For today though, there's much more we could discuss about the housing crisis that seems to be hitting the Western states and Hawaii particularly hard. Thanks to you, Justin Cooper, co-lead of Public Finance for speaking with us. It was a great conversation about a very broad topic. Thanks to our audience for listening to another Bond Buyer podcast. This podcast was produced by Wen-Wyst Jeanmary. I am Keeley Webster. Please rate us, review us, and subscribe to our content at www.bondbuyer.com/subscribe.