Breakout 2: Housing and the municipal bond market

The panel discussion will provide an outlook for the housing sector in the year ahead as well as highlight some of the most pressing issues facing the housing market in Texas.

Transcript:

Alma (00:10):

It is my pleasure again to introduce another person that has helped me throughout actually in the past two years with my Bond Buyer conference. So thank you Adam. It is a municipal bond market and I am handing it off to Adam to kick it off.

Adam Harden (00:27):

Thank you. My name is Adam Harden, I am a partner with Cantu Harden Montoya. Hey Corey, like Alma said, this is the housing and the municipal bond market panel. I will turn it over to my esteemed panelist to my left to introduce themselves and tell you a little bit about themselves.

Tim Nelson (00:46):

My name is Tim Nelson, I am a Managing Director with Hilltop Securities and I work exclusively in affordable housing and spend about 99% of my time working on these multi-family deals that I believe we are going to be talking about today. So look forward to sharing our experiences with you.

Andrea Shields (01:08):

I am Andrea Shields. I am the managing director for the Travis County Housing Finance Corporation here in Austin. We have nine different corporations that can issue debt for a variety of reasons. Our most active is the HFC, so we also work exclusively in the multifamily space for the most part and looking forward to the conversation.

Tim Alcott (01:27):

I am Tim Alcott, I work for Opportunity Home San Antonio as a housing authority. We have done about a billion, a little over a billion dollars worth of development in the last seven or eight years. It is about 7,000 units. We have a housing finance corporation. We partnerships do a lot of 9% deals, 4% deals, facility corporation deals. The law is changing relating to all those, but we have done all and we have enjoyed it.

Adam Harden (01:52):

Sure, thank you. So diving right in, so we hear a lot of these different, I will say defined terms or buzzwords with affordable housing, low income housing, workforce housing. So would you guys mind walking us through the overview of what we really are talking about with multi-family and what fits within that context?

Tim Nelson (02:19):

Yeah, I think I will start and try to do a little bit of an overview here, although this is a little bit like covering medieval history in 45 minutes, so we will do the best we can. But I would say broadly, the types of deals that you are going to see out there are broadly split into several categories. One category would typically be referred to as low income that is typically targeted toward people who make 30% of the area median. Those are typically going to be housing authority type deals that would typically involve project based vouchers or housing vouchers of some sort to assist people in getting into that type of housing. Second broad group would be what I call sort of moderate income, typically a tax credit deal involving private activity bonds, if you have heard that term. Those are typically targeted to folks that are at the 50 to 60% of area median.

(03:25)And then you have again, what I would call workforce housing, which kind of covers the 60 to 80% AMFI. And even though I am not going to do this on everything, I did think it would be instructive. When people talk about those percentages, what does that mean in terms of dollars? So I have got a few faction figures here for you for Travis County. When we talk about the income that you need to make and they break this out by the size of the family for 60% of area median, it ranges from 46,000 to 66,000 for one to four 80% is 61 to 88 and a hundred percent is 77 to 110,000. So that is Austin. To contrast with that, if you go to Amarillo, you are talking about 60% being 32 to 46 for one to four in the family, the 80% being 43 to 61 and a hundred percent being 54 to 77.

(04:38)So you can see a wide range of who qualifies for these. And that is going to vary depending upon where you are at. And I did not get into the rents and I won't do that here, but the conversely, the rents in Austin go from about $1,200 a month to $2,800 a month, whether you are doing 60, 80 or a hundred and whether you are talking about one, two, or three bedroom. So again, broadly, that kind of tells you what you are looking at and that is part of the reason that you need these different programs in order to address those different groups. And I do not know, Andrea, if you want to add anything to that.

Andrea Shields (05:22):

Yeah, I do not know that I have a lot to add other than just to say from the local issuer perspective and coming from Travis County where we are constantly battling how affordable can we get, but also looking at the borrowing costs, the cost of the land, the carrying cost on the land while we get permits, the time it takes to get permits, the cost of those entitlements. And I am sure you all run into the same thing, it is just so front end heavy that there is not necessarily a sweet spot anymore in terms of what affordability level we are trying to hit just on the submarket and all of those extenuating circumstances. And I am sure we will get into that a little bit later.

Tim Alcott (06:03):

I will just add on with each of one of those categories. There is different financing tools that people would primarily use for each one of and so on. Deeply affordable ones, typically on 9% tax credits because the way the TDHCA or Texas Department Housing Community Affairs writes the rules, they require 10% of the units essentially to be at 30% AMI. And I say essentially because It is a scoring mechanism and you just won't win unless you do that. And then the ones that is the gray area between true World Workforce Housing and deeply affordable, as Tim was saying, either 50 60% mi, those are typically 4% deals and those are 4% tax credits with bonds and those, they allow you to do income averaging. And so you could have some at 70% AMI and you could have some conceptually at 30% AMI or lower, but that is a tool for that group. And then the higher income, which is your firefighters and your teachers and people that are making, I can say generally in Texas 60, 70, $80,000 a year, we call those PFC deals or Public Philis Public Facility corporation deals. And so depending on who you are focusing on, there is typically a different tool because 9% tax credits give you the most amount of equity. You do not that you do not have to pay back 4% gives you less. And POC deals is more traditional financing. So you are able to hit different groups, the tool.

Adam Harden (07:25):

That is right. And I will piggyback on Tim's statistical analysis here, but just in terms of how we are doing here in Texas right now. So there is a new report by the National Low Income Housing Coalition that showed that Texas is now in the top three states with the least amount of available rental housing for low income families. So last year in 2022, we were sixth worst or best, however you want to look at it, but sixth worst, we had about a 614,000 unit deficiency. Fast forward about 12 months, we are now at 904,000 units behind and for every, just generally speaking across the state, for every 100 families that are looking for units, there are about 29 or 26 depending on which study you look at, available and affordable units per 100 families. So we are really, really in need of more supply and more available and affordable units. And that is where I guess I will ask another question too!

Tim Alcott (08:29):

Actually, lemme add on to that. So just give your perspective in San Antonio, the San Antonio Housing Authority Opportunity Home, one in 17 people in San Antonio are on our wait list. We have 86,700 people and we serve about 61,000. So It is a pretty massive amount of people that are looking for affordable housing!

Adam Harden (08:50):

And they are looking to people like you guys to help build supply, create additional units, and with the influx of people to Texas, It is not only hard to just stay afloat, It is hard to do it, It is hard to not fall behind.

Tim Nelson (09:11):

So well, and that is really what we have done. I know nobody takes a look at these statistics, but It is improved a little kind of over the pandemic and in more recent time. But if you look at the last 30 years, let us just call it the real income that you have today is lower than it was in 1993. So if you feel like you are making less money again on a real basis occurring. So when you translate that into housing, and again, to throw out some other statistics, we worked with one of our clients to do a housing study in Williamson County and determined that 60% of the people living in Williamson County are housing burdened and basically means they are, ideally when you underwrite for housing, they want you to spend 30 to 35% of your income on the housing. And so those 60% are spending more than that and they are spending more than that because they are following further and further behind.

(10:19)In terms of real costs, and this is more apocryphal, but it was actually with Andrea, we had a meeting with the Austin ISD and they were wanting Travis County to set aside units in their moderate income program. So that is the 50 to 60% category for their teachers because they were losing thousands of teachers because they have to live in Johnson City or wherever and commute in and people just won't do that. Plus you want to have your teachers, your firefighters, people like that living in their community. And so we said, well, that is great. Do you have a salary scale for your folks? And amazingly they did. I actually did not think they would. And we looked over their salary scale and I handed it back to and said, that is great. None of these people qualify. So back in the eighties, the people that we were serving in these programs were the teachers, the firefighters, the policemen. Those guys do not qualify anymore because their incomes have just exceeded what's allowed under these programs. And that is what makes it challenging. But again, that is why you want to have the variety of programs because we said what you do not want to do is set aside units in your moderate income program. What you want is a workforce housing program. They will qualify for those programs. So a couple of more statistics and interesting story perhaps.

Adam Harden (12:03):

And just for the record, I do not know if Ed's out there, but we love Austin ISD, they are great clients. But yeah, that is a great point. It really speaks to the missing middle that people are, they are growing and we hope their incomes are growing and they are not eligible for those lower income units anymore, which is what we want. But now they have another problem, which is that they do not qualify for these units anymore, but they still need assistance. So that is like Tim, you mentioned that is the public facility corporation, right, that we are hopefully going to continue to have, but we will see. But just throwing it back to you guys, so now that we know really what universe is out there, what types of program or projects are you really working on? What's the focus right now?

Tim Nelson (12:54):

Well, I would say for us, and we work primarily with housing finance corporations who can do all the same things that public facilities corporations can do. And I would say we Do not do much in that sort of first category. We have done a few 9% deals. And as Tim said, you really want to keep these deals in their lane, if you will. If you are going to do deals in that 30% category, then you are going to want to have vouchers, you are going to want to have 9% tax credits because you need a lot of subsidy to come in and fill that gap and that, that is probably the other thing that I would throw out there. The real challenge, which I might be getting ahead of where we are talking about challenges, but I could throw that out there now, is that all of these types of deals need some sort of what we refer to as gap financing.

(13:55)And so the challenge in getting them done is to try to figure out how you are going to do that. So if you are doing a 30 deal, you want to target to 30% people, if you can get your hands on some 9% tax credits, that is a great way to bring a lot of money in to help subsidize that. The problem with the 9% program is, I have not looked at the statistics lately, but looked at it several years ago and there were like 420 deals that came in as part of the pre-app process in January. Out of that, about 200 is deals came in for final applications and TDHCA funded about 64 deals. So highly, highly competitive. You go to any region, any category, and the winners and losers are separated by fractions of a point. So to sort of answer the question, if you are like, well, that is a great idea, Tim, why do not we just go bring a bunch of 9% credits into deals and we will solve this problem? Well, that is part of the issue is that there is a lot of need and a limited supply of what you can do with those. But we see a lot of deals in that sort of middle category, the 4% tax credit deals. It is been reduced here more recently, but still heavily oversubscribed. Last year we had I think a couple hundred applications, and this year we were probably closer to a hundred or whatever. So it came down substantially, but we still have way more applications than we have got the cap to fill that.

Adam Harden (15:37):

Real quickly, so on the 9% deals, those are competitive, they are scored, and on the 4% tax credit deals, you must receive volume cap, which comes from the federal government allocated to the state. And It is a lottery system right now because like you mentioned, there is such an oversubscription for the volume cap. So again, It is a finite resource that everybody's competing for, and they literally do a lottery drawing with Texas lotto balls and they say application number 85, your deal's not getting done this year. Sorry guys, you are last on the list. But yeah, so the volume cap is a huge constraint right now on those 4% type deals we can get in later to a workaround or potential solution for that.

Tim Nelson (16:19):

And I think on both the 9% and the 4%, because the fourth percent when you go in there is sort of a scoring system or whatever in that if you meet various criteria, and that is typically if you are targeting more of your, for instance, if you said, okay, I am going to target a hundred percent of my units to 50%, then you are going to be more highly ranked than somebody that says, I am going to do a hundred percent of mine for 60. You have similar, although much more varied category than 9%. So you run into this game for lack of a better term, that you are doing a real estate deal, but in order to have the opportunity to do the real estate deal being asked to undermine your underwriting in terms of obviously It is much easier to underwrite a deal that has a hundred percent of the units at 60 than it is at 50. So you end up with people who we end up calling them up and saying, well, the good news is you got your allocation. The bad news is It is a hundred percent at 50, so now we have got a 9 million gap in our deal and how are we going to fill that? But unfortunately, I Do not know that there is any better way of doing it, but that is part of the conundrum.

Tim Alcott (17:36):

I am going to add on to that. So in San Antonio, It is region nine for the 9% test scoring and there is a little over 30 applications and only three will likely get this year. And to hit the highest scoring to make sure you get the award, you have to have hit the deeper affordability requirements. Well, the two that we did last year, cause we got two of the three when we typically do, they had funding gaps. And so the city of San Antonio had to do a mean a housing bond, and each one of those deals is nine percents were two-thirds of the property is paid for by tax credits, which you do not have to pay back. They still had three to 4 million gaps. So they got on average about three and a half million dollars on nine percents. And I had never seen that before, because construction costs being so high, interest rates being what they actually are, the city is funding 9% deals. I have seen it on fours but not on nine. So it was unusual for us.

Andrea Shields (18:39):

Austin has done the same thing and Travis County dealing with the revenue caps is just our hands are tied. So the HFC is trying to be creative in ways that we can step in and fill the gap on deals. But we are certainly, three or four years ago, I would say probably 95% of the deals we saw were 4% bond deals, and now It is probably 80%, 4% bond deals and 20% sort of this PFC workforce model. And we are just seeing so many 4% deals who did not get their cap trying to pivot and become a workforce deal. And there are so many public policy considerations and implications for trying to pivot from a deal that was initially approved and induced as a 4% deal, taking it to a workforce deal. So It is a really challenging and interesting time.

Tim Nelson (19:31):

I think the other thing that is what we are seeing out there that is driven by, again, these incomes not rising as much cost going up a lot more is that probably 15 years ago, I would say one out of every 10 deals had a nonprofit general partner. So basically a way of removing that property from the tax rolls. So you would benefit from not having to pay taxes today, that is nine out of 10. And so It is just much more prevalent. And frankly, even with those, you still have gaps. They are just smaller than they used to be, but I am not sure if to most localities having a $3 million gap is really any more manageable than a 9 million gap. Neither one can be filled or at least easily.

Adam Harden (20:27):

So I guess do we want to talk about the challenges or did we just hit all the challenges?

Andrea Shields (20:34):

I think we could talk about the challenges all.

Adam Harden (20:36):

Okay. Sure!

Tim Nelson (20:37):

Sure. No sir. I think just talk about mean, we have sort of talked around a little bit about the essential function and workforce type structures, and that is the reason why, again, you are seeing that a lot more. We have talked about what type of deals that we are seeing, and I think our clients are seeing it is probably, again, it used to be a majority of it certainly was 4%. And now I will bet we are seeing more workforce deals than we are seeing 4%. And so again, that is being driven by all these elements that we are talking about. But again, the thing to really bear in mind with the workforce type deal is again, if you are doing the 30% stuff, you have got the 9% tax credit. If you are doing the moderate, you get both the tax exempt bonds and a 4% tax credit. So you have got a lot of third party money coming in when you do a workforce deal, and I guess I should say there is really two different flavors, if you will, of the workforce deal.

(21:43)One of them is that the issuer can come out and sell governmental bonds that will basically fund all of the acquisition and rehab costs and related costs of a particular project. If they are going to do that, they then have to meet statutory requirements, which basically mean that they need to target 50% of the units at 80% AMFI, which is why I gave you those numbers earlier. So It is higher than what you see on a 4% deal, for instance, but you do not get any of the hesitate to call it free equity. But that is basically what it is. So when you put together these workforce deals, again, what you are getting out of it is half the units are targeted to 80, but you need those other half of the units. And again, I hate to say the word that my clients are providing market rate housing, but even though It is limited to a affordability level that the issuer determines It is basically market rate.

(22:50)And the reason you need that market rate is that subsidizes those other 80% units because you do not have 10 million worth of equity coming in to help buy that down. And that is just really important for people on the sort of issuer side or the city and county side to understand that a lot of times we will have people say, well, why can not we on the workforce include 30% units or 60% units? It is not that we do not want to, it is just that is a very expensive to include that. And that frankly, again, you ought to be coming into the market with a portfolio of deals so that if you have got need for that 30%, well do it with a 9% deal if you can because that is good. That is the most efficient way of meeting that requirement.

Andrea Shields (23:44):

That is what I was going to say. I mean you on the 4% or the 9% side, you have got a built in kind of infrastructure with investors and lenders who kind of come as a pre-packaged deal, understand that on the PFC or the workforce side, I mean It is essentially conventional financing. you are doing a market rate deal. And so the return on vestment is very different for an investor on that side than what we are used to on the tax credit side. And then to on the flip side of Tim's comment about not being able to get those lower AMI levels on a workforce deal, this is where the sensitivities come into play from a public policy standpoint is that by and large, across the region, market rents are at 80, 90% AMI already. So if we are saying we are going to do a 50 at 80 deal and take it off the tax rolls, is that affordable enough to warrant that tax exemption? And these are just, we have round and round and round conversations about that. I am sure you all do as well.

Tim Alcott (24:41):

Yeah. And so on a POC deal, there is also outside the financing, cause I have talked to my board about it, is that you would not necessarily want to have a 30% AMI unit, and that is zero to 30% AMI because of the POC is on the outskirts of Austin or San Antonio or Dallas. They often times do not have a car or transportation. And so not just looking at the financing, It is like what's appropriate for that type of development? Where is the location? And if It is downtown, It is one thing, but oftentimes, we have seen a lot on the outskirts of town, and so we just do not do it that way. And so we put in different buckets, but when we look at a PFC deal, we have 500 million worth of deferred maintenance. Those are the ones that really generate funds, 9% and 4% deals do not really generate much money. They are more mission oriented. So if I am doing a PFC deal, I am looking at it, Hey, I might not make money at this location for my purpose, which is lower income folks, but I can then make money on that POC deal to put those funds directly into deeply affordable units somewhere else. So we put in buckets that way, both from the tenants perspective, but also from our perspective on what our goals are.

Adam Harden (25:56):

That is a great point. And It is sort of best on with the policy, but in practice, if you are a 30% family that is two miles from the nearest bus, bus stop, It is not really that helpful for you. So it could be good intentions, but in real life it causes more challenges than it solves.

Tim Nelson (26:15):

But you do have to take a look at, and Andrea certainly knows this because we do a lot of analytics on these deals for our clients and try to work with developers mean, again, probably the easiest example to understand is that the developer brings you a project, and as Andre said, let's say in this particular submarket, the naturally occurring market rents are 80%. So that developer says, Hey, if I got a deal for you, I am going to take this off the rolls and I am going to guarantee you that half of these units are going to be at 80%. Well, a hundred percent of already are. So we would in that instance, either look to them and say, okay, rather than doing 50 at 80, maybe we do 50 at 70. And so what we try to take a look at is we want to have at least a 10% savings to market.

(27:08)And part of the reason for that is that we really sit down and take a look at this, and It is really a dual underwriting that we are doing on these deals. We are doing a real estate underwriting, like I talked about earlier. We are doing a real estate deal, but we are also doing, for lack of a better term, policy analysis because in order for, I mean our clients cannot, Andrea can not go out and buy some real estate just because she thought it would be a good deal, that It is a good investment, can not do that. There has to be a public policy reason for them, a mission driven reason for them to do that. And what is that you are providing lower rents? You are taking, I think the statute talks about substandard housing, but I do not know if I want to go that far. I would just say you want to improve the housing stock, even if you are say not reducing rents, you are improving the housing stock or you are also providing some type of social service, probably not the same amount you are going to get on a 4% deal, but some type of deal. So that is what we look for in these and that is what you all ought to be looking for as well. And so again, that is what makes it really important. As we talked about before, we do not have this equity coming in, so we have got to look at these other. It really got to be the classic real estate deal at the right time and the right location so that it can meet all those various criteria.

Adam Harden (28:40):

And how do you differentiate from a public policy perspective between new construction and acquisition of existing? Great question. Right? that is

Andrea Shields (28:48):

A great question. Yeah. I mean It is why we have not done any AC rehab deals, not favorably challenging and that I had a question to maybe the two Tim's here. Are you all seeing pilot payments on AK rehab deals? That hasn't necessarily been typical in the past, but is that one way around that potential hurdle?

Tim Nelson (29:12):

You can have them. And that was the other thing I was going to go into. When you look at these deals, you end, obviously you have this tax abatement, so let's say that is a million dollars just to make the math easy for me. So you can now take that and there is several things you can do with it. You could take a portion of that and make that a rent subsidy. you are lowering the rents, you take another piece of it, and we want to make that available to our client so that they can then go out and do more wonderful things potentially in the 30% and 4% category. And then you have got to have money that you can use for rehab and the like. So you could move those things around. The challenge with pilots is that these deals, because of what we have talked about before, are very tight.

(30:06)So we actually had a conversation with one of our clients who they were going to make $300,000 a year, or no, I think it was $200,000 a year. And the city came in and said, we would love to do these deals, but we would like a $300,000 pilot. And so I said, well, obviously the HFC is not going to come out of pocket for a hundred thousand dollars for the privilege of doing this, so the they can be included. But It is a difficult discussion because the deals are very tight in particular on, again, the essential function deal that I was talking about. you are selling, you are financing this with a hundred percent debt and in today's market that debt is at six and a half, seven and a half percent rates. So the deal ends up being very, very tight. So it makes it more difficult. And I guess that is the other thing, since we have sort of meandered into challenges that I would say unless you have been under a rock recently, you obviously know that we have had a several hundred basis point run up in rates thanks to the Fed.

(31:17)And I am not saying that it was not required. They were maybe a little bit late to the game, but in any case, It is a lot easier to finance affordable housing when long-term interest rates are 3% versus where they are now. And like I said, on a rated basis, we are probably looking in the fives, but most of our stuff is done and we are north of that. And like I said, certainly on the essential function deals, because those are a little bit riskier, but also what you are seeing in the market is that spreads are widening. So in addition to rates coming up a couple hundred basis points, because people have now started looking at these deals and recognizing there is risk involved with asking for a wider spread, for instance, on a, It is a different market, but single family mortgage rates last year at this time were 4%, they are now six 50. If you were to look at the 10 year treasury a year ago, it was 2 83. Today It is three 40. So you might be asking yourself, well, 10 year treasury went up like 60 basis points. Why did mortgage rates go up 250? It is because the market's looking at that and saying, I am going to start charging a higher risk premium. So we are being slammed with both of those things occurring at the same time.

Adam Harden (32:39):

So when you say risk, you are referring to the investment risk, but there is also a shift in the risk profile between what I would consider to be a traditional PFC with a public-private partnership where you are offshoring all the liability onto the for-profit developer versus an essential function bond. The reason that you can do an essential function bond without volume cap is because there is no private partner. So you are as the governmental body, assuming the risk for the repayment, and I know It is underwriting it based on the tenant income, so somebody else is paying it, It is not derived from ad valor taxes, but there is still a shift in risk from the P three structure to the governmental purpose bond. Sure. So how do you analyze that? And I know I have had conversations with people where they just say, we do not have an appetite for that. We want a developer in here because we want that protection.

Andrea Shields (33:31):

Well, if you are dealing with a board comprised of elected officials, risk reverse does not even begin to cover it. Yeah, I mean that is why we have not done one, right? I mean, It is not an appetite for taking on that kind of headline risk. I do not know, Tim, have you all done some?

Tim Nelson (33:50):

We have and it is just very tough deals to get done. I have not updated the statistics, but the last time I did look at it, when you looked at 501 deals used in conjunction with housing, that is essentially what we are talking about here, highly levered debt, the default rate was astronomical, it was approaching 50%. So It is just the high leverage in real estate. Don't mix. Bad things can happen and they usually do. So if you enter into that, is just something that you have got to be very careful of. When you do 4% deals, you have a partnership with a developer involved. They are the obligated person, which has a lot of implications on disclosure and risk, et cetera, on these governmental essential function bond deals. The HFC or the issuer entity, they are the obligated parties. So you get pulled into a lot of disclosure issues.

(34:56)Are you doing a true private placement with a traveling big boy letter, which is typically how we do our 4% deals if they are non-rated. But on these essential function deals, those have tended more to be a limited offering, which is in the offering world, that is the safer option, but still not as safe as a private placement with a traveling letter because you do have an offering document. So there is disclosure that is going on there. And again, you are the party that is responsible for the disclosure. So we have 40 clients in Texas that focus on broadly housing type programs. Three of them have done essential function bond deals, but It is sort of the same thing, even when you talk about workforce housing or even these public-private partnership deals where you are having your client enter the partnership as a general partner. Out of those 40 clients we have, It is probably what 15 of do those non-profit general partnerships. So there is a big difference, which I know you could appreciate being on the issuer side between, look, I am just providing financing.

Adam Harden (36:11):

And a tax exemption!

Tim Nelson (36:13):

Tax and then getting involved. And even though again, on the general partnership side, it is not like you are running around out on the project with a hard hat, but I mean it is more than just being the issuer. And so that is really probably broadly, is that a bridge too far and can you get there? I think that is the issue.

Adam Harden (36:39):

I have heard conceptually speaking that one for or one governmental body will issue the essential function bonds, they will do the 50% 80 with the idea that once this debt is repaid, then we are not servicing the debt anymore. Then we can drive down affordability once the bonds are paid off. But there is not a lot of appetite for that because everybody says, well, that is 40 years from now, who cares? So It is an interesting balancing act with the political ramifications. Yeah.

Tim Nelson (37:12):

Well yeah, that whole political side of the discussion is  got a lot of implications. I mean, when we have a client center in, as the general partner, again, you are providing, in my example, a million dollar abatement for the next 99 years. Well, most of us know that these partnerships are really only going to be in place for probably 15, 20 years. But that is also the issue again with the essential function is that those bonds are outstanding for 40 years. I mean, most real estate that is kind of getting into its useful life, mean, you know, drive around, you do not see too much World War II vintage housing still around, It is been knocked down and somebody built a McMansion on top of it or certainly a newer apartment complex. So that is the issue when you say, yeah, by the time when this thing's done, you are the proud owner of this frankly, fully depreciated asset. Maybe he owns some land. Yeah.

Adam Harden (38:15):

Here is the put keys, good luck.

Tim Nelson (38:20):

And that is also the challenge on those deals. And that again, the bonds are out there for 40 years. What do you do in year 15? Well, you are probably going to have to do some kind of major restructuring. That is the issue. Again, look at housing bonds. Not only do you not see World War II housing around, you do not see too many multi-family bonds from the 1990s because you got to come in and people want whatever is the new version of granite countertops and just whatever. And within the structure you can not provide that. So you are going to have to sell it, put it into a new partnership. They bring in new money, either tax exempt or taxable. And if you have heard the term 15 year restructurings or whatever, that is what they are doing. They get to the end of that initial tax credit compliance period and they come in and do it again so they can get that equity come in and help to do the rehab on it.

Adam Harden (39:17):

Well, someone who's still barely in my thirties, I love the notion of work 15 years away from me that I know I can count on.

Tim Alcott (39:25):

Oh yeah.

Adam Harden (39:28):

So let's do some more bonds. So when we touched on a little bit here, the politics angle of it all. So we have the 2023 88th legislature in session crystal ball predictions. What are you seeing? What are you hearing? What are you predicting happens in terms of reform or elimination?

Tim Alcott (39:52):

Well, I can go into that. So with PFC deals, there is been a lot of negative publicity in certain parts of the state because certain parts of have done a lot more deals than others. And San Antonio, we have only done four PFC deals, only three with partners when we self-developed and we did the whole thing in house. But I think there is going to be changes with ensuring there is local control. So there would probably be some jurisdictional changes where PFCs may not be able to do anywhere in the state, but just whether they are accountable to local politicians, there is going to be more transparency and accountability. We are going to see more compliance reviews requiring registration with the state, things of that nature.

(40:47)I think that they are going to require outside auditors of the files, which we have not seen before. We are also going to see some AMI changes as though, as Tim was mentioning, I think Adam you mentioned as well, the typical PFC deals, 50% of the units that 80% AMI and there is been another 50% is market. If my crystal ball is that we will probably end up somewhere where about 10% of the units will be at 60% AMI probably about 40% of the units at 80% MI and about 50% market. But the real kicker is that you are also probably going to see rent caps whereby even though that is the AMI, it may not be more than 30 or so percent of the income. So that will be part of it. You also see housing size adjustments or family size adjustments. And if you are not into this, that is kind of a complicated deal.

(41:43)But what that means, but essentially that means that based upon the bedroom size, the AMI's determined on the likely number of people actually live in that unit. And so that probably will be there. Lots of other parts of it are in there as well, but there is been several different bills. One of the reasons It is changing is a Senator Betton court, he was a former tax assessor for Harris County where Houston is, and he saw a lot of properties coming off the tax rules and knew something about it. And so he was personally involved, seen as a tax assessor and oh my goodness, all these are coming off. And sometimes a lot of those properties also were existing apartment complexes, which is very different if you are taking dirt or undeveloped land off the tax rules and an existing deal where it may have naturally occurring affordability and you take that off is one thing, but to take off dirt is a different thing. So I think there is many ways it can be improved, but the legislation. But I think that is what I am hearing. How was you, Adam? You were at the hearings yesterday. I was actually out of town, so!

Adam Harden (42:56):

Hopefully nobody watched me. So I did testify. One of the items that Senator Eckhart was really honing in on was the oversight and control, the compliance aspect. And one of my recommendations, so in the, there is two bills really I think that have some support. One is generally a compromise bill that keeps the program around, but puts guardrails on it. The other one is what we call the death bill, which basically says, no more PFC's after the end of this year. Or you can do a PFC, but you do not get the tax exemption on the leasehold, which undermines the whole thing.

(43:28)In the Compromise Bill, it says you have to give notice to either the mayor, the county judge, and the school district. And what I suggested was also the appraisal districts because I think you should involve them as early as possible and also deliver to them those audit reports so that they know just like a homestead exemption or an ag exemption, that you are actually in compliance with the exemption that you are granted. And so there is a lot of ways that this could come out, but I think, like you said, right now we kind of have the wild West where there is really, all you are doing is qualifying a tenant based on how much money they make. You could still charge $5,000 a month for the unit and it would still qualify as an affordable unit. Somehow narrowing and reigning that in I think is important. I think that is where the focus is. And I think they are going to be, well, hopefully successful in doing that.

Tim Alcott (44:20):

Absolutely.

Adam Harden (44:23):

And hopefully I still get to do some deals. All right. Well It is three. I think that is our time. But thank you guys so much for your input. I really appreciate it. Great job. Thanks.