Breakout 2: What's the Landscape for Housing Sector

Transcription:

Ben O'Malley (00:07):

Good afternoon everyone, and welcome to the first post-lunch breakout discussion here that we put together. My name is Ben O'Malley with Build America Mutual and our panel today is here to discuss the landscape for housing in the state of Texas. Housing is certainly a crucial topic nationwide and certainly a centerpiece of our industry. I think the discussion here in Texas is unique because the state has added more residents in the last several years than any other, and managing that growth has far reaching implications for really every sector of the municipal market. We have a great panel here today that has really helped us understand all those factors from the latest challenges they face in maintaining affordable housing and what is certainly a shrinking affordability market to structuring and selling housing transactions to the breakneck pace of new home building. I'll briefly introduce the panelists before we get into the questions from the public sector immediately.

(01:05):

To my right, Rene Martinez, Executive Director of the Harris County Housing Finance Corporation, and then third on the table, Jim Shaw, Executive Director of the Capital Area Housing Finance Corporation. And then from the market, Andrew Prihoda, Partner at Bracewell here in Austin. And then finally Alex Zaman, head of Transportation and Urban Development at Morgan Stanley. So I'm going to get right into it. Fellas, thank you again for being here. I'm excited for the discussion. Jim, let's start with you. Given your experience working as a developer and now in the public sector, can you explain generally what role local governments have to play to improve affordable housing? Not only regarding agencies like yours but also overlapping school districts, cities and other entities that have benefited from the rapid growth that the state has been experiencing.

Jim Shaw (01:57):

So I guess this is where I introduced myself as a recovering developer. You look at the city, we serve in nine county areas, so we're dealing with numerous cities, numerous counties, and when I look back over the last, gosh, 35 years of doing this in one form or fashion, really regulatory burden probably is the biggest that in timelines, and I'll get into that more in a moment, some cities like Austin, SUGO bonds and use that to try to help buy down the expenses. But we were talking about this earlier before the session started about capital stacks and there are really only two capital stacks that I know of. One's a dedicated capital stack in the tax credit world, which is taxes up bonds and tax credits, and the other is conventional market rate financing. So how does the city impact that? And I think that really financially just kind of around the edges, cities do have CDBG funds and you use home funds you can go after.

(02:59):

I will tell you that we don't do any of that. We're kind of a semi-public entity in that we are an instrumentality of government, but I don't work for a county for example, like Rene does. We're a standalone organization and I tell people while we are an instrumentality of government, we are a real estate finance and development company and that's what we do. That's how we generate the fees we generated and then turn around and reinvest that. So when I talk to local communities, one of the perfect example is in Texas we need to a tax exempt bond transaction, you have 180 days to close the deal. Historically, getting the financing in place was a challenge in 180 days. Since covid, the challenge now is to get the real estate side done in 180 days. The attorney general won't let us do escrow closings, so we have to have a permit readily letter from the city that says, but for the payment of fees, we're prepared to issue permits.

(04:00):

Since Covid, we've had a horrendous time getting plan review done and getting through the review and approval process to where they are ready to issue a permit within that 180 days, we have had cases where the ag has accepted kind of a qualified permit ready letter that says we are going to issue the permits, but the following three things have to occur and that's going to take another 120 days. So now I just have to build another 120 days of construction period interest into my deal. So unless there is a very significant source of capital from a local community, it's hard to have enough of an impact because our typical deal now is about a $50 million bond issue, total deal size of a hundred to $120 million. So when you're doing deals that big, somebody bringing $2 million to the table doesn't really move the bar very much. And that's a problem we've had with home funds not being able to get enough home funds on any one deal to make it make sense. So that continues to be the challenge I think.

Ben O'Malley (05:10):

Thank you, Jim. Rene, shifting gears to you, Harris County largest in the state from your perspective at the Harris County Housing Finance Corporation, what's the scope of the current housing need and what kinds of tools are you using to address the need for housing specifically on the multifamily side?

Rene Martinez (05:30):

Thank you, Ben. So Harris County Housing Finance Corporation, a little bit of background on the entity, it's a public nonprofit that was created in 1980, so we're celebrating our 44th year. And with that we are really maximizing the powers enabled to us under chapter 3 94 and then also with a board membership that's comprised of appointees from each of the county commissioners and the county judge's office to really think strategically. So that said, in 2021, we finalized a 10 year housing strategy that was from the Rice University Kinder Institute. And in that we determined that we had a need for 200,000 units of single and multifamily housing up to 120% of median. Over the next 10 years. We have 500,000 cost burden households. We have a county that's 4.7 million. Our unincorporated area by itself that is largely regulated through either municipal utility districts and in some cases maybe water supply companies is very large.

(06:44):

There's at least two and a half million people there. So when we talk about the need, it is a very, very large need. And on top of that, we have an 1800 square mile county. So we determined that we had these various challenges. So how do we get there? We've got large gaps with respect to projects that come to us, even with 4% tax credits, bonds, 9% tax credit projects. So we were really blessed to have been awarded almost a billion dollars in US Treasury ARPA funds. Of that 250 million or so, we structured in a housing portfolio and homelessness portfolio. So what we've been doing is taking roughly a hundred million dollars in treasury ARPA and directing that into projects to fill some of these gaps to create what will be roughly several thousand units. And with that, we're really putting in place permanent affordability that I really call up to 99 years.

(07:46):

So we're buying underlying land, we're placing it in single asset entities of the finance corporation. We're entering into partnerships in the general partnership structure, so we're putting in maybe 10 million into a deal. Some folks have approached us saying that they need 20 million. I mean, we're talking really big numbers, and part of that is because of the high costs, high interest rates that have doubled from a year ago, insurance rates, particularly in Harris County and more coastal areas that have quadrupled operating costs are high. And so with that, it's really been a perfect storm and so we're really having to infuse significant dollars. But what we're also looking at now is what I call a post ARPA strategy and really tasking our financial advisors with Stifel and our MON and Partnership Council with bracewell to look at how do we create sustainability after this. So we're generating revenue off of projects into this permanent affordability housing fund, also leveraging tax and current revenue. My other hat is also executive director of a local government corporation called the Harris County Redevelopment Authority. So we're issuing bonds, we're using tax and current revenue for affordable housing purposes. It has to be in your project plan as well. But with that combined, I think we're trying to put together these strategies and a path towards sustainability after our ARPA funding is utilized by 2026.

Ben O'Malley (09:21):

Great. Thank you Rene. And Andrew, I want to shift to you for a moment on the topic of single family housing. How has the T-D-H-C-A been coordinating with local HFCs regarding single family mortgage offerings and their respective jurisdictions?

Andrew Prihoda (09:38):

Well, you're looking at two of the great success stories sitting here on my right and left. BRACEWELL is lucky to be bond council to the Texas Department of Housing and Community Fair. And in that role we've been able to work between the T-D-H-C-A folks and the local HFCs to create a program where the HFCs are able to secure volume cap for single family mortgage bond purposes and assign that volume cap to T-D-H-C-A. So the T-D-H-C-A can issue bonds for multifamily or for single family housing, I'm sorry, in the local jurisdictions, and really provide deep affordability in those areas. We piloted that program with Harris County, what was that, 2020 Rene I believe. And it was so successful that multiples of other folks joined us, including Jim Capital area. But it has been a very great program, and I don't want to detract from these folks. They can probably describe even better the benefits to their local jurisdictions, but it has really allowed to stretch the volume cap in the single family set aside to actually be used for single family purposes to lower issuance costs, to really provide economies of scale. And it really has been a program that has been beneficial, I think to all involved,

Jim Shaw (11:11):

Can I go, this makes much more sense than the way we used to do. We've done a lot of single family deals. If we did one when they went and did one, then all the loan officers had to learn his paperwork, his rules had to learn our paperwork, our rules. Doing this in a strategic partnership with T-D-H-C-A is a much more efficient delivery system for the origination and delivery of mortgages. So why would you not do that? They're doing this statewide, and we've started this about four and a half years ago using their money, just our down we're self-funding down payment assistance and then saying, we just put together a $61 million allocation. We're in the process of spending that. We'll be doing that again this year, but we have had much greater success, particularly in our more rural counties than we've ever had. So it's just more great for us.

Ben O'Malley (12:08):

Great. Andrew, I come back to you for a minute. When I think of construction housing in today's market, I think of construction costs rising. I think of higher interest rates. It seems more difficult than ever to execute an affordable housing project. And of course you talked about optimizing the entire capital stack a little bit. What are agencies and developers doing today to build munis and other sources of capital into their plans?

Andrew Prihoda (12:35):

You make me switch my hat here I guess. Thank you. Not speaking loud enough for you folks there in the back. On the multifamily side of things, we have certainly seen, again in our role as bond council, we kind of have a unique view into the transaction from above the developers and seeing the full capital stack and how it's all working together. We have certainly seen a lot of movement to incorporate the additional public monies either from federal funds like the ARPA grants that are coming through the Treasury. Also, I believe a number of jurisdictions have voted multifamily general obligation bonds and are using those monies to provide additional funding mechanisms to close the gaps. And with those dollars, we are seeing deeper affordability being purchased down. We're seeing long-term affordability. Rene mentioned for Harris County, the 99 year affordability that Harris County is working to get long-term permanent affordability and deep deep targets. So I know there's deadlines that are coming up here to commit the ARPA monies. There are still opportunities. I think some jurisdictions are reprogramming some of their dollars. So if you're a developer out there and keep your eyes open for what RFPs are available, there are opportunities to continue building more affordability.

Rene Martinez (14:11):

If I could add into that on the ARPA side, it was really transformational. You're talking about 916 million that came to Harris County for multiple portfolios, everything from public works to economic development, health and safety, just really transformational on the housing side, there's just too much demand. We were completely oversubscribed on the funding requests that we have. And in some cases, folks were coming in with let's say an $18 million ask. It is just really more than what we could really see putting into an investment. But with that, it does create a significant number of units, but then you have to really think beyond that and what's after that?

Andrew Prihoda (15:02):

Rene, do you remember how many units you guys have put in with the ARPA

Rene Martinez (15:05):

Program going to? I think with our ARPA money, we're probably going to have over a couple of thousand. It is really up in the air because we do have some projects that have decided to withdraw. Also on the operational side, a developer really has to be ready for federal requirements and with a tax credit project, they can go to T-D-H-C-A, they've got a package deal. They may have their contractor and everything in place. It just doesn't work that way with the two CFR 200 federal requirements under arpa. And so that's really the education that we have to do and engage in. There are requirements associated with this funding.

Ben O'Malley (15:50):

Great. And Jim, I'm going to come back to you. Relatively high cost of living in Austin also experiencing, as we know, very rapid growth. We were talking a little bit about it before we stepped up here and we're hearing more about it in general, but in terms of workforce housing, can you first give us a sense of who is served by workforce housing projects and what is needed to get these projects done?

Jim Shaw (16:16):

Therein lies the challenge. We've been sitting here talking about that again in the tax credit world, and I'll talk about the politics of all this. We serve nine different counties. So when you step outside of Austin, you're going to find market rate rents are probably somewhere, give or take, 80% or so, 80 to 85% of the A MF high. So you have a well-defined framework with the tax credit program, everybody agrees 60% that's affordable. You've got a framework for the debt and the equity side. So delivering one of those is a pretty well established setup when you move into the workforce arena, which I prefer to call the missing middle because I think our tax credit deals are also workforce housing, but when you start looking at people, a demographic of 65 or 70% A MFI to say a hundred percent A MFI, really the only financing tools, we have the only capital stack available to us.

(17:16):

It's the same capital stack we have for any market rate deal. It's private debt, private equity. So we've backed away for a few years, as I was telling the guys earlier, kind of let that market mature a little bit. Let the equity investors start to realize that this is a little different animal than a market rate deal. So all we're doing is taking that capital stack and in Texas pulling the property taxes off that property. And that's the mechanism that you use to lower those rents. So the question then becomes, in any community, how affordable is affordable enough? Does 80% work? Does it need to be 10% below 80? Those are the kind of the push pull discussions that actually Megan says she's been in the middle of a bunch of these with us. How affordable is affordable enough? How much affordability do you need to bring to the table to that community so that they're not going to be extremely unhappy when you start talking about not putting it on the tax rolls?

(18:15):

Texas is a very property tax dependent state, so that's a pretty big deal. There have been some instances here locally over the past couple of years that have made that challenge even greater. There've been some people that I would just flat out refer to as bad actors that have done this in ways that have angered a lot of people and stirred up a real firestorm in the area. So needless to say, we have to be careful with that. But the challenge is these are real estate transactions. How do you put together a deal, a capital stack when you're taking into consideration very high land costs, high insurance costs, high construction costs, but we're doing all of this dealing within migration in our area of around 60,000 people per year. So every two years we're absorbing the 110, 120, 130,000 people. It takes me about two and a half years to put one 300 unit an apartment complex on the ground.

(19:18):

So you can't get there fast enough. And when you look at the tax credit world, there is simply not enough volume cap for bonds or 9% tax credit volume to take care of that demand. When I look around our area, drive around kind car guys, so I look at out-of-state license plates. I find very few of those attached to Ferraris and Bentleys and Lamborghinis. I find most of them attached to cars taller than a $40,000 car. And there's probably a direct correlation between what I can afford to spend on transportation and what I can afford to spend on housing. And that's kind of the bleeding economic indicator that I'm looking at all the time. And we're trying to figure out how we talked about putting a square peg in a round hole. Every workforce deal we've worked on, there's been over 40 of them and we have yet to close one because they're all very unique and taking a huge amount of work on the front end because there's not that framework to try to figure out how to make that deal make sense not only for the developer and the investors and us, but for the local community.

(20:21):

And that continues to be, I think, the challenge that we all face. And now there are rumors of a federal workforce housing tax credit, but I still on the board of now Alpha, we're still, we're monitoring that closely, but it has not gotten beyond the kind of kicking it around stage over a cup of coffee. But that's being talked about that. I think if we can work it out the way I hope we can, that would provide some real assistance on the equity side of the deal. So maybe the future is brighter.

Ben O'Malley (20:57):

And Rene, I wanted to just go to you quickly. I mean us, are you experiencing similar challenges in terms of workforce housing in Harris County?

Rene Martinez (21:07):

Yes. The issue for us is really how do we create mixed income opportunities because it's amazing anybody that thinks about who actually is in that load or moderate income space. So with respect to workforce, I'd really consider that maybe up to 120. Although the Housing Finance Corporation Act lets you go all the way up to 140% of median and defines that as modern income. So we're definitely looking at workforce housing mixed. I really call it mixed income type development. We don't really just focus on 50% market, 50%, let's say 60% of medium, 80% of medium. We really want to look at a cross section that has multiple income bands. And so with our investment strategies, we will look at those developments. It's likely that they don't necessarily qualify for tax credits, but we can certainly look at local resources being put into those as well.

Ben O'Malley (22:13):

Sorry. Thank you for that. Alex, coming to you now, I certainly want to get the market perspective, so to speak on the issue of workforce housing. I know previously we've talked, you've executed workforce housing transactions in Texas. Can you tell us a little about your experience and how to think about financing workforce housing given the current interest rate environment?

Alex Zaman (22:36):

Thanks, Ben. No, appreciate the question and I think Jim and Rene hit the nail on the head. When we think about defining the problem here, in addition to the incredible growth that we're seeing here in Texas, the mere fact of the matter is that wage growth has not kept up with the supply of housing or the cost of housing. Saw a statistic the other day just here in Austin that over the last three years, I think we've seen per capita income rise 23% while the cost of housing is up about 50%. So that's pretty staggering. It's truly a supply issue here in addition to where wages are going relative to the job growth in the economy. And I think just back to what Jim was referencing on wherein lies the problem, there have been no subsidies here in this sector whatsoever. On the affordable side, you certainly have tax credits, you have volume cap, you have other exemptions depending on the jurisdiction and the market side, you have a lot of incentives to drive developers to force their attention into that sector.

(23:37):

And really the only subsidy that we've seen in the workforce space is through the value of this property tax abatement or exemption depending on what state or locality you're looking at. And so why has this really become such an issue in our market in terms of the localities that we're working in? We have a lot of our essential workers, teachers, firefighters, first responders, but also high income earners who are being forced to commute incredibly long hours and or move out of the state. So in the last couple of years, in the absence of any of these real subsidies, we have seen the capital markets attempt to facilitate the production of workforce housing. And while I think it's certainly not without a lot of room for improvement, it has provided the opportunity for investors and the markets to really understand this space and at least provide a temporary solution for the issue.

(24:33):

So I'm going to briefly summarize what this model has evolved to. It is the essential function housing bond model that really emanated out of California in 2020 through what was called a JPA program. That program gained some legs in Texas over the last couple years, and it really entails the financing of conversions of existing market rate assets into rent restricted housing whereby you use a property tax exemption and an HFC or a governmental entity comes in and issues the bonds and then serves as the owner of the asset for the life of the bonds. And so typically in this situations, we see developers source the asset, bring them to Jim Rene, others with a plan to convert these units. And so the market has evolved to the tune of about 50 projects that have been done in both California and Texas. The lions share in California about 10 billion total.

(25:28):

And so it's a market that has matured in a relatively short period of time, but as folks are well aware, in the last couple of years, we've seen a lot of challenges and pressures to our market. Interest rates are no longer in the two to three to 4% range as they were in 2021 when these deals could be much more favorably financed. They're now 5, 6, 7, 8 for what is essentially non-rated paper financed on a hundred percent debt basis. And as a result, we see far fewer investors in this space as opposed to 2020 and 2021 when we saw maybe 2030 investors who were clamoring for these bonds. We now see maybe three or four. So there's a tremendous lack of liquidity in the market for these financings to really gain execution viability. I think another overarching policy limitation, which I think takes up a lot of our discussions in this space as practitioners, is really trying to maximize affordability for tenants. That is something that I think this model has struggled with at times and no secret here in Texas with just the concerns around the widespread use of that property tax exemption and the PFC structure, which has been partially addressed by the legislature, but also just the exemption dollars that would otherwise go to local taxing jurisdictions, which are not made whole in this.

Jim Shaw (26:50):

Can I add, yeah, excellent points. I just want to give you a little bit of a feel for how this translates at the local community level and if you're taking particularly an existing market rate deal and converting it to workforce housing. Part of the challenge, and we talk about this all the time, and that is the public benefit analysis. You're sitting down with an elected official to try to talk to them about how you're going to try to build in a rent growth hedge over the next 10 years. You're talking to a mayor who's up for reelection next year. So that 10 year planning window may not have quite as much importance as how are my voters going to feel when they go to the polls eight months, nine months from now? So that's a little bit of a hard story to tell when you have an existing property.

(27:42):

Plus that existing property was probably paying somewhere in the neighborhood of $2 million a year in property taxes. That's a big number. It's a big enough number to get everybody's attention. We're looking at new construction only on that for that reason because we can build in pilot payments and all to try to ameliorate some of those concerns. But those are the kinds of things, kind of the reality where on the ground, when you start talking about these deals and there's some push and pull, we're working on a deal right now and we've got some 50% units, some 60, some at 70, some at 80 and capped at a hundred. But the push pull sometimes between the community and the developer slash investor is, if I'm going to go build this deal or acquire it, and I'm going to go into this partnership with the housing finance corporation, I'm probably looking at selling my partnership interest in about five years.

(28:36):

So when you go talk to the local community, and this is happening right now in one of our communities, when the mayor and a number of other people have said, look, why don't we build something that's not quite a double plus property? Why don't we take a little money out of the amenities and try to lower the rents a hundred dollars, $150 a month? But the problem with that is you've got to have a property your investors are going to require. You have a property that if you go sell that and convert it to a market rate deal, it has to be a property that looks like and acts like a market rate deal. So there's this continual push pull between the needs and the views of say, the community that wants a little bit lower rent and all the people involved in the transaction that are saying, well, I have to have an exit strategy. So it is just a give and take. That's just part of the deal, part of a real estate deal. But that's all the balancing act that we're always trying to figure out how do you make happen? And every deal in every community is different, and that's why people like made and I spend all these hours on the front end trying to figure out how to make it work, but it's challenging.

Alex Zaman (29:42):

Doug. Great. Thanks Amanda. I totally agree with that. Do want to maybe move our discussion from that 1.0 model, which I think we all acknowledge has its challenges, its limitations, and where do we get to 2.0 to a much more sustainable model? I think we can use elements of the framework that the capital markets have provided to get there, but I think to your point, Jim, new construction is a huge focus because with the acquisitions that have been done in the market, we're obviously not adding to net housing stock. We're just maintaining it. So when we look at new construction, I think it is being creative with the public and private sectors, with state and local governments, the federal government in particular, to really find other ways to enhance the economics of those. Because in the capital markets, new construction is more challenging than acquisitions.

(30:29):

You have construction risk, you have investors looking for additional liquidity to maintain that, their performance during lease up and stabilization. So do we look at a developer to kick in equity in these deals? Do we look at potentially municipality contributing either direct or indirect dollars or providing vacant or surplus land to buy down the cost of these deals? I think there are some tried and true programs out there at the state and federal levels that can be used to help move these deals a little bit forward. On the state side, I think we see some HFAs now starting to create middle income housing programs using different things like vouchers and other subsidy programs to contribute to projects that come through the pipeline. Fannie Mae I think has a new workforce housing product that is eligible for 80 to one 20 that can be paired with some of these financings.

(31:25):

On the federal government side, there are a couple of very long standing transportation related programs called TIA and R that have now expanded their eligibility over the last year or so to help facilitate the construction of affordable and workforce housing around transit, TOD. Those programs, TIA and R, have financed billions of transportation projects and are now able to help finance up to either 50 or 75% of the cost of some of these projects around transit. So that's something that we're starting to look at in conjunction with the public and private sectors. And then P threes public private partnerships. I know there's a school district in ISD here in Austin that is undertaking a process to have a developer come in, lease 20 acres of land to build 500 units through a P three and PFC structure. So I think it is about being creative as practitioners to move from what's been a model that has introduced and help generate more discussion around this to something that is sustainable and can help make a dent in this crisis.

Jim Shaw (32:33):

Any evolution.

Alex Zaman (32:36):

And I do agree on the federal legislation topic. The middle income housing tax credit has been, I think introduced for several years going now, and Jim I think is far closer to it, but to the extent we can get something like that, that's a real needle mover. It's built on something that's very successfully implemented in Litech and I think could be a real unlock to help just add another tool in the toolbox for these projects.

Jim Shaw (33:03):

Make sure equity play a little.

Ben O'Malley (33:06):

Yeah, so I mean hearing about all these challenges and knowing that there is such a significant pent up housing demand in these communities. Rene, I'll start with you in Harris County specifically, how do you prioritize what you're going to work on in this sector?

Rene Martinez (33:21):

I'd say it's multifold. One is really leveraging our resources, assessing what resources we have, what resources we're projected to have, and how do we deploy those really to create this model of what we're considering permanent affordability. I mean in our deals, our whole strategy is that we want to remain a landowner and be able to have, say if the property management company starts going under, what happens if vacancy rates start going up? So there's a considerable say by us having this permanent affordability model, and we really want to stay in it for the long term. So really leveraging resources and assessing that. The other is also seeking additional bonds on the single family side. We've been very happy with the partnership with T-D-H-C-A and I think that they've been happy Back in 2020, we had to convince the attorney general's office why we wanted to do this, and I said, well, we have a very significant housing crisis and our commissioners want this to happen.

(34:26):

So they relented and they allowed us to assign bonds to TDHA. That was the first time ever preservation of units. We really have a significant issue with properties in decline, extending useful life of the property, but also getting that 99 year affordability as well. Also targeted investment. We're going to start doing RFPs, looking at land acquisition financing development, really bringing to bear all the powers that we have under our finance corporation and their support for that. So really putting our infrastructure into play to bring about this revitalization of communities, looking at new development that's in proximity to job centers. Also defining a strategy to invest in mixed income housing. Really I think of that as the workforce element, 80% of median to above because you really can't address that with just tax credits. And then so with that really combining all of those, but just really being in pursuit of additional money. If we could get more bond cap through Texas Bond Review board, we could put in place all of that. We probably created 500 units of housing with our bonds that we've done so far. That's on the single family side, I should say.

Ben O'Malley (35:52):

Jim, I'm going to toss it back to you. I mean, similar question. How do you prioritize what needs to be done?

Jim Shaw (36:01):

Well, Nate said on several topics, it's interesting to think back 10 years ago, less than 10 years ago, our average multifamily bond issuance was about $20 million. It's now $50 million. So you get same volume cap or close to it, you got half as many deals done. So that's part of the problem is what's happened because of, I can't tell you how many 2 million lumber change orders I've signed in the last three years, just lumber. So what's happening is the sweet spot, if you will, on these deals has gone from 200 units to two 50 to 300 to three 50. Now what that means is all of these bond deals are going to be done in more urban areas where you can have a lease up schedule that will work on a 300 unit deal. So you're starting to say, I think you'll start to see more of a concentration of bond transactions, and then it's just a matter of running out of money.

(36:57):

When you look at our end migration throughout the state of Texas and certainly in our market area, there simply is not enough volume cap. The 9% program has always been extraordinary competitive. I've always told people I kind of compare it to a blood sport. I mean it's a pretty hardnosed business, but now that's the way the volume cap situation is. Our region, region seven is oversubscribed by a factor of somewhere between seven and 10 to one every year, every year. So the question becomes how do I fill that need? What do you do? And so the workforce housing comes in, how do you close that gap? There's simply not enough. There's all the talk of changing the 50% rule on the bond deals. I still haven't figured it out. I'm waiting for somebody to explain that to me. If I've got X debt, half of that was going to be taxes, debt bonds.

(37:52):

Now 25 percent's going to be bonds, I still have that debt. What's the source of that remaining 25% of debt? So there's no magic in there. It is just, it may stretch volume cap further, but you're going to have to have another source of debt, whether it's a bank loan or whatever, because the cost of the deal is the cost of the deal. People sometimes forget these are real estate transactions and there's only too many ways you can cut that up. So those are the kind of challenges we face on an ongoing basis. And I will tell you that it really said something that I very, very much agree with, very much believe in, and that is these partnerships we started doing these 25 years ago, the advantage to that to the community is they know who we are. They appointed my board members so they know that 10 years, 15 years down the road, we're going to be involved in making sure that property is managed and maintained in a very effective way rather than trying to get in touch with an LLC that's registered in New Jersey and you don't have any idea who the owner is, they know who the owner is.

(39:01):

That's us. And that's a long-term investment and commitment. We're very straightforward with our communities. I tell of all the elected officials, I will tell you what capillary will do equally important, I will tell you what we will not do. If we can't do a good product that we can all be proud of, we're not going to do that transaction. So that's the way. But I will tell you that I've been around this affordable business for quite a while. The product that is going on the ground today is night and day different from the product 20 years ago. I'm very proud of what the industry as a whole has done in terms of the quality of product that we're bringing to the communities. They always have to figure out how to build more of it. I will tell you, I'd meet with a lot of school districts and they said, well, help us house our teachers and what can we do for you?

(39:51):

In fact, I've got a meeting right after the associate with the, and I just tell 'em, free land, if you guys are banking land, if you've got some land, some dirt that you know you're not going to use, give that to me. Let me get my basis in the dirt down to nothing. We'll haircut all of our fees. We'll go get the deal built. It'll be something you can be proud of. We'll figure out the fair housing stuff later about how do you market? You can't market it solely to the school district, but those are part of the components, the pieces that put together a deal in a lower prices. How do you keep the land from being $20 a square foot, which is what's happening in our area. So it's a long-term, hold long-term love with trying to keep the property where it ought to be.

Ben O'Malley (40:42):

Yeah, certainly. And it looks like we only have a couple minutes left, so I definitely want to give everyone in the audience a chance to come up to the center, mic and ask some questions of our panelists here. It's a little bit less intimidating in the half room.

Audience Member 1 (40:56):

Come on. I don't think

Audience Member 2 (41:03):

I've met anybody here at the conference yet that's in the mud industry in the Houston area, and we got punched out a little bit yesterday by the TML chairman. But Jim, I think you and I did a deal 10 years ago on Ella Boulevard in Houston. Is that right? Yeah, you recall that? Mud 86. Okay. I just want the panelists to engage somewhat on the issue of the cost of utilities. When you're doing a deal in the ETJ, you're bound to get your utilities from a mud district, and those utilities are financed with tax supported bonds. So when you give away all the taxes through a tax exemption, you're eviscerating the financial structure of the mud. And I've had three districts in the last 24 months that have been hit to the tune of 20 to 25% of their tax base or potentially hit if we didn't try to head 'em off. But the muds are going to react. And you talked about push pull. This is the push. There's going to be a pushback from the mud industry because those utilities are not free and you can't go dig in the mud's pocket to take their taxes away to bring them to the table and engage in affordable housing.

Jim Shaw (42:27):

Interesting, you brought that up. We were just talking about that among ourselves before the session started. Again, being a recovering developer, I put together five muds myself as a developer. When we do this, we always pay the mud tax. It's just a matter of the underwriting.

Audience Member 2 (42:44):

And I heard that in what you were saying. In the new deals that are coming out of ground where you give the mud an opportunity to negotiate over the utilities, there are alternative ways to structure that to where the mud can be made whole, which is not what Houston Housing Authority is doing in the ETJ. They're just no notice taking it away from you and you're left swimming.

Jim Shaw (43:08):

I will tell you that we don't do that. I touched a little earlier on a group in this area, PFC, that's done this undercover of darkness. We never do that. The third party, the third partner in a partnership is the community. There's us, there's a developer and there's a community. So we're working with them from day one on many of our deals. We do pilot payments. So if somebody brings a deal to me and says, I want to partner with you, first question is show me that it won't work with the taxes in it because if it will work with taxes in it, then what's the basis for us entering the partnership and keeping it off the tax roll? It's kind of a tough sell in the paper tomorrow. So we go through that and notice simply to go back and run it with no taxes and play with that proforma, do some stress analysis and figure out what the property can't afford to pay without jeopardizing the economic viability of that property.

(44:05):

And then that becomes a pilot payment. Two things in the state of Texas are kind of unique with the Hood School Finance program, and I kind of figured this out with the Round Rock transaction years ago, chapter 41 school districts, most of the districts around the Austin area are chapter 41 districts. They're better off in some cases not having that asset on the tax rolls, but getting a pilot payment because it falls outside Robinhood, that's money that we give to that school district. So every dollar we give is worth probably $5. They get to determine the highest and best use of that. In 2019, Senator Bedden court passed senate Bill two and that bill limits avalor tax-based revenue growth year over year to three point a half percent. So you now find a similar dynamic working, I think at the local government level of, Hey, if we don't put this on the tax rolls, but we give you a pilot that's outside that three point a half percent. Now it gets a little more complicated because if it's new construction, that doesn't apply the first year, et cetera. But that's always been our way of trying to make lemonade out of elevens. The legislature, I think state of Texas had a decision to make in that is how do you help get affordable housing bill? Does the state go fund a $2 billion housing trust fund or do you do it the way they've chosen to do it, which is the VO of exemption?

Audience Member 2 (45:29):

Well, which is why I brought up in the larger session the PFC reform bill that was passed last session that the state recognized an abuse and Senator Benton court called in an abuse, called it out, and then to my mind, effectively shut it down. So all those deals are now running around looking for other laws coming

Jim Shaw (45:52):

On door. That's

Audience Member 2 (45:53):

Right. And it's more chaos than it was before. I think.

Jim Shaw (45:58):

Let tell you a critical difference of the HC, the rules that Rene and I have to operate under our exemption under 3 94 0.905 is based on the concept of equitable title or beneficial ownership. There's a 2006 attorney general ruling that I was very involved in way, way back, but you go read any ag ruling and they're all little squishy, but that concept of equitable title is key. And that's why I tell every developer that comes in our door, there are no brother-in-law deals here with us. Every deal looks just like the one before, from a legal standpoint, from a document standpoint, so that because we believe if we don't practice good stewardship on that exemption, the legislature will come fix it for you. I pretty well assure you're not going to like the way

Audience Member 2 (46:47):

They fix it. I completely agree with that statement. Thank you

Jim Shaw (46:48):

Saying that. Do it like the first time and every time and make sure that you're dotting every high and crossing every T. And no one deal is worth blowing that up. I don't want to be that guy. And capillary doesn't want to be that company that does that, that damages that. Because 20 years ago, one deal out of 10 I did was a partnership deal. Now, nine out of 10 are partnership deals. The dynamics of the market are such that deals simply will not work without that. But how do we try to be as good a partner as we can be and as good a community member as we can be? And that's through these pilots. And I've had more elected officials come to me, me and say, Jim, I understand that you don't have to do this, but I can't tell you how much it means to us that you're trying to do it, that you're putting your best foot forward and you're trying to give us something trying to help out it been worth its weight and gold.

Audience Member 2 (47:44):

I genuinely appreciate you saying that. Thank you and good answer. Thank you.

Rene Martinez (47:50):

If I could also add into that, I'm not a PFC expert by any means, but under the new legislation, there is a notice requirement in there, but typically they're structured as these 50 50 deals that's either 60% or typically 60% of median, like 10% at 60, 40% at 80, and then the rest are market. And so I think as HFCs, at least, we practice really trying to encourage and obtain much more diverse income bands. And so with that, not necessarily just having a 50 50 deal, but I mean we tend to be more tax credit and deeper affordability centric teachers in many cases, and Jim and I were having this conversation, they're also the working poor. I mean, so when we look at who can afford housing or conversely who can not afford housing, a lot of folks that you would not consider to be in those affordable housing bans are who's being affected? Essential workers. People can't even afford to live anywhere close to their job. They got to live 2050 miles away from work.

Jim Shaw (49:10):

Yeah. I sometimes have these conversations with elected officials. I'm pretty blunt, straightforward. I say, guys, what most people don't want to acknowledge is that someone earning 50, 60% of the area manian income in our area is working poor. And that's Seton Hospital has a hard time getting registered nurses because they can't find housing close to where they live. The commuter shed for Austin runs from about schulenberg on the east to ano on the west. If you don't want to believe that, to get in the car at seven o'clock and drive out one of the directions, look at the headlights. But that's the challenge. So what do you do about people who are making 65% of the area media income? They're priced out for tax credit deal. And that's the challenge, what we've all been working on in this missing middle, but the tools aren't there yet. We're trying to figure out how do you build a capital stack that makes sense at that price point? And that's where the industry's been now for years. And then we keep working on it. But like they said, if it was easy, everybody would be doing, I guess. But that's the challenge we all face and police first responders, teachers, nurses, those salaries have crept up above that 60% tax credit limit, and that's who that missing middle is.

Ben O'Malley (50:37):

Any other questions? Well, I think those were some great closing comments, and I want to thank the panel one more time for their great discussion before we conclude.