AHF Live: The 2005 Tax Credit Developers' Summit
Industry leaders debate ways to improve LIHTC program
Transcript of Affordable Housing Finance's Editorial Advisory Board roundtable meeting

DANIEL CUNNINGHAM: Good afternoon. My name is Daniel Cunningham. I'm with Wachovia. I run the affordable housing activities for Wachovia. We work extensively on the debt side as well as tax credit equity and CRA lending through our community development finance group. I'm here today from the point of interest of what I see as the dual-edged implications of the tax credit business maturing in a time of shrinking federal budget. We have a very willing group of financial entities, including my own, so it is an extremely good time to borrow. The challenge, though, is that it may not be the best time to build, given the ground rules and the opportunities. So, I would certainly like to explore that. I also have a side concern as I look around the room, and that is from the financing and the development side, how we continue to develop talent – people that really can commit their time and resources to working on the next generation of solutions.

PAT CLANCY: I'm Pat Clancy, the president and CEO of Community Builders, a nonprofit that has done about 18,000 units and with a regional focus, on a regional presence here in Chicago, one in Boston, and then an emerging one in Washington, D.C. I am here to tell you that even though I agree with everything that Tony Freedman said, [I believe] the glass is half full. We started about 15 years ago really looking at attempting to work more comprehensively on how neighborhoods evolve and change. That led us to looking for where the federal dollars were, so we got very involved in the initial design of HOPE VI. There continues to be $2.5 billion of money flowing into public housing on the capital side that can be used in dynamic ways. The same approaches can be utilized on the Sec. 8 side. I think we as an industry, and particularly on the public side, have to be more ambitious, as certainly Jack is, about looking at the real estate, the families, the subsidy streams, breaking those things apart and redesigning them, repackaging them, using markets. We're doing a lot of mixed-income housing where we're capitalizing on the growing market value to help enable continuing affordability to be a part of the package as well. So, I think there are a lot of tools out there and available, and I think that we as an industry have got to do a little less crying and a little more innovating to expand what we are able to accomplish.

JUDY CALOGERO: I am Judy Calogero. I'm the housing commissioner in the state of New York. I also sit on the Board of Directors of the state's housing finance agency and the State of New York Mortgage Agency. I have enjoyed 10 years in the Pataki administration, and we're closing in on $10 billion invested in affordable housing, impacting over 80,000 affordable housing units. We too face similar dilemmas in New York that you face in other states and other sides of this business. We are not building as many units with the 9% credit as we used to, but we have responded to that and invested more money into our housing trust fund program so that we have up to $100,000 per unit available for soft seconds. That has worked well and we're doing some other innovative things like mixed-use housing, mixed-income housing, something with green buildings, and we're also doing some preservation with our Mitchell-Lama portfolio, looking to transition long-term middle-income renters into homeowners. We're having some success with that as well. I'll speak a little bit later about a new bill that Gov. Pataki signed earlier this month, which is going to give us some further relief on the real property tax assessment side.

JANA BLACKMAN: Hi, I'm Jana Blackman. I am the chairman of Sonnenschein, Nath & Rosenthal's Real Estate Group. We have about 70 real estate lawyers across the country. A big part of that group is the tax credit business. I began in this business a long, long time ago with Jack Markowski on the public-interest side, when he was with the city (well before he was commissioner). I was with a not-for-profit called Thresholds. I've been on the private practice side of the world for about 10 years. We principally represent investors. Most of the end consumers of a lot of this product are represented by Sonnenschein. You'll hear about my concerns a little later. What I want to touch on just briefly, though, and what is worrying me, is that I am seeing the high cost of doing these deals, and the low yields, and the compressed spreads to the syndicators, and the reduced fees to the developer, put a pressure on the legal structure that is unwise. I believe we are pushing the envelope beyond what it should be pushed. I can't agree more with the need to be aggressive and creative and innovative. I just think we have to be smart.

ANDRE SHASHATY: The most positive response to the question of how to deal with rising costs that we have seen at our magazine is the mobilization of local political power to generate more capital for affordable housing. Whether it is by managing property taxes more sensibly, or by putting bond issues on local ballots, that's where the action is. So, we think that there's hope. California voters did approve a proposition four years ago, and now we're looking to get it as a dedicated revenue source.

We are going to go into our presenters’ material now, but I wanted to just elaborate briefly. Our end product from this roundtable is an agenda for improvements in the tax-credit and housing bond programs, that we can put forth and advocate in the pages of our magazine throughout 2006, wherein we might be able to generate enough political support to actually get some of the changes enacted. We're going to see what our readers have to say about what this group comes up with, and we're going to put it out there as something where we're going to encourage readers to take concrete steps to get some of these things enacted.

DAVID REZNICK: We are all really very fortunate in having Affordable Housing Finance as a significant voice for affordable housing. The power of the media is significant. The understanding of what we can come up with today will really truly have a potential significant effect going forward. Let us start first with David Perel. Will you talk to us about some of your thoughts, and let's see if we can agree that these are something that can be put forward?

DAVID PEREL: The first set of ideas regarding mixed-income housing, both for the social value of it and also to deal with some of the cost issues. I'm from Los Angeles. I'm not sure what [new policy proposals Mayor Antonio Villaraigosa] is going to present, but one of the ideas that has been floating around for a while is a citywide inclusionary requirement to capture some of the extra land value that has taken place. This is one way of dealing with cost. Anyway, it's very difficult to use tax credits on mixed-income projects. Everybody says, "Yeah, I can do it." But by the time you take it to the investor, they won't do it.

Also, the land and basis would make it a little bit more attractive to do a tax credit deal in a higher-cost area. If you did that, you'd have to be revenue neutral. You would adjust the credit rate so that the total amount wouldn't change, but deals where land is more attractive and higher-rent areas would be a little bit more attractive for tax credits.

ANDRE SHASHATY: I would just like to ask Dave Perel to elaborate a little bit for the record: Why is mixed-income helpful? What problem does it solve besides the social benefits? Does it solve deal feasibility in certain markets? Secondly, why do you need to encourage two different sets of investors to make it work?

DAVID PEREL: Well, let me answer the last part first. The investors who don't want to do it don't want to underwrite the real estate market too much. They're focused on the low-income credits. It's a whole different operation to look at the conventional real estate market. So, they are reluctant to buy those deals. From an economic point of view, it's sort of a cross-subsidy idea. If you're in Los Angeles doing a new rental unit, you know, it's going to be $2,000-$3,000/unit to cover the markets there and cover the cost. The tax credit unit is $700/month.

ANDRE SHASHATY: So, it really only works in really strong markets?

DAVID PEREL: This is really more for strong markets. With marginal markets, it is not so attractive. It's more for strong markets where you want to have economic integration from the social point of view as well as the economics of the project. The other issue is that if you could facilitate more non-syndicated deals on deals with 20% of the units earmarked for low-income use, where it is just a partnership and the partners have an income where they can use the credit themselves, those deals also may operate better in the future because it's hard for the general partner to invest money in a deal where they don't get much of the cash flow and they only own 1% of it. But if they're not dealing with a syndicator and it's just a partnership, and they can take the credit on 20%, it's a deal that might operate more easily in the long term. That's from an economic point of view.

JEANNE PETERSON: It's also much more politically palatable in a lot of jurisdictions to do mixed-income.

DAVID REZNICK: What I'd like to do is get responses first from the panelists on that, recognizing that we are going to try to keep within the restraints of no increased budget cost. So, we're talking about if land becomes part of eligible basis, it would just mean more credits to that particular project, making it work. The next project that didn't get funded would go on to the next year. Your thought, by the way, as it relates to specific provisions that would allow a carve-out, would actually meet Jana's terms of why should there be all of this creative legal structure to try to get to the same place when it's a no-cost fix. Other thoughts from panelists?

RONNE THIELEN: I like the idea of allowing land to be included in eligible basis and maybe it gets a 4% credit instead of the 9%, so if it's under the 9% allocations, it would only get 4%. It should get the 130% boost as well. What it's really doing is helping to compensate not only for the higher cost of land, but also for the higher cost to build and to operate projects. It brings more equity into the deal.

PAT CLANCY: We found mixed-income deals are able to be structured. I guess we've gotten used to the brain damage and all of that kind of reserves and what-if scenarios and all that with ACC units and tax credit units and market-rate units. The biggest problem that we have is that in moderate markets, where you only get another $100 per unit for having a market-rate unit as opposed to a credit unit, you simply can't afford to walk away from the credit value to get that $100, which will carry 5% of the debt that you would otherwise pass up in equity. So, some ability to be able to get credits on units that might initially be eligible for credits and let them flip [to market-rate occupancy] over time, I think, would make the credit more dynamic.

DAVID REZNICK: You know, it's interesting: for those of us that remember when the tax credit rule Sec. 42 was first put in place, two of the very, very first tax credit deals – Harbor Point and the Roosevelt Island transaction – I remember them slightly. I was a high school intern at the time. Actually, those particular transactions are really 80% market, 20% affordable, but in fact have credits on the entire project. Now, they were of course given as kind of presents to the folks that were ... the senator, I believe, from Massachusetts, and the senator from New York as a present to go ahead and approve all of this, but it sets an interesting precedent and may initially reduce a total number of units, but would be able to effectuate more mixed-income housing, which in the long-term could provide better long-term ability for low-income people to reach up by participating in a mixed-income project. Perhaps they would allow an entire qualified basis if 80% of the units were affordable, and that would be relatively simple as compared to some other complex solutions of going several years and then moving back and forth. We all love the next-available-unit rule as a fun example of how things can be complex.

TONY FREEDMAN: I think what David points to is the need for another set of technical amendments on the tax credit. There haven't been any amendments to it since 2000. The only real change we had then was the stacking rule, and we had the increase in credit cap. But we have had as intelligent and benign administration in this program between the IRS and state agencies as we're going to see in any housing program. But there's periodically a need to fix it up. The 10-year rule – there's no longer any justification for existence of the 10-year rule. I agree with Pat that you can do mixed-income properties, but you're doing them right now by the virtue of a state's willingness to allocate 9% credits to them and force you to do them. There is still no syndication market where you can efficiently place a mixed-income deal, and the enforcement difficulties are substantial.

JANA BLACKMAN: What gives me comfort in this is that we are being pretty upfront about it and saying to the IRS, and saying to the various agencies, "This is what we want to do." The other thing that we're seeing in the mixed-income structure: we always had ways of doing this. We've done vertical subdivisions. There are all sorts of ways we've come about having more than one project in a project. I also believe that we're looking at, and there are ways to deal with some of the reconciliation that is needed between the bond rules and Sec. 42, because I know there are inconsistencies there that make these projects very hard to do. In our experience, the IRS is actually receptive to looking at ways to reconcile some of these. From the lawyer advocacy standpoint, my position is just that we do it in a way that we get IRS blessing as opposed to IRS ire. That will become a theme of where I'm going with my talk.

DAVID REZNICK: One last comment?

RENEE GLOVER: Yes. I want to underscore and caution a couple of things. We now have about 8.5 years of experience in doing these mixed-income deals. One of the questions that I think the industry has got to come to grips with is: When does a new idea become an accepted idea? Because I think part of the pricing and all of the risk analysis all goes back to the original thought: Will this work? Well, I think there is a lot of very strong evidence that it does work and that mixed income is no longer a foreign concept. So the question is in terms of the kinds of reserves that you see and depending on how risk-averse the different investors are, there is always pressure to keep the reserves at an extraordinarily high level. I'm not sure what risk is being avoided when you look at the track record. So, that's one concern. The other concern is that I think it is critically important for the sea change effect to be realized that there must be a true market-rate component. We all know that all services and all private investment follow disposable income. In order to have a true mixed-income community, a market component is critically important. These deals do work. I think we have to look at the cost of not approaching development from a mixed-income approach as opposed to continuing to develop exclusively for the different income spectrums, which I think is horribly expensive both socially and financially. There are decades now of experience and actual data that prove concentrating poverty doesn't work. By the way, concentrating wealth doesn't work either, because that has fueled urban sprawl and other types of costs, which I think we often ignore because we look at issues in a very tunnel-vision way.

SHAUN DONOVAN: A couple of comments. Just one, I couldn't agree more with the comment about inclusionary zoning. We have been experimenting in New York City with some ways to use the 80/20 program in novel sort of variations. We have created a program where an otherwise sort of plain vanilla 80/20 gets up to $45,000 a unit to add 30% moderate income, so you end up with a 50/30/20. Where it has been successful is not in the very strongest markets in New York City, but in Harlem, downtown Brooklyn, neighborhoods that are emerging as strong market areas but don't yet have the sort of $3,000-to-$4,000 rents that we traditionally see now in Manhattan. That's an area where we can get 20% low income and then another 30% of the units are targeted. Generally, what we're seeing is about 100%-110% of our median income, which is $65,000 a year for a family of four. So, we found that to be a very, very successful way to try to mix incomes, but what it takes is a city housing finance agency willing to put up $45,000 a unit of its reserves towards those projects.

DAVID REZNICK: Thank you. I'd like to go on to the next speaker, David Heller from the NRP Group, and some of your thoughts and questions.

DAVID HELLER: David, what I wanted to talk about today is: More and more the credit is going to inexperienced developers. It is something we touched upon last year at the conference, and it is something that concerns me greatly. When we went around the table here this afternoon and talked about the different problems and challenges that are facing our industry, just about everyone said that you need to be creative, you need to be aggressive, you need to be innovative, you need to be creative in order to overcome many of these problems. Well, who can overcome these problems but experienced developers? So, when I was talking to Andre about this, Andre said to be very careful when you talk about this because when you mention this it will come off as very self-serving. An experienced developer comes out and says, "Of course, more of the credits should go to an experienced developer." But as I was preparing for this, I talked to several different syndicators and lenders and people very involved in the industry and said, "Why don't you give me some examples of deals that have gone bad." Well, my e-mail was overflowing. They loved this topic because it is a topic that is high on their agenda.

What is popular at the state agencies is: “let's spread the credit. Let's get the credit out to a lot of different people.” On one hand, that is fine. But you need to spread the credit amongst people that are qualified and have the experience to get the credit to have this come to fruition. The problems are out there. They're widespread within our industry. There are inexperienced developers that will go out and do these deals. They get in trouble. They deliver credits one-and-a-half years late. And who comes to the rescue? The syndicator. Well, as the prices that the syndicators are paying are increasing, and the margins are getting smaller and smaller, those syndicators aren't going to have the capabilities to go out there and save these deals much longer. So much of this discussion has been a discussion of for-profits versus nonprofits. What I'm talking about is changing that paradigm. The paradigm needs to be experienced versus inexperienced. I am talking about the nonprofit strong developers and the for-profit strong developers, because as I looked for examples in our industry where the credit has gone where projects have been delayed, many times they are for-profit developers as well in addition to nonprofits that have gotten allocations and haven't had an opportunity for them to come together, to come to fruition. [Some people think they can] mitigate the problem of the incompetent developer by surrounding them with a great team. That is not the answer. The answer is having top-quality developers to get these projects to come to fruition. When you have a weak developer, you have a weak project. I'd love to open it up and have comments.

JUDY CALOGERO: Thanks, David. Since I am one of the representatives from government, I'd like to respond. Also, being a member of the National Council of State Housing Agencies, this is an issue that we take very seriously. That's why two years ago we put together a working group to bring about some uniformity in practice across the state agencies and put together a list of best practices. Many of the states have responded in kind, including New York, and we've amended our qualified allocation plans on a whole number of issues, including this. I will say that in New York, we have a lot of return business from developers who have a lot of experience in the industry and with us. Many of them get more than one allocation per round. Experience does count with us. They do receive more points. They are more likely to get funded. Also, we have a very quick turnaround between our rounds and the most experienced of developers are only going to be able to respond in a competitive way given that type of scenario. However, we still believe there needs to be room in our system for new development teams to come forward, nonprofit and for-profit, and we do a lot of one-on-one and group technical assistance to get people up to speed. We still have seasoned development teams that we lose projects with. These lose staff. They make mistakes. You know, they can fail too, just like some of the less seasoned teams do. We see that all the time. I see more of a mix out there than what you have portrayed. That may not be the case across the country, but certainly it is in New York. We're very proud of some of the new and younger development teams that have come forward and are really succeeding in our state.

DAVID HELLER: You know, looking deeper at the developers, they ask for experience and you write down to the state agency, "Oh, I've participated in five, six, 10 different projects." But I think you need to look deeper. The agencies need to look deeper at the developers and look at the financial capacity of the developer. Look at what guarantees the developers are providing on the projects. As I mentioned, Judy, I think that you are right. A lot of state agencies do have experience requirements. But in many of the states where I work, no one comes back and polices [agreements developers make in order to win the competition for tax credit allocations]. No one comes back in their audits and comes and looks at the supportive-services plan, which is an incredibly important part of our business. Those types of things need to be looked at.

Experienced developers that are spending the time and effort of not only writing these supportive-services plans, but implementing these plans, and then delivering a quality project should be rewarded. Those developers that are just hiring a consultant to write this beautiful little plan, but then three, four, five years later it hasn't been implemented, and there's no policing in that. So, I think that you need to go back and do audits and create negative points. Some states do offer negative points, but most of the ones that we work in don't have negative points. I think that you should be rewarded if you do well, and if you've been foreclosed on a number of deals by syndicators, then you need to disclose that. There's probably a reason that you were foreclosed on, and you should disclose that and you should receive negative points for that. I want to just underscore one of the comments I made and have the syndicators respond to this, and that is that the syndicators are saving this industry. They are out there funding and putting dollars into deals that the agencies and directors of these agencies aren't really seeing. There are fundamental issues out there, and the syndicators are coming in and putting in additional dollars to make them work.

JANA BLACKMAN: I have a few thoughts. I'll say that some syndicators are saving the industry, and some syndicators are killing the industry. It depends on the syndicator, just like it depends on the developer. I find myself having a visceral reaction to your remarks that I can't entirely articulate as a lawyer or as an experienced tax credit person. Some of the most experienced developers we see are the most aggressive. You say to look at the guarantees the developer is giving. I wanted to leap off the table and say, "Hey, wait a second. It's my most experienced developers that won't give any guarantees anymore. It's the most experienced developers who are the most aggressive in terms of their developer fees. It is often the most experienced developers who are getting the sweetheart deals from the syndicators that they should not be getting."

I think a lot of caution is needed if you decide to say you're going to consolidate resources in a fewer number of developers, because what this industry should have learned by now, please, is that when we consolidate portfolios with fewer developers, when one developer fails the portfolio is wiped out. Geographic diversity and developer diversity is a key to the checks and balances in this industry. It is. We've seen too many portfolios fail when one developer goes under. So I would urge caution. I think experience is terrific when experience comes in the form of Community Builders or Thresholds. Or some of the for-profit developers who do just amazing construction product. I understand the value of that product. We talk about the maturation of this industry and how it's maturing. It's not entirely a pretty picture. That is in part the fault of the most experienced developers who found the goose that laid the golden egg and were not as prudent or self-disciplined as they might have been. While some of the syndicators are supporting projects, there are a lot that haven't. I think giving up on our self-discipline of diversity is a big mistake.

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