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[ continued ]

Shashaty: We’ve heard a couple of views on how bad the problem is. Let’s have a quick take on what needs to be done – whether it’s the developers, the investors or the HFAs [housing finance agencies], to try to make sure that deals are of a higher quality. Let’s see if there are some concrete suggestions, other than educating investors.

Freedman: The markets will bail out just about anything because unless you’re in a really lousy deal in a really lousy neighborhood, rents are still going up.  The 1986 tax reform has washed through, and we have more economic deals than we ever used to. The deals get done because the numbers work. As Jana said, investors ought to be the control but they are not, because they get a predictable yield. I don’t think it’s in anyone’s direct economic or institutional interest to produce better deals. Instead, state agencies sensibly have their own priorities for deals and try to produce allocation plans accordingly. Once they have done that, we will all do those deals, and they will get done.

Perel: Let me suggest some legislative areas for change. Maybe there could be legislation where the amount of credit would be the same, but land would be part of basis and just one more credit factor. That would, in some ways, drive deals to standard housing markets. If it’s a hot market, and the land seller can get more for the land, under current law you can’t give them basis. That is one source of market discipline. The tax credit program is this sort of artificial world when you take land out of it. Deals are out of sync with the real estate market.

Blackman: I think that David touched on something I think about a lot and see clients beginning to struggle with as the industry develops; that is, the issue of losses versus credits and the fact that it creates a bad incentive. I keep waiting for the investors to unionize and say we want credits, not losses, and we’re capping the number of losses you can throw at us. A blended yield between credits and losses ain’t going to get it done. Bad debt and all sorts of problems grow off losses, and those can be good. The next step in this industry may be to impose some sort of discipline.

Freedman: We’re still working toward efficiencies, and I’m seeing more adjusters that are written in terms of overall yield rather than tax credits. What troubles me in the equity market (the real wild card) are the regulatory changes: the exposure of Fannie and Freddie, the exposure of CRA, and possible changes in tax law. I think that that is the only thing that creates a precipitous change. If there is an increase in defaults, investors will wake up as they begin to feel the pinch. Everything will proceed gradually unless we change Fannie and Freddie’s interests, tax treatment or CRA scope. Then that equity market is incredibly vulnerable.

Finch: I’ve seen some crazy numbers being paid on the equity side. The biggest part of my business is distressed property workouts. Those of you who are over-investing, thank you very much.

I think there is a trickle-up and trickle-down effect. The investors hold back a payment because something happened, then you have the developer who took all of those subordinated, guaranteed development fees and, lo and behold, the IRS comes along and says that enough years have gone by, and you have to pick up the income on some of these guaranteed development fees.

How many times has one of the investors underwritten a deal based on the GP’s balance sheet? The GP’s balance sheet looks great if he has only one deal but what if he has 33? If it starts to crater … I think it will all be on the investor side. There will be a shakeout. After that everything will return back to reasonable IRR’s.

Thielen: There are two sides of this. On the guarantee issue, you’re right. The balance sheets are great to look at but in the end, there are too many deals out there for the developers who have them. Even worse this year, syndicators are giving up on guarantees; they’re just kowtowing to the developers. We’ve lost deals because of this and it’s a shame.

I want to get back to the developer’s point. Chris is one of the few who uses the 7% vacancy rate as a developer. Except for Chris, they all use 5%. When Chris does his deals, we know that he’s looked at his operating expenses. State agencies can’t look at every project the way we do. They don’t talk to the utility department or the water and sewer department; they don’t do what we do. There is no way they could underwrite a project, and they shouldn’t be expected to. There should be just as many thresholds as I suppose they have now, but I’ve spent more time with developers this year who have proposals that just don’t work. I’ve worked with them to find ways to make the deal work, and I end up losing that deal to a higher price after I’ve worked to help make it work. But it has not been the developers who have been putting them together this year, it’s been the syndicators who have worked hard on this because they want deals.

Heller: One thing that hasn’t been brought up is rising costs. We went through that this past summer. Ronne, a lot of the developers you see around this table are builder-developers. When it comes to increased costs, we saw them coming and were able to adapt to them. What we’re going to see over the next year or so is, when deals try to convert – and you had developers trying to chase every nickel in deals that were tight to begin with – a lot of developers that were not the general contractors on the deal are going to get hurt.

Shashaty: I’d like to wrap up by going around the table and asking people what the single most important change in behavior or regulations would be to make this program better.

Blackman: It’s not the most important, but it’s the most simple one and no one has said it, and it’s my other great pet peeve. Get rid of recapture bonds. Dump them. They’re a waste of money and a waste of time.

Griffith: I’d try to solve the Sec. 8 problems so we have assurance for the future.

Freedman: I’d like to see removal of a lot of the technical tax obstacles to mixed-income housing. It will make … better housing, and it makes this housing more useful for the next wave, which will be assisted living as the baby boom ages and looks for rental housing. If you remove those obstacles and get a fluid investor market, then you can routinely do mixed-income housing, and that allows you to deal with the next area of demand.

Tawa: Not so much regulatory or legislative change, but I would say a change in mindset in the industry. We ought to stop shoving the most high-cost [fixed-rate] debt down the throat of affordable housing projects. Let them have the benefit of what every other piece of conventional multifamily real estate has, which is variable-rate, low cost debt so our properties can operate at below 90% occupancy and still survive.

Perel: I would say the obstacles to mixed-income housing. In particular, the limits on individual investors taking credits. If you could raise those or eliminate those, you could have the partners taking the credits themselves, and they would be the ones on the front line, and they could do it on mixed-income projects more easily.

Harris: Let’s encourage state agencies to stop giving credits to failed developers.

Foster: There needs to be changes in the qualified allocation plans to make the projects more like “real” real estate. Let the projects have upside and residual value.

Heller: Let’s take the advantage of a Republican Congress, take on the unions, and get rid of prevailing wages. That is really hurting the inner cities where prevailing wages are the biggest problem. These urban areas are where the greatest need for the credit is.

Shashaty: Let me stop there with David. When can we expect a Republican administration to actually cut red tape, programs, and make them easier to use? It’s a Republican administration that’s doing the 2530s and the REAC scores. When are they going to actually simplify red tape, and when might they ever deliver on attempts to streamline state and local regulatory processes? When are we going to see some fruit from that anti-regulatory stance that we hear about but in housing we never actually see? 

Heller: My cynical answer would be that so many of the departments in Washington are just filled with so many Democrats. The current administration is just viewed as Christmas help. The red tape isn’t going to be taken away by Republicans or Democrats. The red tape is a systemic problem of our society. Many of these departments, from the State Department to the Housing Department, are made up of life-long civil servants who are more interested, in many cases, in job security than furthering the agendas of either the Democrats or Republicans.

Peterson: A couple of big issues that could make the program work better are eliminating the 10-year hold rule for the acquisition credit and giving states discretion to award it or not. Also, synchronizing some of the tax-exempt bond rules and 9% credit rules that are not currently in sync.

Swank: Building on what Chris Foster said, both nonprofit and for-profit developers should get more involved in the state agencies in engineering the QAPs better. There will always be social engineering, there’s room for that, but make them financially viable. Both sides of the aisle should join hands and do that. We’ve been advocating that for many years; sometimes it’s worked and sometimes it hasn’t.

Gaber: I would love to see the state agencies and the applications that come out from the developers actually show the AFR [applicable federal rate] as it is. Some states still use 9% and 4%, and it just causes all kinds of problems when you get down to writing. I would love to see them actually use the current rate that’s going on at the time.

Finch: I like to think I’m pragmatic. We need compliance that makes common sense. The state and federal agencies have gone way overboard.

Moreland: One of the things that would help this industry is if developers really understood the compliance and management end of the field to the point where they can see what it is doing to these properties and their staffs and why it’s causing the cash-flow problems that they have. They need to understand it in a true fashion.

Thielen: I’d like to see a national consulting firm, sanctioned by NCSHA, that can go around, critique and advise each state agency, sit with their board members, and figure  out what they’re doing wrong or what they could improve upon.

Sereda: I would like to see state allocations agencies that allocate credits only to markets that need additional housing. Talk about what the primary market area should be and what the maximum vacancy rate should be. No more credits or bond cap allocated to 10% markets.

Shashaty: Let’s go around the room one more time for everyone to give us the one most important thing you think our magazine needs to do to serve the industry in 2005.

Harris: Here’s a suggestion. Let’s get some practical ideas from the industry, whether from syndicators, investors, developers or whomever. How can you build more of a margin of safety into the deal? That would be a real service to the readers at all levels. Something that focuses on helpful information like that.

Swank: I would suggest more case studies but go more in depth. People could see the good deals in more detail and take a lead from that.

Perel: I’d like to second that. Profile a deal that had a crisis – and they all do. Show a crisis and how it was solved in a detailed case study.

Finch: The big issues: Year 15 and all the ancillary items surrounding it and preservation of the existing housing. There are a lot of rules coming down. Try to explain what those rules are, such as qualified contracts and exit taxes.

Sereda: Anything that would induce caution on the part of investors, developers, people in the middle. People are not as mindful as they should be that there is a downside.

Shashaty: Some people would be of the opinion that the less said about poor deals the better. You’re disagreeing with that “see no evil” point of view.

Sereda: I think the truth benefits us. I don’t think we’ll lose the bipartisan support we enjoy if we point out some of the excesses that are occurring.

Heller: I think we’re up for some challenges this year. As a part of the advisory committee of this group, I don’t think we should be airing our dirty laundry in a public forum. We have issues but this magazine is read by those folks on Capitol Hill. I think this industry has better ways of policing itself.

Shashaty: This is one of the ideas we had, and we’d like to get your guidance on this. One possibility is to write about how a good asset management department works and deals with problems.

Thielen: How about an article on turnarounds?

Shashaty: So frame it positively – an article on turnarounds and an article on good, proactive asset management.

Heller: I think the prevailing-wage issue taken on by the magazine could be a very effective and responsible approach to helping out California at this critical time and helping out many other of the major urban markets. The time is right and the data is available to show how the prevailing wage really hurts the affordable housing industry.

Finch: If we do not define ourselves, and let someone else, a local newspaper, define who we are, we’re in trouble. If a project goes down the toilet, it will be defined by the media. We need to define this industry, and I think, Andre, your magazine is the one magazine that can do it.

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Donna Bushore
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