More than a dozen excellent ideas for making the federal low-income housing tax credit program more efficient were aired at a meeting of the industry’s leading developers, financiers, accountants and attorneys held in Chicago in October.

The leaders convened as part of a special public meeting of the Editorial Advisory Board of Affordable Housing Finance magazine at the start of AHF Live: The 2005 Tax Credit Developers’ Summit.

Below is a transcript of that meeting. This is a very important document for the future of the tax credit program, full of very candid assessments of the state of the industry as well as ideas for improvements in public policy and private practice.

Reading this transcript is just the beginning. The whole point is for you to read it, think about what was said, and respond with your thoughts. Affordable Housing Finance magazine will lead an industry-wide virtual discussion intended to set an agenda for changes to the program. Stay tuned for reports on our progress in forging consensus on an agenda for improvements in the tax credit program.

Andre Shashaty

Editor in Chief

Affordable Housing Finance magazine

Industry leaders debate improvements in tax credit program

Some of the toughest issues facing the affordable housing industry were on the table for discussion at an open meeting of the Editorial Advisory Board of Affordable Housing Finance magazine held at the start of AHF Live: The 2005 Tax Credit Developers’ Summit. Board Chairman David Reznick introduced the discussion with his characteristic humor, but without understating the challenges to be addressed.

“We know that federal resources are shrinking. We know costs are going up. We know housing isn’t affordable. We’re going to be talking specifically about those problems that we see as the greatest that face us,” said Reznick, chairman of the Reznick Group, P.C., in Bethesda, Md.

Reznick explained that the goal was to create an agenda for improvements in the low-income housing tax credit and tax-exempt bond programs that Affordable Housing Finance magazine can put forth and advocate.

The following report is an abridged transcript of the roundtable discussion.Affordable Housing Finance magazine Editor Andre Shashaty, who served as co-chair, invites readers to watch for a report in the January 2006 issue of AHF on the policy implications of what was discussed.

“Reader feedback is invited. Please send us your comments on the program issues and possible solutions raised in the meeting. Let us know what issues you think are most important and what policies you believe are viable solutions,” Shashaty said.

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ANDRE SHASHATY: I'm the editor of Affordable Housing Finance magazine. I'd like to welcome you to this public roundtable discussion of our magazine's editorial advisory board. This is the opening event at AHF Live, the 2005 Tax Credit Developers' Summit, which is sponsored by our magazine and by the Reznick Group, and by Illinois Housing Development Authority and the Chicago Department of Housing. We're pleased to have Shaun Donovan here with us today, who is going to be our speaker tomorrow. He's the commissioner of housing and community development for New York City.

We're especially pleased to have as our board chairman Mr. David Reznick of the Reznick Group. With that, I'm going to turn it over to David to explain our agenda and begin this roundtable discussion. We need to keep it moving pretty quickly.

DAVID REZNICK: The last time I was a chairman of anything it was for my granddaughter's nursery school open house, so hopefully this will be somewhat more orderly. We plan on going around and introducing you to everybody that is on the advisory board. These folks will talk about what we know is happening. We know that federal resources are shrinking. We know costs are going up. We know housing isn't affordable. So why do you call your magazine Affordable Housing Finance? Housing is not affordable. We're doing everything in this room to try to put together teams to make that happen, and it all seems to be swinging kind of against us with costs, against us with subsidies. We're going to be talking specifically about those problems that we see as the greatest that face us. After going through the entire group, several of us have put in thoughts and questions that got selected to actually discuss. They will be discussed and answers (or thoughts) will be provided to us. The goal here, if there is time, is to get more feedback and attempt to select those three, four, or five which will have zero cost to the treasury.

WALLY SCRUGGS: The Housing Trust of America, we're a four-and-a-half-year-old company of tax credit developers. We've done five projects in four states, primarily using tax-exempt bonds. I'm sitting here listening to David and we certainly have the same issues that he is talking about: rising costs and shrinking subsidies. As we move on, we have a couple of ideas. I am certainly interested in sharing those and hearing from the rest of you folks.

CHRIS TAWA: I'm Chris Tawa with MMA Financial. I'm senior vice president and head of our affordable housing lending platform, which is tax-exempt bonds with enhancement from all the agencies, private-placement tax-exempt bonds, and taxable executions. And, of course, my colleagues on the equity side are significant players in equity investment and syndication. MMA has 300,000 units that we asset-manage in 3,000 properties, the vast majority of which are affordable. The issues we are talking about today are ones which we see constantly in our daily practice.

RONNE THIELEN: I'm Ronne Thielen with Related Capital Co. I've been with Related for 11 years. Before that, I was in the public arena for even more years than that. I spent a lot of time staring out the window of the airplane this morning trying to figure out what I was going to say about what developers are doing today to cope with the higher costs and other problems facing them. The business strategy that I come up with is that people are leaving the affordable housing arena, which is not a good one. We've even had people in California recently give back their 9% allocations because their costs were so high. They get negative points for it, but they just couldn't get the deals done. You can't stockpile materials anymore, so that's not even an option, where before you were able to contain your costs if you were able to do that. The higher equity pricing obviously has helped, although we see once we've given them that extra say $600,000 that it disappears in their budget and gets spent. So, it's definitely needed to make the deals work. I do have some ideas as well, and I look forward to the discussion on changing the credits.

JEANNE PETERSON: I'm Jeanne Peterson. I work for the Reznick Group in its Sacramento office. Prior to going to Reznick a little over a year ago, I ran the tax credit committee in the state of California for five-and-a-half years. Before that, I was at the Michigan State Housing Authority for a number of years as general counsel. Like Ronne, since we're both in California, we have seen incredible rising costs for land and construction. We've been battling the whole prevailing wage issues there, [and are] trying to get affordable housing [exempted from] prevailing wages. There are resources in California and in other states as well that will help fill the gap between 9% and 4% credits, so a lot of deals have been able to utilize the 4% credit and tax-exempt bonds.

CORINE SHERIDAN: I'm Corine Sheridan with Boston Capital. Boston Capital is a 35-year-old company. We've got about 145,000 apartment homes across the country, primarily affordable. We also are in market-rate as well, on a smaller scale. We are in the process right now, because we were primarily a syndicator that did a lot of the old farmer's home [Sec.] 515 deals, and I like to say that we're in the recycling business, trying to figure out ways to help the owners of some of those rural deals keep them in the affordable housing arena. So, I'm interested to hear if there are any ideas at all, because it's difficult to come up with any, on what can be done about those.

JEROME RUSSELL: I'm Jerome Russell. Our company is H.J. Russell and Co. We are a fully integrated real estate and construction firm in Atlanta. We are the largest owner and manager of HUD properties in the state of Georgia. We still hold onto a sizeable FHA portfolio. We've also developed bonds, Hope VI, tax credits, and today we're kind of somewhat caught up in the condo craze. We're just trying to figure out the balance going forward in our product mix as we attack the marketplace.

PATRICK SHERIDAN: I'm Patrick Sheridan. I'm with Volunteers of America. We probably got the age of organization beat. We're a 108-year-old national spiritually based nonprofit organization doing a lot of affordable housing development.

We used to be focused primarily on HUD [Secs.] 202 and 811 development, and now we're looking at doing redevelopment of a lot of the older properties we've had, some of which date back to the 1960s. We're also doing a lot of preservation of HUD, FHA, RHS, and expiring-use tax credit projects. Certainly, our biggest challenge has been trying to find ways to finance these deals and keep it affordable for the deeply needy residents that we have throughout our properties. A couple of areas we're looking at in terms of solutions to that would be partnering with single-family home developers where there are inclusionary zoning requirements. They're not interested in doing multifamily affordable. The other area is getting into the single-family modular home construction business, both from a single-family side but also a multifamily.

DAVID PEREL: I'm Dave Perel with Preservation Properties. Our firm has done seven acquisition/rehab deals using tax credits and bonds and acquisition rehab of Sec. 8 properties. Before joining Preservation Properties, I financed affordable housing for 20 years with the city of Los Angeles. My comments try and bridge both the public sector and then from the private sector side of things.

JACK MARKOWSKI: Hi, I'm Jack Markowski, commissioner of the City of Chicago Department of Housing. Through our department, we use about $400 million a year to finance about 10,000 units of affordable housing each year. That ranges from everything from first-time homebuyer programs to emergency assistance programs, foreclosure prevention, as well as allocating tax credits, tax-exempt bonds, and other resources to rehab and construct affordable rental housing. We're certainly seeing the problem of increasing costs and diminishing resources, which would result in fewer affordable rental units. Our answer to this has been pretty much to keep costs down as best we can, but also to bring other resources to the table. We've helped develop a number of local resources, including resources at the city where tax increment financing is used extensively. At the state level, we've developed something called the Donations Tax Credit, which brings new resources to the table. In the state of Illinois, we've just recently started a new statewide rental subsidy program, which is important to reach very low income renters. In our city, we've also seen an oversaturation in rental housing targeted at households from 50% to 60% of median income, and we need to find ways to reach a lower-income population. We need that rental subsidy.

HAL KUYKENDALL: Hi, my name is Hal Kuykendall from GMAC. GMAC got into the affordable housing business when it acquired a firm called Newman and Associates, which I was a principal of. We've been in the affordable housing business, that has been our core business, for 26 years. We've seen a lot of different real estate and capital market cycles, and this is one of the more interesting cycles. I live in San Diego. There is a debate in the paper every day about whether we're in a housing bubble or not. I'm pretty much convinced we are in a bubble. So, we see the same issues that everyone else does. Too much money chasing too few deals and irrational exuberance in the for-sale housing market, which causes increased costs in the affordable market. I don't think there's one solution; hopefully, there are many solutions.

DAVID HELLER: I'm David Heller, principal with the NRP Group. The NRP Group is a developer, general contractor, property manager. We've developed over 120 different communities and we have developed over 6,000 units. The states that we are involved in are Ohio, Michigan, Indiana, Virginia, North Carolina, Texas, Arizona and New Mexico. The challenges are obviously the same as everyone else's around the table. The way that we handle that and try to work in this environment is probably similar to all the people in this room, and that is to hire the highest quality developers in the country and also surround ourselves with the best syndicators, lenders and attorneys that we can. A lot of times when we do that, we're forgoing things such as the highest cents on the dollar or the lowest debt rate, but we're getting the best advice. Sometimes, that good advice is worth a lot more than the extra penny or so, because a lot of the challenges in our industry can really be worked out through deal structuring, which really has paid off for us.

STAN HERSKOVITZ: I'm Stan Herskovitz. I'm senior vice president of Fairfield Residential. Fairfield is a national developer and purchaser of multifamily property. We operate out of San Diego and Dallas, Texas. We are probably the most prolific builder of apartments in the United States, and we're one of the three top purchasers. This year we'll purchase about 52 different apartment complexes. On the affordable side, in December we'll close our last two deals. That will be eight affordable transactions this year, about 2,000 units. We have about 6,000 units financed in total with bonds and tax credits, another 6,000 units approximately that have bonds but not credits (but do have regulatory agreements). That having been said, we have no new product in the pipeline on the affordable side. There is nothing right now that is new that we're processing. Everything that we've processed or is closing in December has been on our books for a year to get done. Our problems are exactly what has been said at this table. It is tougher to find the product. It is tougher to make that product work. Given what has already been said with respect to the affordability and what really the definition of affordable housing is, are the real issues we're facing today. As we try to reach for deeper affordability and more social programs, we find that we have less and less dollars to work with and more things that we have to do. It is an ongoing problem.

LEE HARRIS: I'm Lee Harris, president of Cohen-Esrey Real Estate in Kansas City. Four of our six business units touch affordable housing in some way. We have a construction company. We have a management operation that handles conventional as well as affordable housing in 17 states. We have a company that makes a market in Missouri state low-income tax credits. We have a development arm doing affordable. One of the more interesting things we've been working on recently along these lines is the historic conversion of old schools and hospitals. Interestingly, there are a number of subsidy layers that are available for that kind of work, and some of them make terrific seniors housing.

KIM GRIFFITH: I'm Kim Griffith with Freddie Mac. We are fairly large investors on the equity side and the debt side in tax credit deals. We're about 15% of the market currently on tax credit equity, and we plan to stay a major player in the tax credit equity market. We're having trouble finding deals that work on the debt side, so what we're trying to do is expand the way that we think about things and work with maybe higher-margin lenders and try to structure deals on the backside. Our thought is that if we can't make it work on a one-off retail basis, we're going to make it work on the wholesale side.

RENEE GLOVER: Hello, I'm Renee Glover. I'm the CEO of the Atlanta Housing Authority. During the last eight-and-a-half years, we have been repositioning our distressed public housing communities by partnering with excellent private-sector development partners, and we have closed some thirty-plus mixed-finance deals. We use every resource that is out there: some public housing development dollars (primarily HOPE VI), 9% credits, private-activity bonds with 4% credits, Sec. 8 project-based vouchers. Of course, all of these resources are under attack, which is somewhat mind-boggling in the face of the kind of leverage that has been accomplished and the impact that has occurred in the city of Atlanta. We have generated some $3 billion of economic impact just over this eight-and-a-half-year period, and literally brought life back into every corridor of the city, which was just being killed off by these very distressed properties. So, I've got some ideas and I think this is a timely panel, and I'm only going to say that hopefully the pendulum will swing in the right direction.

TONY FREEDMAN: I'm Tony Freedman at Hawkins, Delafield & Wood, your friendly neighborhood housing lawyer. What concerns me right now are not so much the cyclical changes in the housing market, which the 80% of you around this table with whom I've done deals have been very good at accommodating over the last 25 years. What concerns me right now are the major shocks to the system threatening to be administered by people who are unencumbered by knowledge, information, experience, or accountability. The things such as the tax reform proposal, which constitutes a trillion dollar disruption to the economy without a shred of an idea behind it. The shrinking of resources that will undermine not simply Renee's inventory, but the nation's inventory of 1.1 million units of public housing. The stuff that is going on in the context of the FY06 appropriations that would eliminate HUD's ability to preserve affordability on the housing that it takes in. Major shocks to the system that are threatened simply because people know nothing.

CHRIS FOSTER: My name is Chris Foster with Hampstead Partners. You know, this business has always been a tough business. It continues to be tough. I think that the fact that the Department of Housing and Urban Development is low on funds has had a dramatic impact on the way that they do business. You can show them something that makes a lot of sense. If you could get them off to the side and get them to focus on it in the past, they were willing to do something. The Department now is just so focused on saving every nickel that they can that they can't even look out to the next two or three years. I'm not sure that it's their fault; it's just the facts that we're dealing with. You know, I'm sure other people have talked about it, but certainly costs have gone up (operating costs). I know that we used to underwrite at about $3,000-$4,000 a unit and thought we were relatively conservative compared to some. We're running pro formas now at $6,000-$7,000 a unit – without property taxes now in some cases. Also, the cost of construction is way up. We used to routinely run our baseline pro forma at $8,000/unit for rehab, and now our baseline is probably at $20,000 and we're routinely doing $25,000-$30,000/unit or more in some cases. So, that has us concerned. We also are utilizing 9% credits a lot more [vs. 4% in combination with bonds]. The bonds and 4% credits are just not providing enough proceeds to get projects done right now.