EDITORIAL ADVISORY BOARD TRANSCRIPT

Leadership Roundtable Discussion of the Editorial Advisory Board of AFFORDABLE HOUSING FINANCE

Participants:

David Reznick, Reznick Group; AFFORDABLE HOUSING FINANCE Editorial Advisory Board chairman

Andre Shashaty, editor-in-chief, AFFORDABLE HOUSING FINANCE

Jana Cohen Barbe, Sonnenschein, Nath & Rosenthal, LLP

Daniel Cunningham, Wachovia

R. Lee Harris, Coehn-Esrey Real Estate Services,Inc.

J. David Heller, The NRP Group, LLC

Robert Hoskins, The NuRock Cos.

Cynthia Lacasse, John Hancock Realty Advisors,Inc.

Robert Moss, Boston Capital

Jeanne Peterson, Reznick Group

Todd Sears, Herman & Kittle Properties,Inc.

Patrick Sheridan, Volunteers of America

Chris Tawa, MMA Financial, Inc.

Ronne Thielen, Centerline Capital Group

Sean Thomas, Ohio Housing Finance Agency

Deborah VanAmerongen, New York State Division of Housing and Community Renewal

Shashaty: My name is Andre Shashaty. I'm editor of AFFORDABLE HOUSING FINANCE and chairman of AHF Live. And welcome to the Editorial Advisory Board Roundtable, which is the opening event of our 2007 conference. We are very glad to be back in Chicago. I am going to go around the room, and we usually start on the left. I think we will change it up and just confuse everybody by starting on the right this time. And we are going to ask our panelists to state their names, title, company, and where they are located and respond briefly in less than a minute to the question, is the tax credit industry better or worse off today than when we last met here on a rainy day in the fall of 2006? So with that, we will go to David.

Reznick: David Reznick, with Reznick Group. We are accountants involved in affordable housing. My answer is, yes, I believe that we have not seen as much of price declines as was anticipated. I believe that, in fact, we have seen some costs go down. To me, rising operating expenses and flat rents are the biggest continuing threat.

Sears: My name is Todd Sears. I'm vice president of finance for Herman & Kittle Properties, a developer in the Midwest. And I would say generally, yes, starting off with the reasons that Dave mentions, pricing stabilized, construction costs are off of their post-Katrina highs, the 10 year’s down in the 4.30 [price range], and hopefully spread—the local will soon follow, and the GO Zone transactions are not necessarily clearing out, but I think people are getting a much better idea of what they have a hold of for those transactions. I think all of that is tempered by the AMI issue, which I see as the biggest threat.

Barbe: I'm Jana Barbe. I'm the chairman of Sonnenschein Nath & Rosenthal's Global Real Estate Group, and thank you for having me back. In terms of answering the question, shockingly, I'm going to say, I think that the industry is better off, but I'm going to go out on a limb as to why. I think the industry is well positioned now, in light of the subprime lending debacle and the current decline in home values, and I think there are economic trends at play here that will serve us, if we are smart.

Cunningham: Good afternoon. My name is Daniel Cunningham. I'm the head of affordable housing for Wachovia based in Bethesda, Md. I run the long-term affordable housing debt lending as well as private placement. I believe that the affordable housing industry continues to be well positioned, and I look first to the fact that as an overall industry, financial services have been rocked by several trends. We, as an industry, and affordable housing in particular, have weathered the storm, and we remain poised to continue to focus on fundamentals And, let's face it, the need for affordable housing has not changed, has not diminished at all, so I think we have a long-term set of strategies that are in place that will allow us to be successful.

Heller: David Heller, The NRP Group. We are developers of affordable housing. We develop in about seven different states across the country from Ohio, Michigan, North Carolina, Texas, Arizona, and a couple in between, Louisiana. Are we better off or are we worse off than we were in 2006? I think everyone so far around the table has said that we are better off as an industry, and I would strongly disagree. I think that we are in a much worse place than we have been. I think we need to be intellectually honest with ourselves about what is going on in the industry, and we have some real issues. As a developer, one of the main concerns is the pricing. You know, for years I have been sitting across the table from syndicators, and they have been saying that prices are going down, prices are going down, and I say, yeah, yeah, whatever, they are not going down. And this year I really believe them. Pricings are really going down, and it is a concern, and it is a challenge to making deals really work. So I think we need to be honest with ourselves. But the other issue is the AMI issue, and if we are not honest with ourselves and we don't go to Washington, we don't get it fixed, it is going to be a problem. I mean, we are in an industry that for 15 years has been modeling pro formas.

Shashaty: Could you define the term for the audience who may not know?

Heller: The problem is that the incomes that are defined by HUD that we use in the formula to calculate the 60 percent of area median income, there is a flaw in the way that they are approaching that. The flaw is—from the developer's perspective and from the industry's perspective—is that we are not seeing rental growth, and so we have areas like San Francisco that we are seeing declines in area median income. We are seeing areas like Houston, where it has been flat for many years, and the problem is, we are all pro formaing our developments with 3 percent income growth year after year. And when you wait for the Federal Register on that one day, when they come out with what the rents are going to be, and we open it up and we say, “Oh, my God. It is down again.” Then our expenses are trending up as well, so you have flat rents and increasing expenses, and I think that the equity investor community, the syndicator community, everyone has looked at this and said, “This is a real challenge to our industry, and soft dollars are not there to make up for this challenge. What are we going to do?” And I think that several people, many in this room, have taken the fight to Washington. I think Washington is listening. They understand it is a challenge for the industry. But in answer to your question, Andre, I would encourage the others around the table to be intellectually honest with the answer. I think that we are worse off than we were last year, although I do see bright spots and that it can be fixed.

Peterson: Good afternoon. I'm Jeanne Peterson with the Reznick Group, formerly running the Tax Credit Allocation Committee in California, before that the general counsel in Michigan, and I think it is sort of a mixed bag. I certainly take in part what David has said. I think that we do have a lot of bright spots, in the sense of the modernization bill. We have leaders in Congress that really care about housing and care about affordable housing and are trying to craft some legislation that will be helpful. Also, looking at the number of tax credit applications around the country, they are certainly off. The competition is greater, which means that we are getting developments that have more energy-efficiency, that are trends-oriented, and so on, so I think in that respect it is thriving. On the negative side, I think the AMI issue is certainly run in, for example, not only places like San Francisco, where the AMI went down by $4,000 this year, but in 80 of the 83 counties in Michigan, it was either flat or went down, which means it is going to be a long time before rents can rise. I think some of the other downsides are that with increasing costs and diminishing payments, that we are seeing fewer units being built, and that is also a continuing concern for me.

Thomas: Hi, Sean Thomas with the Ohio Housing Finance Agency. I guess I would also say mixed, maybe closer to the good side. I referenced a number of applications. We had 169 applications in Ohio, and we funded 39. We probably had 50 deals on the table that were good deals. We are also fortunate in Ohio. We have a very strong gap financing program. Our housing trust fund, and that is still strong and enables us to do some deeper carving and some other things. Our vacancy rent for tax credit properties went down this year, and utility allowance regulations, I think, this year was helpful. Ohio, we went ahead and did our own anyways, but I think having that is helpful nationwide for utility allowances. I would just ditto the comments on the flat income. I think Ashtabula County, I think that is like the most to receive an increase in 10 years or something like that. We had that county that was an outlier, so that is my minute.

Tawa: Hi. I'm Chris Tawa with MMA Financial. I'm the head of our affordable housing debt group, and to copy the line of a famous author, “It is the best of times and the worst of times.” I wanted to get that line before anything else grabbed it. The worst of times is if you think that the housing tax credit program is supposed to be a housing production program and we are supposed to use it primarily to produce new units, because I think that has been on the significant decline. And I have not seen any stats on this to back that up, but just from my position and observation of the business that we do, more and more deals are infeasible. Land costs have not declined. They seem to still be as high as ever. Per the issue just mentioned, it does not take much to show a pro forma does not work with flat rents and increasing property expenses. And that is simply an infeasible deal. And the availability of soft money programs to fill these gaps are overstretched, so we are seeing a tremendous feasibility challenge on any new build, new generation of new tax credit units. On the other hand, it seems to be a very good time if you think the credit program should be used as an acquisition-refi rehab program because that seems to be where the vast majority of the business right now is being done. We call that preservation, and it's laudatory to protect older units, but I don't think that was necessarily what we all expected from the program 20 years ago when it was initially enacted. So that is, I think, the plus and minus right now.

Lacasse: I'm Cynthia Lacasse, and I run the tax credit and equity investment group at John Hancock. I'm also the president of the Affordable Housing Investors Council, which is the trade organization for investors in the tax credit industry. As others have said, I think the question is a tough call. It is easy to find concrete examples to argue either position, and I think that is because these are very interesting times, both in the macroeconomy and, more specific, to our industry. In the long run, I think the industry is moving in the right direction in terms of being better off because the high prices and some of the other things that were going on in 2006 were clearly unsustainable and not good for the industry. In the short run, though, I think the industry is worse off, at least right now, because of the turmoil that is going on in the capital markets. Right now there is a lot of uncertainty about the availability and the cost of both equity and debt capital. And that is resulting, as others have said, in uncertainty about deal feasibility. How are the deals going to pencil out? I think that we are in a very interesting time right now.

Hoskins: I'm Rob Hoskins. I'm with the NuRock Cos. out of Atlanta, Ga. We operate both in the Southeast and Southwestern part of the United States. My answer to the question would mirror David Heller, and that is, I think not only are we in a more difficult time period, but I think we are in a quagmire. I think we are in a position where we have got a continuing allocation of diminishing resources or diminished resources, and a lot of the states are now going after the existing acquisition-rehab for existing tax credit properties that need to be put back in the housing stock, which is, as has been indicated, laudatory. But at the same time period, there is a definite need for new affordable housing stock on the market, yet there are no resources to do it. But beyond AMI, I think we have got true market condition issues in several pockets of the United States. I know for a fact that Atlanta has been extremely soft for the last 20 to 22 months, and I don't think the AMI has anything to do with it. I think the real market rents have had an issue to do with it, and I think affordable housing becomes a real interesting definition when you start competing with equity REITs that are dipping their rents down to try to maintain market rates. And that becomes a whole different ball game that the developer has to play and still try to make money out of the transaction.

Moss: Hi. I'm Bob Moss with Boston Capital. For several years now we have seen the issues that David Heller spoke about continuing to rise. The area median income is flattening out. At the same time, this year we testified before Ways and Means, and it was the first tax credit testimony on the low-income housing tax credit program since the program was incepted in 1986. So we have an audience. We have an audience in Chairman Rangel. I know that a lot of people are going to talk about that later today. John Shiner, who is the chief legislative director, is very interested in mechanical changes now and, hopefully, an increase in the future. We all know we need more tax credits, and we need the credits to go further, but it can't go any further until we have a 20-year change. We need a 20-year change for the future. So are we better off than we were last year? I don't know. Are the Red Sox better off? Yes.

Sheridan: Hi. I'm Patrick Sheridan with Volunteers of America. We are a national nonprofit developer working nationwide, and I head up the housing development division. I think things must be worse this year because the table is smaller than it was last year, but the other thing I think I notice is that the developers seem to be pretty much of the opinion that things are worse off, and I have to echo that myself, too. They are probably not as bad as people were predicting a couple years ago or even last year. Certainly, I think we are seeing equity prices that are lower now than they were last year, although it may be only a couple cents instead of four or five. That is a higher cost than it was a year or two ago, maybe only by 50 basis points or 100 basis points depending on the deal, but, then again, it is not as bad as it could be. And the other thing we are looking at is cost is definitely higher. I was going to say, we are seeing a dip in insurance premiums coming up and now with California burning, I'm probably not going to see that when premiums come up again this spring. With increasing utilities and insurance and taxes, again, the flat AMI thing is just killing us, so we are definitely in markets where we are not going to see a rent increase for two or three years. If you ask somebody looking for an apartment in those markets, you are going to find that the vacancies are down and the rents are up. And it is just counterintuitive to what is happening as far as housing and the flat AMI.

Thielen: I'm Ronne Thielen. I'm managing director with Centerline Capital Group, and I am based in Irvine, Calif. I left there Monday morning, and things are certainly worse there. There is no doubt about it, and they are actually saying that insurance rates won't change. They may not go down, but, hopefully, given the extent of what is going on there, that won't happen. I really have to fall sort of, I guess on the side of uncertainty about whether we are worse off or better off because it is so uncertain on the investor side who we are going to have in this business next year. One of the major investors is in AMT, and without them, you know, investing 25 percent of the credits that are available, we have a huge gap, and that could only mean that the yields to the investors are going to have to go up and they probably should, because we need more investors. We should not have this kind of a hit when somebody has to back out of the program for a while. So I see the prices for credits going down, the yields to investors going up. I don't know that that is a bad thing. I think it is probably a good thing because I think we probably got too far down the other way. But investors, because deals don't pencil as well and, particularly, the income side is not the actual cost side with the construction costs increasing. So I think with the—Bob had brought up Charlie Rangel and Barney Frank, both working toward making our tax credit program more effective, more efficient, and just sort of modernized in general. If it really happens, one of the great things will be that on the bond side, the taxes on the bond side, there are things that sort of go along with a 9 percent credit that will really allow us to use more on the bond side, thereby getting credits that come for free. So we will get to that a little more later, but that would be a very positive thing, if we can get some action.

Purcell: I'm Paul Purcell. I'm president of Beacon Development Group, and I work with public housing authorities and developers and nonprofits in the state of Washington. I would have to agree that I think that the industry is worse off and for a couple of reasons. One, we continue to lose two affordable units for every new affordable unit that is built and that we are not replacing those and that we are increasingly taking more and more money, more and more tax credit money plus soft money to replace those units. In addition, QAPs around the country are targeting lower and lower incomes. So when you talk about the problem with the AMI, you match that problem with a level of Littenberg (sic), and you are seeing it more and more difficult for people to afford even our affordable housing. So I think that the income issue, the AMI issue, is not limited to the impact on us as developers, owners, and managers. There is really a broader Littenberg (sic) issue. In Washington, our construction costs have gone up about 20 percent in the last two years. I respect that investors need good returns, but to see soft money going down, investor equity going down, is really limiting the number of projects. And the final thing that I will say is that with costs going up, as we look at $250,000 to, in some states—and I know in California we are looking at $350,000, $400,000 for an affordable unit to be built, our ability to maintain public support for affordable housing at that kind of cost is difficult and to go ask for state trust funds and other kinds of additional soft money with those kinds of costs, so I think we are in difficult shape.

VanAmerongen: I am Deborah VanAmerongen, and I am commissioner of the New York State Division of Housing, which is the tax credit allocating agency for New York state, and I get to skate on the question because I was only appointed in January. Seriously, I would like to think that New York, at least, is better off for having an administration that cares very deeply about affordable housing. And having worked in the housing industry for about 13, 14 years now, I would say that I'm encouraged but for a bad reason, perhaps. I think that we have approached, at least in New York and a lot of the high-cost areas throughout the country, a perfect storm on affordability, and it is causing people to have to focus on housing. And I do see more attention being paid to it on the national level, certainly at the state level in New York, where it was not a part of the agenda for many years. And I always say, I feel like the most popular girl in the room. Every other state commissioner is talking to me about their needs and how they want to work with me on housing. It is, I hope—I’m optimistic that it is going to lead to additional resources and continued focus on how to make the programs work better.

Harris: I'm Lee Harris with Cohen-Esrey Real Estate. We are based in Kansas City. We do development, property management, construction, syndicate, state, LIHTCs and federal and state historics. And, Andre, I think I live in an alternative universe, representing the great flyover country, when you guys are flying from New York to San Francisco or L.A. In our neck of the woods, most of the country, we have never been able to achieve maximum rents. AMI, fine and good, but, guess what, we have been dealing with 1 percent or less rent increases from day one, forever. And in terms of the state of the industry, here are some observations that I have made. The environment is still just as competitive as, Sean, you were saying, relative to credit awards. Doug Cook from Ernst & Young is here someplace and was in our panel this morning, indicating that based on the Ernst & Young study, we still have 34 percent of the industry at or below 1.0 debt-coverage ratio, and it has been that way or trending up that way for quite a while. On the other hand, long-term interest rates are still reasonably low, but, on the other hand, equity pricing has dropped a little bit. But, again, in my alternative universe, we have never gotten $1 or $1.05. We have always been stuck at 88 to 92, 94 cents, and so we model our deals accordingly. One thing I noticed with some alarm is that there are very few investors in the marketplace right now willing to do Sec. 8 tax credit deals. It does seem, from an operating standpoint, like more and more of our residents that need affordable housing have credit problems as well as just being general criminals. So we are rejecting 50 to 60 percent of people walking in the door, either because they are criminals or they have bad credit or both. The number of general partners that are trying to panel our interests right now, are an awful lot more than I have ever seen before, and a lot of those deals are stinky deals. Developers moving away from developing tax credits going to conventional market-rate tax products, and I don't think the industry has gotten a whole lot more creative in terms of multiple sources of funds over the last year or two or three. So I say we are stagnating in my alternative universe.

Shashaty: Thank you. I just want to drill down a couple of things that people have said. First of all, who would volunteer to kind of give us a little primer on what is AMT and why the fact that one of our biggest investors is in AMT is a problem? I'm sure some of our audience may appreciate a little bit of an explanation here.

Thielen: Basically, there comes a point—and you have heard about it on individuals and how they are trying to—Charlie Rangel is trying to change it for individuals—for most individuals, not all. But, basically, there is a point where you have to pay—corporations have to pay taxes regardless of what otherwise they could put against their taxes, and the tax credits are not one of those.

Reznick: Actually, there is a particular level of tax that everyone has to pay without regard to what deductions or credits that you have. When the corporation has those deductions, it has to then pay that lowest alternative minimum tax. When it pays that, it can no longer use the credits and/or losses that are generated because they would be subject to alternative minimum tax.

Shashaty: The tax credit becomes worthless to them?

Reznick: Sure. Many of the individuals in this room face the exact same issue when they get too many deductions, too many itemized deductions, which are subject to the alternative minimum tax.

Shashaty: So let's clarify a little bit about what the practical meaning is. I don't know if anybody is in the room from the biggest tax credit investors. Is there anybody here from Fannie Mae or Freddie Mac?

Reznick: Well, see, what happens in the case of a company like Fannie Mae, they have built up a stream of credits over years because they have been investing over years. So they have a continued stream of credits, and as their income rises, they can utilize the credits and they can utilize more credits and then they keep buying and, ultimately, matching their tax liabilities up to the alternative minimum tax. When their income flattens and/or drops, then the credits they have are all they need and, potentially, more than what they need. So unless what they do would be sell some of their existing credit transactions, just so that they can continue buying because they have enough—some companies have done that, I believe in the past—then they are not going to be able to enjoy the benefit of what it is that they are contributing for. Now, that is not to say that Fannie Mae or others may not in the future package up some of their existing portfolio and sell it into the marketplace so that they can then continue to buy. But when they do that, somebody else is buying that would be potentially—that would be potentially buying new products, so that is not really a solution. It takes the pressure off of Fannie Mae, but then someone else who has bought it up is not going to be buying.

Shashaty: So let's touch on the question of just how significant is it. We have heard at the magazine that the one institution is affected by AMT and that the other one very well may be but is not really saying. So let's talk about how significant this situation is and what it will mean in 2008 in terms of the demand for equity investments. In our latest capital markets forecast in AHF, we quoted a number of people saying that they think that projects will go begging because the investors or manager won't be there. Let's get some comment on just how significant this situation is with these investors, and I have kind of a "what if." I mean, we hear that Fannie Mae and Freddie Mac are doing great business in multifamily debt financing right now because of the conduits and the problems that they are having. So their market rate multifamily business is gangbusters, and they must be seeing—projecting a big increase in income in '08, so wouldn't that mitigate in favor of more tax credit investing?

Barbe: I guess just a few observations. I happen to think—and I know it wouldn't be the first time that the developers get really mad at me around this table. I happen to think that the situation with Fannie and Freddie is good for the industry right now. I think the price corrections that are going on were absolutely necessary. I think you cannot expect investors to invest in deals where their cost of funds is higher than their yield, and that's what I think this industry has been expecting people to do for the last few years, to invest when their cost of funds is higher than their yield. And it is a gamble that your CRA credit investors are sometimes not going to do. I think life does not work that way, and in the end that would kill the industry to a far greater extent than what is going on now. And to me, anyways, from both a macro and a micro level, the fact that we are having a pricing correction—and the fact that Fannie and Freddie stepped back—means that new investors will, as Ronne said, enter the marketplace, and they are. Some of them are the insurance companies. They have come back with a vengeance. In the last week, I was retained by an insurance company to do a significant investment. They have not been in the market in seven years. Today I got a call from someone wanting to do a new deal that has been out of the market maybe a decade coming back in because all of a sudden it is attractive. In the end, Fannie and Freddie are going to come back. It is inevitable that they are going to come back, and then you will have more investors introduced into the marketplace and at least a pricing model, from the investor perspective, that is sensible because I don't think that you can ask people to lose money on these deals at the end of the day and expect it to be viable long-term. The second point I guess I would like to make, speaking for somebody who thinks the macroeconomics right now will actually serve this industry in the end. I guess I have a few. One is that—I met recently with an economist for one of the world's largest banks, and we were talking through their perspective on some of these issues. I think that you are going to see an environment where vacancy rates continue to decline because people can't afford to buy homes, and in the end that puts an awful lot of pressure on the federal government to allocate additional resources to multifamily rental housing. That means we have go to put the units up. We have to find a way to do that. I think that you are going to have a better tenant profile because you are going to have a lot of people who are working with good credit needing housing who are not able to buy in this market. But, lastly, and maybe most appropriately, the subprime debacle was sort of a weird thing. In many respects, if you drill down on it, it was really very isolated and a very narrow kind of lending that got into trouble. But because of this kind of peculiar emotional reaction that spread through the country and spread through banks and spread through the real estate markets, it affected everybody. And a lot of banks were completely innocent bystanders to all of it, and, yet, they found themselves not originating any more CMBS loans. But, equally, they found themselves changing their underwriting standards. And what we are beginning to pick up on now industrywide is a different sense of underwriting, and, frankly, a more diligent, more precise, more conservative underwriting. And I'm beginning to see the effects at our banking clients in their equity investments, not just when they lend on these deals. Credit committees are more focused. Agendas have changed, and that means the quality of the product goes up. At the end of the day, I think there will be a run to politics. I think that is what always happens, but I think that serves everybody. I think you are making a mistake if you think what serves the investors does not serve this industry because I think in the end they are what drives it.

Reznick: Jana, what you are talking about, if it is not blended in to qualified allocation plans to what they themselves focus and readjust their own goals to meet those "quality projects" as compared to attempting to press the developer to treat more and more lower-income families who have no ability to pay a 60 percent rent and does not have a subsidy or a Sec. 8 certificate, you are going to have a mismatch. You are going to have projects that are awarded credits that don't meet the criteria of what your banks and those other investors are looking for.

Barbe: You know, yes and no. I'm not sure I entirely agree with that. I do think there is a significant risk of that, and we do have to be careful. But I also think, at least from what I'm seeing, that the deals that are now getting done do pencil out, and, yes, we are requiring that the underwriting be more conservative and the lenders coming in with commitment letters are being more cautious. Where I'm seeing the impact is, I'm seeing deals that shouldn't get done not get done, frankly, and I am seeing syndicators who never before stepped up when they brought you a less than desirable portfolio or a less than desirable project saying, You know what, I'm going to stand behind this and then the deal gets done. And I think the lesson to be learned is, corrections happen in the market for a reason. We can learn from the corrections going on now, and it can make us better, if we choose to.

Purcell: The comment that you just made about corrections in the market happened for a reason. One of the problems with QAPs being driven below the market, the number of Sec. 8 vouchers that are required to make projects work, we’re trying to serve a whole population that really the market doesn't get to, and this was a market-driven vehicle which increasingly relies upon soft subsidies to make them work. So you say deals that shouldn't be done are not being done. Well, those are frequently deals that are for people below 40 percent median income. They are frequently the deals that are priorities of the state, cities, local communities. So how do you match those two? They should not be done from an economic point of view, but they are the priorities of the community and with shrinking HUD or other resources—

Barbe: A lot of what you say makes perfect sense to me, but where I'm struggling with it is—maybe people around this table know more and, certainly, some of them are doing it, so they undoubtedly know more. But at what I am seeing as investor counsel, and I represent a lot of investors, is those 40 percent deals and those 30 percent inner-city deals, our clients would kill for. There is unbelievable competition to take a New York City 30 percent AMI deal. The investors are clawing all over themselves to get it, literally. Those are still in many respects some of the most desirable deals, and, yet—you know, you have to wonder, is debt-service coverage not a 1.15x, I buy that. It is not as healthy a project, but you also have a much lower risk of foreclosure and you have a sort of portfolio project that people who want to do good, while they are making money in this business, have the project they get to point to. So in my experience anyways, those are not the deals that are suffering. I mean, we have had more than one client bidding on the same deal. The prices get driven up on those inner-city deals. The deals that I am seeing get dicier, are the 60 percent AMI deals that are in not as desirable a market, more traditional debt, higher risk of foreclosure. Those are the ones, at least from where I sit that I'm seeing.

Hoskins: But the problem is that New York City is New York City and Wichita, Kan., is Wichita, Kan., and Abilene, Texas, is Abilene, Texas. The problem that you have is when you have a role model like San Francisco, New York City, where you have investors that "thrive" for these 30 and 40 percent deals, the rest of the state agencies go, “Oh, well, gee, we want to see that in our community as well.” And you have operating expenses running $3,800 to $4,500 a unit and the rent is $360 to $400 a month, you can't afford to make that work in real life. And what we are hitting again is this quagmire situation where what is good for qualified small, scarce resource items like New York City, you know, it is good for them because you do need that in that particular, and it is unique to that marketplace. It doesn't hit mainland America, and that is really where some of the issues are coming down at this particular point in time. And it is what is making, from a developer's perspective, these real estate deals very, very tight. Our state authorities are saying, “Let's do it.” We are fighting it because not only do we, as a developer, not make any money, we can't get them to underwrite. And so we have an option—there has been a discussion that some of the tax credit developers are moving into market-rate housing, like that is a bad thing. They have to make money in some particular capacity. It is capitalist-oriented adventure.

Shashaty: Let me point out that we are going to drill down into this question of local differences, what deals, and underwriting and what deals are still in demand and which deals aren't. But I'm going to try to put some numbers to this discussion a little bit. In our capital markets forecast for 2008, we had one brave individual predict that on an aggregate basis nationally yields to investors would need to go up 50 to 75 basis points by June of next year, and that such an increase in yields could easily translate into a reduction of 5 to 8 cents on typical equity pay-in. So we are going to try to bring this conversation to a little specificity. I know it is hard to generalize nationally because a California deal is going to get a higher price than anything in Kansas is ever going to get. We understand that if, of course, it has not burned down. Let's see if we can get some comment on the specifics of this pricing dynamic, yield versus price on tax or equity. You can pass if you feel like you have to pass, but let's see if we can get some comment.

Hoskins: In terms of a benchmark, from where are you starting relative to pricing? Because if a 5 to 8 cent decrease for me means I'm down in the mid-80s—the low- to mid-80s, then you guys out on the coasts are going to be in real big trouble, and I'm shut down. If we are talking about 5 to 8 cent decreases in pricing off of a buck or even 95 cents, in the midpart of the country that is probably not going to make a whole lot of difference to us. Todd, would you agree?

Sears: We are susceptible to that.

Shashaty: Whoever wants to comment on trying to put some specifics to this trend.

Thielen: I don't think that is far off, what you said, 5 to 8 cents, maybe more like 5. It depends where you start. I think if you start from a year ago, then I think 8 cents is right on the mark, somewhere around there. But, again, we don't know yet because we are still trying to entice investors into the market, so we are still trying to figure out what that means. It is very hard—California just came out with a 9 percent allocation for the second round. It's hard to price those deals because they are not going to close until next February, some of them will be a little later than that, and we don't know where to price those deals, and it is very uncomfortable for us and very uncomfortable for the developers. I think probably Cynthia can talk as a direct investor. They really have the upper hand right now because they know where—I think they know better than we do anyway where their yields are going to be or need to be six months from now, so it is a very difficult situation. I want to go back just to the Fannie and Freddie thing just for a minute because I think the problem is even though, yes, they are doing a lot of mortgages, they are at cap, and until somebody—the regulatory agency—I have forgotten who it is—raises that cap, they cannot do any more than what they are already doing. So they can't expand and do more credits and buy more.

Shashaty: Who else wants to comment?

Sheridan: Putting on my National Affordable Housing Trust syndication hat, yes, I think we have seen a 50 to 75 basis point increase in the yields, but yet I don't think that translated into the 5- to 6-cent drop or an 8-cent drop that was talked about. I think for some of the reasons that Ronne mentioned and others, what happens in the future may push the yields even higher, and then we will see an increase in the drop.

Moss: Andre, last October, we closed a fund at 4 1/4, and we are closing a fund right now at 5 1/4, so you can look at the percentage difference. There is yield fever. That is what it is, is yield fever. There is going to continue to be yield fever, and investors are going to continue to tell us where to originate and where not to originate. If you look at Texas, New York—we love New York, Deborah—if you look at Florida, look at California, look at Virginia, Maryland, then you are looking in between, and they are not real hot on in between.

Harris: I would like to ask a question, and, Bob, maybe you can speak to this. But from a developer perspective—and there are a lot of developers in the room—obviously timing means a whole lot to the yield in the IRR calculation. Can you give the audience here some sort of a sense for what kind of pricing differential it could make in the current environment, if they were to wait to receive equity funding until a bit later in the development process? Is there some kind of a range that might be interesting for folks to hear?

Moss: You are referring, Lee, to just the general pay-in structure, and, obviously, the more money that is tailored to go into the deal later, during construction, pushes the investment closer to the time that the property is going to deliver credits. What that difference is is not as big as it was a few years ago. That difference, that variable, might be a penny, penny and a half, but it is not a major, major amount of money. Now, if you are talking about no equity going into the deal until stabilization, then that is a much different scenario where the variable is a lot larger.

Harris: How much?

Moss: Again, there is three other things that—you know, you can't say it is going to be a penny and a half. You can't say it is going to be two because it may be a CRA deal, or there may be a CRA investor that is very interested in the property. Also, what you should all know, is that the new CRA is green. Green is the new CRA.

Barbe: I agree.

Moss: So it may be a green investment, which will help the developers, and the developers need every penny that they can get. They do. They need every penny they can get to make these deals work. Lee, it's really hard. It is like saying—it is like sending me—calling me up on the phone, what are you going to pay for my deal? I have to look at the numbers. I have to see where it is. I have to underwrite it. I have got to do my homework. So it is a little irresponsible to say it is 3 pennies or 4 pennies, but I wish I could answer the question.

Shashaty: Let's continue to try to get some specificity. Rob, what are you looking at equity pay-ins and prices to be in the middle of '08?

Hoskins: As absolutely as much as I can get. We recognize—that is the developer talking—we recognize that, obviously, there is a yield credit flow issue, and as Bob has indicated, to the degree that we can structure a deal where the equity pay—the actual real hard equity is in at the latter part of the deal, when it is stabilized, we will try to get that extra penny or so. The problem is in the underwriting. At what point does your bridge loan interest become so cost-prohibitive that it doesn't make any sense to do it? It may help a little bit if you are doing a bond deal, but it is not going to help on a 9 percent credit deal, when you have got too much basis to start off with. The other thing you need to take—that as a developer we will look at and some of the questions that we will ask our syndicator is, you are trying to raise money for a fund right now. How much credit delivery do you require in this fund right now? Because that is a driving factor in their pricing. And if I'm out of their yield curve or out of their box for what I'm trying to accomplish, I might not be the right guy for that particular fund at that particular point in time. That is a roundabout way of saying, you know, we are going to continue to push for the maximum prices. In Georgia, we see about a 91-, 92-cent federal price. We have state credits that range from 27 to 32. In Texas, we are seeing anything from 96 to 98.5 and, you know, frankly, depending upon the sponsor or the deal—you know, I think we are a decent sponsor. I think they we will be able to maintain those particular yields—or those particular prices at that particular point in time.

Shashaty: Cynthia, I hear your company has a big advantage over all those syndicators.

Lacasse: I'm going to step back a little, okay? It's all about risk, and it's all about risk compared to what? Right? If there is significant demand for not a lot of supply, which is what has been going on in this industry, as well as other entire capital markets—the entire capital market, which is why you really do—you can't look at our industry in a vacuum, then pricing is just going to continue to go down, which is what has happened. Now we are having some questions about demand as well as there are lots of things going on in the compared to what. What are the other investments that investors have opportunities to invest in? All of those spreads are widening significantly. They are all going up, and so in a rational market—and, again, this industry is quite unique, and we have talked about it. We talk about it all of the time, that CRA might make—does make them different. We know that. But putting that aside for a minute, in a rational market, you are going to take a look at, I have money to invest, what are the risks involved with the investments that I can make, and what is the best pricing. And so I think, you know, deals that are perceived to be riskier should get better pricing, and it has been a long time—I don't know if it ever has been where there has been a real price differentiation in this industry. Andre, you said before that it is not about price differentiation; I think it is about price differentiation. You know, what is the particular risk of this particular deal and, therefore, what is the return that I should get on that deal? I think it's interesting that our industry is all about putting affordable housing everywhere, and I think that that is part of the problem. I think that some places, some types of housing, whether it is special needs, location, are riskier. They are perceived to be riskier, and so you need a higher return. So I say, Okay, well, I'm not going to put as much equity in that because I need a higher return, and you spiral downward. The deal isn't feasible anymore. I think if there were ever a time to give states more flexibility about where to put the credit to make the deals feasible, this is the time.

Shashaty: Let me you a direct question. Are other insurance companies joining John Hancock in their interest in tax credits, housing tax credits?

Lacasse: You know, it's interesting. I think there are other folks around the table that might have more perception about that than me because they have a lot of clients. I will say though, not being CRA investors, insurance companies are looking at risk-adjusted return and yield, and so it's economics. And so if—as other folks have said, if the economics work, if the pricing works, if the risk-adjusted return looks good compared to the other investments that I have available to choose from, then clearly I'm going to want to invest in the deal and other insurance companies will, too.

Heller: Is the quality of the developer—

Lacasse: Absolutely. Absolutely. All of the risk parameters that you would think of that a lender looks at, that anybody looks at, the quality of the developer, the market, all of the underwriting items that we look at, so—you know, the desirability of the deal.

Shashaty: Let's go ahead and move into the question of which deals are going to suffer the most, whether we are talking about the developer, the market, or the kind of project in question. Who wants to—maybe we will go to this side of the table. Who wants to talk about which deals are going to suffer the most from this apparent shortage of equity capital?

Tawa: If I could amplify the comment I made at the initial go-round, the deals that will suffer the most are anything that tries to be new construction in the current market. And that is for a myriad of reasons, largely along the cost side for producing a unit is very little difference than producing a market-rate unit. It is along the issue of the AMI being flat with flat rents, but we do have some jurisdictions that deals are done in that have some very beneficial soft loan programs. And we also have some developers who have gotten very creative with some of their relationships with housing authorities, for example, to bring them into the partnership and get the benefit of tax relief because of that. But I think that the deals that will suffer most are what I would call or used to be called just a traditional new construction deal, trying to make it on credits and bonds generally and with very little else. I don't see any deal feasible right now that does not have along with that a pretty deep subsidy from some other source, and the traditional profile deal I just don't see getting done at this point with any of the firms that we work with.

Reznick: Chris, you are talking about what may be a typical 250-, 300-unit tax-exempt bond deal with 4 percent credits?

Tawa: That's correct.

Reznick: New construction, 9 percent deals, which some states are allocating, because you have 9s in them, should they pencil out and some do have the soft money to do it, still are in tremendous demand. But your point really, Chris, also relates to, as we remember in high school, immediate gratification.

Tawa: I still like it.

Reznick: The new construction transaction, you don't get your credits until much later, so the burden on the dollar per credit payment, because of the deferral of getting the enjoyment of the credit itself makes it less for the fund who wants to give yield immediately right away. And that is what a lot of people, unfortunately, forget when we do a new construction deal, especially the larger deals in which you are getting your credits three years out.

Tawa: And, David, just to comment on the 9 percent because I think that the problem on the 9 percent is potentially less acute because of the higher value of equity. However, those deals are ones that are burdened with deep-income skewing, and generally the bond deals will escape that except for a relatively small percentage of units. But when you do try to profile your rents on those transactions at 40 percent, 30 percent of median levels, that erodes your income so much that as a pure financial feasibility—when I work with my equity colleagues, they look at deals and I see e-mails, I like this deal because it has no hard debt, which, of course, gives me the chills. But even the no hard debt deals are not working just because of the deep-skewing against the cost of the operating expenses.

Heller: You know, Andre, you asked what deals are the most challenged deals in this environment. I think the most challenged deals in this environment are the ones that suffer from the checking the box scenario, where the states are saying—where the developers are just checking too many boxes to get the deals done, and I think the other ones that are really going to suffer in this environment are the states with lotteries. Because you have incentivized developers to go out there and throw anything at the wall that will stick in order to get a lottery ball, and then uh-oh, my lottery ball came up and look what I have to deal with. Those states, they are just not living in today's environment. They should be—NCHSA should really go after those states. They are just—I don't understand it as a developer. It doesn't make sense to me, and not just because Sean is here at the table with me, but Ohio did a really crazy thing in the past year. They actually went out and looked at the real estate. Can you imagine that? They went out and looked at the real estate. Wow, what a great thing. And you know what, the results of it, Sean mentioned that in Ohio had 169 applications and 39 of them were awarded, and he said 50 of them were actually good deals. They know what the good deals were now because they actually went out and looked at it. And what I'm hearing around the table is that more states should be doing what Ohio did, and that is go look at the real estate. North Carolina, same thing, they actually go out and look at the real estate. I know it is a crazy concept in this industry, but, believe me, it works.

Moss: David is going to be on my panel which is at 4 o'clock right next door. We need deals with green. We do. I can't emphasize that enough. We need deals with green components. Investors are going to climb over the wall backwards for green deals.

Shashaty: We are going to come to the green part in a minute, but I find it kind of incredible what David Heller just said. I mean, I have been covering this industry for a long time, and I find it incredible that only two states look at the real estate. Is it a true statement, or are you exaggerating?

Hoskins: By and large, it is a true statement. There are some other states that actually do look at the real estate, and then there are people that look at the real estate and don't understand the real estate inside the state authority.

Shashaty: In other words, in most states it is all on paper and they look at a description and they decide on that basis?

VanAmerongen: In New York, we go out and validate the scope of the rehab. If it is a new construction job, we don't. We do—at the start of this year on the new construction, we do.

Shashaty: Wow. We know Ohio is ahead of the pack. I'm from Ohio, so it is obvious that they always do things right.

Thielen: Andre, but there is another reason though. That is because state agencies don't have a lot of resources, and they can't go around hiring people. So a state like California that gets 100—80 applications in a cycle, they can't go out and look at 80. They can't even go out and look at 30, you know, and try to get it down to that. It is really a resource issue. It is not a good answer, but it's a resource issue.

Thomas: That's a good point. We were pulling people from other offices and you are in some site visits for a couple weeks.

Cunningham: The first thing is, I have been a real estate lender for the last two decades, and it used to be green was actually about money. So I want to talk a little bit about some of the perspectives that I have from the debt side, as it relates to this. The first thing is that the deals that are going to fall out or are not going to make it, are the marginal deals, which are the ones that shouldn't be making it, so there is an aspect of correction here that is not all bad. And when I say—by "marginal," I'm talking specifically about transactions where there really are stretches, either there is not enough soft debt that comes in or the terms are up higher—and that is another issue that we may look at. In terms of soft debt, that providers of soft debt may want more, want to make it harder in the sense of getting paid back, and, actually, if they are asked to put more money in, that is going to be an issue. But in terms of the rent differential, where we have seen some of the dropoffs, including the net result of the AMIs being flat, area median income being flat or going down, is that the differential between tax credit rents and market rents is disappearing. So those deals become even more marginal, so the ones that we are stretching—and that could mean deals where on the bond side acquisition-rehab, where the rehab is actually very light and does not have a meaningful impact in terms of occupancy and longer-term stabilization is really what preservation is designed to do. Other issues are going to relate—from a lender perspective, I'm going to want to be very comfortable and my colleagues on the debt side want to be comfortable as it relates to the interaction between the equity investor and the developer because, you know, we often didn't worry too much about adjustors. But as equity providers are getting the opportunity to impose tighter standards on their underwriting, things like state—like equalization payments in terms of paydown to adjustors may actually come up as an issue, so if you look at sponsor strength and access to capital, we are all looking around and, again, everybody is always looking to the other person who could be underwriting, where is the money going to come from. But at the end of the day, when you think about where we are and what would have passed for the deals that got done and the two standard deviations in 95 percent of deals, I think we have seen some movement in deals that were approved or people ran after, both on the debt side and the equity side and on the developer side, those deals are going to become less palatable because of the primary issue, which is about returns. And I think—we have this discussion every year and, really, what we are trying to do is shoehorn an irrational process into a rational model. Are the returns there? If you just look at it, it is the whole reason why there are subsidies and why there are tax credits. So these deals—we are going to exhaust our intellectual capabilities to make them work very quickly, and I yield the balance of my time to Mr. Reznick.

Shashaty: Let's talk about one of the specifics that you just mentioned. You said that the differential between tax credit and market-rate rents is disappearing. Earlier, Rob said—I think you said that rents for market-rate properties were falling, so you are basically agreeing, there is a differential that is disappearing?

Hoskins: The traditional underwriting agreement from syndicators has long been, let's look at a deal that is a tax credit deal and let's look at a market rate deal, and there needs to be $100 to $150 rent differential. Well, in many markets today, you are going to see that 60 percent rents are equal to. In some cases, the 60 percent rents are higher than what the market rate rents are for some submarkets. So all of a sudden that creates a whole—as I was saying earlier, there is whole different definition of what is true affordable housing and what is the tax credit program serving as opposed to what is the conventional market serving.

Reznick: Do you think that the subprime problems, which are going to cause some foreclosures and/or people being forced to move out of their homes, are going to build up rent streams and rental income by putting more demand there? I saw a very interesting thing on television. They were interviewing a guy that was about to be foreclosed on, and they said it is so obvious, based on your income and not having any capital, how could you possibly buy this home? And the guy looked at him whimsically and said, I just got evicted from my apartment. So we do know some of those issues, but now you are going to see them coming back into the rental market.

Hoskins: There is another misnomer in the underwriting market, and, that is, if you have a deal that is around an area that is affordable for that marketplace, some family houses that are being built that are affordable, say starter homes in the $120,000 to $200,000 area, depending upon where you are located, that all of a sudden you might be stealing or cannibalizing your potential renters to your single families. The reality of the situation is that there is a different mindset, by and large, for a renter versus a single family homeowner. What is going to happen and what we have seen in our markets is that we are seeing an increase in occupancy as a result of the subprime problems because all of those folks that thought they could get evicted because there was zero down—there was some very aggressive brokers selling zero down financing. All of a sudden, those brokers are gone. In further television reports we have seen, is the guy said, Well, I did not realize that I did not need to make my mortgage payment, so I'm not understanding, you know, why we are being foreclosed upon. That is the same as the eviction argument. Yet they very well-known that they are going to be evicted if they don't pay the rent, so we see a cycle that is well-served as part of the market cycle in which we are going to get those otherwise single-family homeowners who should never have been there to start off with, they are going to become renters again.

Sears: I would want to follow-up on that. I would say we do see an increase in occupancy coming from that subprime, but if you are in one of those places that AMI restricted, the push up in occupancy and the subsequent push up in market rates is not helping you a lot.

Shashaty: Let me try to pause for a moment so we can clarify what Todd Sears just said. First of all, try to slow down enough to say your name before you comment so she can pick it up because this is going to confuse the transcript. Can you kind of go over that again a little slower so that we can follow it, so that I can follow it?

Sears: And I would just say that I would agree about what—about the effects that subprime is having on the rental market, which is we are getting increases in occupancy, and not only increases in occupancy but decreases in bad debt because folks who are coming back in—subprime is basically skimmed off the top of the rental market. So now you have less bad debt and better occupancy, and it will ultimately, I think, put pressure on rental rates and the rental market in general. But if you happen to be in one of those counties or one of those locations where you have already been restricted in terms of your rent increases, the market rent can do whatever it wants. You are still running into that AMI restriction problem either way, and that is where it really does not make sense. When you have population growth or income growth, you have rental rate growth in the market, but your AMI is just stuck.

Sheridan: One other thing, too, that I think that is happening with subprime and with marketing is—everything you have all said was very true as far as family properties go. I have two new 9 percent tax credit senior projects that don't have deep subsidies attached to them that will be coming out of the ground next year, and I think what is going to happen there is with the glut of single-family homes on the market, you are going to find seniors who may have to sell their homes to move into a new tax credit senior development, not able to move their home as quick. So I think as a result, we are certainly looking at what our reset reserves are and things like that, maybe adding a longer absorption period. Because I think it is going to be a little bit tougher to build up a senior tax credit because you don't have deep subsidy or even if you did have deep subsidy, you are still going to be dependent on seniors selling their homes.

Heller: We are nervous about the same thing, Pat. Although, I have never seen a VOA deal without deep subsidy, so I will take your word for it. We are seeing the same things with seniors and seeing a much slower lease-up when people can't move their homes at all in this market.

Shashaty: Let's go over to the hot topic of the year, which is green. The new CRA is green. Let's try to explore the implications a little bit. I would call your attention to AFFORDABLE HOUSING FINANCE coverage of the Community Reinvestment Act. For those of you in the audience that don't know the shorthand, I apologize for all of these acronyms. CRA is the Community Reinvestment Act, and it is 30 years old. It was enacted in 1977 and gives me a chance to plug our Hall of Fame luncheon which comes up Friday, in which we will be honoring three people who we think were instrumental in the enactment and enforcement of the Community Reinvestment Act. And, of course, for those of you who don't know why it is important, it is the law that requires banks—federally regulated banks to tend to the credit needs of their entire community, and all of the places where they take deposits, not just the wealthy neighborhoods. So it forces banks to look at affordable housing and invest in affordable housing and it’s a primary—fundamental driver of the flow of capital into the program. So to say that green is the new CRA is, indeed, a very, very profound statement. So let's go there, but I am going to ask you this question: I know that the green approach to development is very important for long-term operating costs and sustainability. And if you projected that energy costs are going to double or triple and that there will eventually be a carbon tax, well, you damn well better be green or you are going to be in deep trouble from an operating standpoint. But you seem to be saying it attracts investment dollars.

Moss: I am. Andre, it is an incentive. It is growing in interest. We are seeing investors that are different types of tax credit investors, nontraditional investors, who are willing to pay more for the equity because the investment in the green technology and construction materials and environmental materials is something that they benefit from. And they benefit from the capital point of view, and they benefit from a socially beneficial pool, as well.

Barbe: I think we should pause for a second and clarify what we are talking about. In particular, at least when you are talking, what I'm thinking is the solar energy credit in particular.

Moss: Can be.

Barbe: There are obviously other incentive programs out there, but what we are seeing in the market and the shift that we are seeing, which I never saw before, is the introduction of the solar energy credit into both direct LIHTC deals. We have clients who have invested directly in the project that—with LIHTC and solar energy. And we are seeing in the multi-investor funds, and some of you that are sitting around this table, we are seeing solar energy incorporated into the private placement memos. We are seeing the syndicators come to market saying—it is not that material. On the ones that I have seen, I'm not sure it was more than 1 percent of the fund. It is a relatively tiny piece, but that is a really material development in the market, at least in my view that we have not seen before. The other thing, for people who don't know green, now what we are taking about, the 30-second take on this is the solar energy credit, you should think historic tax credit because that is almost exactly how it works. It is a very similar credit to the historic credit. It is a big bang for your buck in the first year, five-year compliance period. It functions a lot like historic, to the extent that you have been able to marry LIHTC to historic and now solar to historic. But I just wanted to kind of put that out there because I have never seen that in however long I have been doing this, which is a long time. This is the first time I have seen somebody introduce a new credit into a multi-investor fund.

Reznick: It's a relatively small credit. I think it is 15 percent of what is a relatively small number in an overall development of a project. So it is unlike a historic credit because typically—because you are doing it on most of your rehab. It is not your personal property, but what I am sensing and seeing is where this—where this is going to also be important will be in existing properties. A guy that has a portfolio of 20 properties—I'm looking at you, Jana, because you may have seen this, and you may have it coming up—they will potentially make the investment themselves through a master partnership, which let's say puts this energy efficient solar onto these 20 different properties and then lease, in effect, this equipment or this—and be given good strong appreciation and credit, they will get paid from the existing property out of savings that are going to be coming with reduced utility costs. And I picture that is going to be a big thing in the next year or so with folks who have large portfolios because, in fact, it is going to meet the need of long-term reduction of operating expenses. After the payback period, which may be five or seven years or something like that, it all flows to the bottom line of these existing properties.

Barbe: I think that is absolutely how it is going to be to work. I think the other thing is—and maybe Bob was getting at this, for lack of a better term, it is sexy. It is cool. It attracts this degree of attention that you didn't attract before. I saw it used in a very low-income housing project in Boston, deep skew, the kind of project with multiple layers of soft debt. You add on top of this state-of-the-art solar energy conservation system and all of this other kind of stuff, and it was an experimental kind of thing, and yet we are seeing the technology brought to bear to reduce the operating expenses. And then we are seeing almost this glamour element, you know, like Al Gore is going to come visit your project.

Shashaty: Is solar the part that appeals to investors, is that because it is going to add on to their tax benefit?

Moss: It is not the only benefit. The other benefit is just the overall materials that are used and the green, the sexy green.

Shashaty: So if I don't have photovoltaic in my project, but I have lots of energy-efficient features and all of that …

Moss: But in the—I am not going to name the state, but if the sun is not shining much, you are not going to have it in some places. But you might have other materials. You might have other uses going into the building that meet green technology, and, of course, the green technology standards have not been agreed upon yet. That is still something that is being debated among industry groups, as to what is the standard, is it the LEED standard? There are some other standards that are being proposed.

Harris: Bob, I need to interrupt you.

Moss: Okay.

Harris: To what extent will the investor pay right now, up front? Forget about five- to seven-year paybacks and all of the years of all of the wonderful stuff that is going to happen to our environment. I want to know the extra cost to me as the developer, is the investor who wants this to happen willing to pay for it?

Moss: Yes.

Harris: 100 cents on the dollar?

Moss:Well—

Harris: 100 cents on the dollar?

Moss: No, it is not going to make up the differences that we have lost in the past year, but it is something that they—they want and they will pay more for, and you are going to save money over the long run operating anyway.

Reznick: It is interesting if you are planning out your transaction and you are able to pro forma lower utility costs, it could appear that you are going to get your money two ways, A, Bob is going to overpay and, B, you are going to be able to get a higher mortgage.

Harris: I don't want more debt.

Heller: I am glad you said that, David, because I was getting a little embarrassed sitting up here at the table with all of this talk about sexy product of green building and all of these people want this. You have got people in the United States of America that are in need of affordable housing, and that is really what we need to be doing is delivering safe, decent affordable housing, and if green building is a good thing because it is going to provide energy savings and real cost and people are going to pay for this, and it is going to be a better product in the end for these residents, then absolutely we should do it. I can tell you as a developer that on the first list of 3,000 questions when a tenant comes into our building and asks us questions, not one of them is asking whether it is a green product. Maybe it is the area that they are in and maybe we are just not there yet, but right now that is not happening. We need to deliver safe, decent affordable housing. I am all in favor of green. We are doing a green project right now. I think it is a good thing, if we are doing it to serve society, to bring costs down, to deliver a better project.

Purcell: Are you going to the workshop tomorrow on green building? I think it is at 1:45. My company developed the first LEED-certified affordable housing in 2003, and we just finished the first gold-certified housing in the country in September, and we are going to talk about the cost issues in relation to that. The other interesting thing is that it is now part of the Washington QAP, and as it goes across and as part of the QAPs across the country, it is also part of the state trust fund that it has to meet green standards. So it is not going to be optional, and so we are going to have to figure out what is incorporated in it, what benefits to the residents. Unfortunately, the solar parts are the most expensive things to add on. I mean, if we got leftover money, we will think about it, but we have not had left over money in a few years.

Shashaty: The green issue and some of these other topics still all kind of come back to the question of which deals are going to be in demand and get a good price and which ones aren't, so I would like to get a little more comment on that. So if you have a green building with a big differential between the tax credit rent, the market rent, in a hot market area that is not part of the flyover, you are going to do great. Is that what I'm hearing? And if you are in the Midwest, and it is an old-fashioned energy hog and the market-rate rent is pretty low, you are just really out of luck and it is cold and you have to spend a lot of money on oil heat? Let's get some more comments on which deals are going to be getting the good prices. Ronne.

Thielen: Well, Andre, I have to bring up something that really is not at all sexy about projects that are not appealing. And, well, I guess if you are not appealing, you are not sexy. So maybe it is more acceptable. It is projects with so much soft debt and very low rents where you can't support any hard debt, and you look at the residual value of that project, and tax code actually says you have to—it is not really debt unless you can actually show that it can be paid off. So your soft term goes 40 years and some go to 50, you have to go 40 years and you look at the residual value, you use what you think is going to be the cap rate and the right market rents. And if you can't show that you can sell that property at a price that can payoff all of that soft debt, then you are going to have to start counting some of that soft debt a grant, and that is going to reduce your basis. And that is very serious. We see it a lot now.

Reznick: On those deals, reduce your cap rent and increase your rent projection.

Thielen: We do that actually. We always increase our rents and reduce our capitals.

Shashaty: Who else wants to talk about the differential between various deal types and locations? Anybody?

Sheridan: I just think that—it is what we see in the QAPs and what we think the investors want. It is a dichotomy there. I think that the ideal project right now might be a New York City permanent supportive-housing deal in an old building that would get historic credit, low-income housing credits, solar on the roof, and tax credits on the ground floor as an excuse.

Shashaty: That is it? If you wanted the ideal deal, that is it.

Sheridan: And not have any soft debt, too, so it is just out of the possibility because what is really out there is more like the deal that Sean said. It is 40-unit, ex-offender facility in Toledo that is likely not going to get a whole lot of credits on that deal.

Heller: Andre, you asked about what deals would demand the highest yield. For those particularly in the room that are listening, you know I come to this table with a lot of far-out ideas but, really, the ones that are going to achieve the highest demand in pricing are the deals done by a high-quality developer, where there is demand in the marketplace, where there is not a lot of funny business on the deal. It can be new construction. It can be rehab. It can have Sec. 8 vouchers, but it is just a simple deal with a lot of demand for that type of housing. The departure that we have gotten into—and I know that is crazy—the departure that we have gotten into is that a lot of these QAPs are asking us to do things that are taking us away from that traditional real estate, from that traditional affordable housing real estate like adding special needs in this area and adding just all sorts of funny things to the deal to drive us to areas that are not good real estate. And I think if there is any cry to the industry, it is, Take us—at this time that everyone says is a good time for some self-examination and for some correction in the market—bring us back to our core. Bring us back to serving safe, decent affordable housing to the people in our society that need it, and stop using this as an add-on. And I think you have a whole panel on this, but as an add-on for all of these special needs that are being added on. That is not to say that those special needs in our society don't need to be served. They absolutely do, it is absolutely critical but not necessarily with the tax credit program.

Hoskins: And I think that you will find that once you gravitate back to that model that David is talking about, you are going to get that one national thing that all of the syndicators and debt providers like, and that is called financial feasibility.

Shashaty: We are going to pause there. We are going to take a break to go to the audience, but when we come back, we are going to talk about QAPs and we are going to talk about state and federal funding programs and go in that direction. But for right now, let's pause and see if anybody in the audience wants to question us about anything that has been discussed thus far. Anybody out there have a comment or a question? There is one over here.

Barry Zuckerman: Barry Zuckerman, Millenium Housing, Milwaukee, Wis. We do preservation. On the issue of the rents and expenses, I'm curious as to how the panel feels, particularly the syndicators, regarding preservation work with Sec. 8s, where the issue of the AMIs really does not come up. They strike me as being considerably safer, but there was a comment earlier that they were less desirable, so I'm curious as to how the panel feels.

Shashaty: Does somebody have a response to that?

Harris: From a developer perspective, I mentioned that I believe there is fewer investors in the market that are interested in doing deals with project-based Sec. 8. That seems to be at least a trend for the moment. And one of the things that we have found in the Sec. 8 deals that we do is, when you look at what truly is market rate, if you lost that Sec. 8 contract, what does that do to your rents? And we typically—one deal we had $200 a unit less in what is truly market rate. If we had to re-tenant, we created a reserve not just for the releasing of that project but, also, we underwrote the rents at $200 less. I will tell you, we had an enormous cash flow on that property because of that underwriting. We had many, many layers of funding sources. The deal works unbelievably well, and we have done several more just like it. For whatever reason—and I would defer to the syndicators of the panel here—maybe there are not enough people doing deals solidly with the project-based Sec. 8 that way, but there is a big-time risk that if you lose that contract, your deal goes upside down.

Shashaty: Bob Moss.

Moss: Investors are always concerned about appropriations risk, and Cynthia touched on risk earlier. While the Sec. 8 programs, as we all know it, it would be a great social calamity to have Sec. 8 cancelled or taken out of the budget, and it probably won't happen. It's an appropriation. It is subject to annual appropriations, and it is not unlike any other type of funding and special needs deal where in a state you have the state subsidy or per diem supporting a rent by a state legislature, whether it is a special-needs deal in any state that could go away. It could go away with the next legislative session, and it is subject to appropriation. So investors are always concerned about risk, and that is a very real risk to an investor. Sec. 8 would go away.

Lacasse: I think to reiterate what the gentleman down at the end said, though, going away may be less of a chance at the questions about rent levels, which is really, I think, what you are alluding to, is the whole concept of fair market rents. We are just in a period now where HUD has gone through and changed the way that they calculate median income that causes folks to talk about a very serious problem in the industry. And when you have a question about a methodology and a methodology can change, I think that that is really a major concern, and so—at least—and I only will speak for us. When we look at these Sec. 8 deals, we really want to see that those units can be supported at the maximum tax credit rent level or whatever level the state agency has set, and just as an aside, it would be great in Sec. 8 deals if the state agencies did not target below 60 percent of median in the event that the Sec. 8 went away. Because then at least you are able to go rent those units to tax credit tenants, but in deals where you have fair market rents that are so much higher than maximum tax credit rents, you get to a point where you say, Okay, if these rents go down, I am going to be stuck with an infeasible deal and that adds risk.

Moss: And the income limit issue is being debated and was being debated this morning, National Association of Home Builders, LISC, Enterprise on a conference call, and there is no consensus. Although there was a compromise reached this morning, which I have not read yet, on income limits.

Shashaty: Let's stop there because I think that is kind of significant. We are talking about the HUD AMI definitions?

Moss: Yes.

Shashaty: And there is—

Moss: There was a consensus.

Shashaty: —a policy change in the works, or are you talking about an advocacy position that has not been adopted yet?

Moss: There was an advocacy consensus reached this morning on it, and I have not read it yet.

Shashaty: So these groups are going to take this consensus to Congress or to the Department of Housing?

Moss: They are going to take it to Charlie Rangel.

Shashaty: And then this will require legislation.

Moss: Yeah.

Shashaty: So what is the consensus? Is Congress on the industry's side, and they are just waiting for—to know what we want and, bam, they are going to give it to us?

Thielen: No, not exactly. They are very, very aware of the issue. We are talking about the Ways and Means Committee, John Shiner, and Mr. Rangel. But they want it to be clear that the tenant advocates can swallow it before they are going to just take it and run with it, so we have work to do. I don't know that what they did decide this morning, but we have work to do. We have the right arguments from the tenant's sides.

Shashaty: I'm confused why Charlie Rangel would be putting this—is it because it would be a change to HUD methodology, not to Sec. 42?

Lacasse: It is to change the code, right?

Moss: To change the code.

Lacasse: Not to use the HUD methodology.

Shashaty: Change the tax code to use a different rent-setting methodology?

Heller: I think the advocates out there are taking a responsible approach to this [by bringing a] broad coalition to the table to come up with a workable solution to take to Congress. In this time of uncertainty in Washington and when Washington is going to be looking at—whether it is Louisiana that creates the fix or whether it is the subprime lending that creates the opportunity, we need to be ready to be at the table so that when a bill comes about, that we are there, that we can attach onto that bill. And I think the charge is to everybody in this room, that that can happen in 2007, and if it doesn't happen in 2007, it certainly is not going to happen in 2008, so we are going to have to wait until 2009. So now is the time—be ready to take that advocacy approach here in the fourth quarter to try to make something happen in very short order.

Reznick: Well said.

Shashaty: Thank you, David. Is it pretty clear that this will then—how would—can you give us a clue what it would say because the HUD income figures are the primary data source?

Moss: Starting in 2008 rent-income limits will be generally adjusted based on changes in the AMI, based on the ACS.

Shashaty: What is the ACS, David?

Moss: And this is for areas with populations below a certain threshold. They have not identified that threshold, that population threshold.

Shashaty: Is that a community survey? Is that the old American Housing survey?

Lacasse: Isn't that what HUD is now using? That is the new one. That is the new methodology.

Thielen: They are just going to send a census going forward.

Moss: These adjustments could be limited to CPI, plus or minus 2 percent. No. 2, for projects placed in service before 2008 and where the ACS rent income limits are below the limits that otherwise would have applied, the limits would be increased by an additional 2 percent annually until they reach the level that they would have reached by starting with the 2006 rent and adjusting upwards as described in No. 1 above. So that is their consensus.

Shashaty: Let's go back to the audience and see what they want us to talk about. We have smart people here, so we have about 45 minutes left in this session. Audience, questions?

Luis Diaz: Hi, there. Luis Diaz here from Wealth Square. My question is in regards to rebuilding. I know we actually have a workshop tomorrow, but since we were just covering it, I figured, let me ask the question. I am a true advocate of rebuilding. At the same time, an article came out this week from Business Week entitled “Little Green Lies.” It was an advocate that was hired by a ski resort and was hired to integrate green initiatives into the business model, and the interesting thing is that the more he tried, the farther he actually came away from his true intentions of making an impact. And he started realizing it was actually more for marketing, as you mentioned, the sexy appeal, than really make a true impact on our global space here. So that is one question. The other thing that is my concern is, is the green initiatives and the green building really making an impact here, in our world, or is it just for marketing? At the same time, we have come across a lot of different developers and lot of different engineers who have actually done energy calculations of who is finding out how much is solar energy really contributing to saving costs. And a lot of the calculations are maybe just 10 percent, really something insignificant, and the whole entire image. Based on your experiences and your contacts, in regards to green building, is it really making an impact and is it really cost-effective?

Shashaty: Well, I will answer the first part. Yes, it is a marketing gimmick, certainly to some degree. What percentage of anyone's claims to greenness are marketing, no one can tell you, but some percentage are certainly blatantly marketing. It has certainly gotten to that point. But the other question about how cost-effective solar energy really is, I don't know if I know that answer. I know that one of the projects that our Readers’ Choice Awards is expected to draw all of its electrical power for units and common areas from photovoltaic cells, and just look at your own electric bills for your properties and you will see what difference that would make. And they financed a great deal of the cost. I think it was about $1 million cost for the photovoltaic system, and they got a tremendous amount of financing to make it happen, including state incentives, federal incentives. So I don't know exactly what the payback is, but it certainly was not heavily subsidized. Does anybody have the costs of what solar is in general? Okay. Well, sorry we can't give you a better answer on that. Why don't you bring that up when Paul is on the hot seat on Thursday?

Reznick: But you know you should encourage each of your states to try to follow the lead—I believe New Jersey is a lead state and California with energy credits, that they will give you that will help reduce the cost. So one way or another, as David had said earlier, energy efficiency is going to be good for affordable housing. Sexy, not sexy, I'm too old to even worry about that at this point, but the key here is if we can reduce costs on a long-term basis, this is a change that I believe will be here permanently. And it is just like back in 1951, I remember my grandfather telling me, when we switched and put in automatic transmissions in cars, at first they were not absolutely efficient, and then I remember them leaking and stuff like that, but now it is part of almost every car but mine. So you really need to focus on this and get states to join in and help as New Jersey and California have.

Purcell: Andre, I would just like to say, I don't know the answer about solar energy, but I do know that real energy savings happen through green building, whether it is solar or not. Super-insulating, the kind of windows that you put in, there are things that produce real benefits for residents that go way beyond marketing and quality of the volatile organic compounds in carpet glue and in paint, things like that, that really do affect the health and expense of affordable units. It does make a difference to use those kind of products.

Heller: You know, Paul, I want to pick up on that. A lot of the states over the past several years have put energy efficiency—they called it something different. They called it energy-efficiency requirements, and we have been doing that for years with our projects. And then this year when we had our first green building project, the incremental cost between the energy-efficient work that we have been doing and the green building certification that we had was actually quite minimal. So it is really—it is what—it depends on what you call it, but it's very doable, and it does absolutely provide a cost savings to the project, which ultimately is a cost savings to the resident.

Tawa: The question is, has that cost savings been recognized in the underwriting of the transaction? Because we have really struggled to try to quantify versus all of the other costs in the marketplace with, say, your own subjects versus the new technology that has yet to prove out what that actual cost savings is.

Heller: It actually has, Chris, and here is how it has played out. It has played out in the utility allowances and in the—when we are getting certification from the utility companies and we are using the energy-efficient components in the building, they are actually giving us a better rate on our utility allowances, which ultimately helps with the underwriting.

Tawa: How about your per unit operating expenses, has that been affected positively?

Heller: I think it is too early to tell because a lot of these things—

Hoskins: On the development side, that you can receive an increased approval process for getting permits if you are going green in certain areas of the country, plus there are a variety of impact fee waivers that are part of the green building process, which in many cases more than offsets some of the costs that I have heard as a result of that.

Shashaty: Will it help you overcome community opposition to affordable housing?

Hoskins: Only if it's a seniors unit.

Shashaty: We have a question from the audience over here.

Mike Wick: My name is Mike Wick. I'm a builder from Texas, and I just wanted to—the discussion so far about green building has—it seems to have centered on solar energy, and I just want to make the point that it is not the buzz word. The big buzz word now in green is sustainability. And that is not as sexy as green, but it really describes better what goes in. It is not just solar; it's all of the insulating and all of the other measures, and I just wanted to add that since we have gone to looking for more certification type construction, our costs have not really go up that much. We are using the same stuff we have been using for years and applying it a little bit different, so it is much broader than solar.

Peterson: I would like to add something because I think that California was the first or one of the first states to embody in its QAP what, in effect, are requirements—not standing for points for them, but they sort—they become requirements for energy efficiencies and they do, they did right from the very beginning include things like non-VOC paints, using renewable sources for flooring, and just a whole grab bag of things, probably 10 or a dozen things. I think it does help the tenants. It helps the owners. It helps the environment. It helps the world. All of these things are true. California also has probably one of the strictest energy-efficiency statutes, and we require it right from the get-go that people go above that so-called Tiger 24 standard and, quite honestly—the magazine did an article on a project that is using entirely photovoltaic down in San Diego County, so we all know what is standing today. But I think actually, Andre, that it went through the sources and uses, and it turned out that because there were a lot of soft sources available because it is sort of a model—that they are getting 100 percent payback from the investment.

Shashaty: All right. Well, we have to move on to another topic. I see some eyes glazing over in the audience, so we don't want that. We are going to kind of accelerate the pace on some of these, so let's keep our comments kind of brief. What are states doing or should they do to help increase the availability of soft funding and make deals work, despite rising costs and declining equity? Lee Harris is going to comment on that.

Harris: Again, in the flyover country, you wouldn't think that we get very creative, but we have to be. I want to relate, there is a great study that was just published this past summer that was done from the Missouri Housing Development Commission by BKD, which is a large regional accounting and consulting firm, and it was done for the purpose of the—of validating or not the state LIHTC in Missouri, which mirrors the federal program. The study—which if anybody is interested, give me your business card, I will e-mail it to you. It showed that for every dollar of LIHTC awarded for the last umpteen years in Missouri, on the state LIHTC, gross state product increased $5.45 and overall economic benefit was $9.60. This is a huge study, and we are using that study along with the fact that in Kansas, you would never think that we could get a LIHTC in Kansas, we had a major flood and we had a major tornado that decimated several communities. And we are working with the legislature right now to start a state LIHTC that would initially the first year be targeted toward those disaster communities, but instead of focusing it on low-income housing tax credit, I wrote the bill, actually, that is going to be introduced in the next session. And I call it the Affordable Work Force and Senior Rental Housing Tax Credit. It was just an anecdote. A state senator in a particular community that was discussing housing had a person mention low-income housing, and he said, “No, no, no. We don't need any more low-income housing. We need affordable, workforce housing.” Listen, it is packaging and marketing to some extent in our industry. We need to do a better job of that. But we are talking about economic development here, and if a community does not have affordable workforce housing and it can't—and it has affordable housing being utilized by seniors, instead of workforce, then communities can't grow necessarily, and there are many examples of that.

Shashaty: That's true.

Harris: Therefore, a lot of your states on an economic development basis use this Missouri study; it is powerful.

Shashaty: Tell us what the new governor of New York is doing to pump more money into soft financing for affordable housing.

VanAmerongen: I think what we have tried to look at it, if we are trying to drive housing tax credits to particular types of transactions, through our QAP, that we are going to also try to provide the incentives to make those deals work.

Shashaty: Great idea.

VanAmerongen: Knowledgeable approach. So if we want to do mixed-income, then we are going to target our state tax credit to do those deals because that allows you to go up to 90 percent. If we want to do energy-efficiency, we have something in New York called the New York State Energy Research and Development Authority that is funded by imposition of a fee on utilities. And they have dollars available, so we're executing an MOU, they will make money available to do those energy-efficiency improvements. If we are trying to do special-needs housing, we are making the service agencies, like the Office of Mental Health, the Office of Developmental Disabilities put up some operating or rental subsidy dollars to get down to those lower incomes that are going to be in the special needs housing. So that is how we are trying not just putting things into QAP, saying you must do this, this is how we are going to make you do your developments. We are trying to figure out how to drive some other resources so the deal still works, we hope.

Barbe: I think another thing you do in New York is real estate tax breaks.

VanAmerongen: Absolutely.

Barbe: And when I look at what local governments can do and what state governments can do that can make an enormous in the viability of a project, to make those rates available not just if you have a joint venture with a public housing authority, which is—it can be a very creative structure. It can work. It can also have a host of issues, in my lawyer hat for a second. But any sort of real estate tax break, at least in my experience, and that is something that New York does and something that a lot of other jurisdictions do, can make a world of difference.

VanAmerongen: Right. And we put it in state law, so municipalities that may not be inclined to do so are required to.

Barbe: You do, and it worked.

Shashaty: Anybody else want to tell us about a way that a state is helping with soft funding? Ohio, are you going doing anything to help with soft funding?

Thomas: We were fortunate. In 2003, the state passed a recordation tax, and the money is used for the State Housing Trust Fund.

Shashaty: Right.

Thomas: $50 million goes into that fund each year, and we get $20 million of that.

Shashaty: Is that making a big difference?

Thomas: Yes, it does. Scaling the rents down and the green features to obtain for those types of costs. We also have been fortunate, we use the unclaimed funds from the State Department of Commerce, we used it for loans to investors. And this next year, we are going to open up our guidelines. We have not done that development for—

Shashaty: Your what?

Thomas: Our guidelines for that program, and look at some create different ways to look at that money.

Reznick: That is brand new. I have not seen any state do that yet. You are talking about the SG funds, the funds where checks never cleared and things like that?

Thomas: Right.

Reznick: What a wonderful thought. That is big bucks.

Purcell: Washington has done two new things in the last couple of years. We have instituted a recording fee on every real estate document, and it has been such a hot real estate market, it generated about $26 million a year, and it is dedicated solely to special needs and below 30 percent of the median income housing. So it attempts to provide the operating subsidy, which is so hard to get. We have had a housing trust fund that was dedicated solely to capital, and last year it was $140 million, which can be used as soft money against—with a tax credit project. But now they are putting in place an operating subsidy to go along with that. The other thing we are doing is, we are beginning to enforce our GMA, our Growth Management Act, about affordability. We have affordability requirements in our Growth Management Act, but they have never been enforced because there has been such a reaction, or the smaller cities in particular don't want to look at the issue of the level of affordability in their cities, and that is beginning to be enforced, which is making a difference, as well.

Harris: Andre, one more element here. If you are looking at your state legislature and wanting to advance either a LIHTC or some other funding source, one of the things that we are doing is bundling with that program a homeownership program, and for affordable homeownership with a tax credit component at the state level, since we don't have a federal credit and utilization of some other funding sources at the state level. But if you go to a legislature talking about an affordable workforce rental program and an affordable workforce homeownership program, you bundle them together from a legislative standpoint, you have a better chance of winning.

Shashaty: Let's turn to federal sources of funding for a minute, and I kind of want to get a show of hands from this board. This is a little vote here. We are going to do a little vote. How many people think that the Housing Trust Fund that cleared the House will make it into law during our lifetimes?

(Show of hands.)

Shashaty: How about the funding source, there is the Fannie, Freddie tax which they are not calling it for affordable housing, but the Housing Trust Fund structure cleared the House, and the tax on Fannie Mae and Freddie Mac, which is not called a tax, is one of the funding sources. FHA surplus would be the primary funding source, so I'm curious. How many think that the Housing Trust Fund will clear the Congress in the next two years?

(Show of hands.)

Shashaty: Nobody. Okay. So nobody here should be waiting for the Housing Trust Fund to provide the soft financing for your tax credit deals. Is that what I'm hearing?

(Nos from the floor.)

Shashaty: If we extend the timeline, does that funding source come into being with the next administration?

Tawa: With the next administration.

Thielen: With the right next administration.

Shashaty: Yes, it does? So the odds are we will have a deal in 2009?

Tawa: More optimistic.

Shashaty: Let's talk about the other federal legislation that the tax credit industry is most concerned about, and that is the legislation that is supposed to come out of the select revenue subcommittee hearing on the tax credit and HUD programs making the tax credit more compatible with the HUD home program, giving states more flexibility. I understand it has not been embodied in any kind of a bill yet. Does anybody have a comment on it? Ronne.

Thielen: One of the things that I do for Centerline, I'm also right now president of the Affordable Housing Tax Credit Coalition that is based in D.C., and lobby specifically for loan, tax credit, and all other programs. And we work with the homebuilders and with, as Bob Moss said, that shmossy coalition in Washington to try to work through these things. What has happened is while this tax credit program is so tremendously successful and so popular, I think bipartisan-wise, as well, that there is a lot of talk about some bills. The bill on the—that Charlie Rangel, the House Ways and Means chairman, is they have not yet written. They came out with, at least verbally, what they are going to put in it. We all gave them ideas on what we thought to modernize the program to make it more sufficient. Not to cost a lot but just to make it work better and, perhaps, we will get more units out of it. And a lot of this comes about because the state agencies were so good at allocating over the last 20 years, and there have been payables, all of that stuff that makes it—they are actually proposals to give the state agencies more flexibility. The bill has not been written yet. They are trying to get a hold of all of the different pieces that they are proposing to score, which means they have to figure out how much each one is going to cost the budget. I guess there has been so much activity on the Senate side that the scoring committee—I have forgotten the name. The scoring committee —

Moss: It is the Office of Budget Management.

Thielen: They have not had an opportunity to get there yet, to actually score this, so now they are trying to get the bill written so they can do it that way. It is still possible that something could come out by the end of the year, get attached to an extender bill, perhaps, which is what most people—because extender bills happen every year to extend certain kinds of programs that are for another year, like the research credit and those sorts of things. So there is a possibility, but it has a lot of good things in it. I mentioned one—I won't go into all of it. We can talk about those. One of them would be that instead of a credit rate floating every month, it would be a 4 percent or a 9 percent credit. I mean, that is just like so logical and so smart and just so great. But on the bond side, of course, that will cost, and it will get scored because you will do more bond deals since the rates have been at 3, 4, 6 right now. And if there is a 4 percent and there is no cap on the 4 percent side, you are going to be using more credits for bond deals. More bond deals are going to work, so you are going to have a plus on the credit side and on the tax exempt bond utilization side.

Moss: I spoke to Melissa Mueller yesterday. Melissa is the director of legislative affairs for the entire Ways and Means Committee, and she feels like there is a very good chance that we can have a draft bill out this fall. And Ronne is right, it does a lot of great things for us. It does not just limit the basis calculation to 9 and 4, it also could allow for more equity for a state agency to determine that a transaction might need a calculation of 10 percent of basis, so 11 percent of basis, to make it feasible. This is a—this is revenue neutral, and it meets the economic substance doctrine of this Congress, which is pay go, but there is a very good chance that we are going to get a lot of these, and this income limits consensus which was reached today was one of the hurdles, so I'm optimistic.

Shashaty: Would President Bush sign a bill like that, Bob?

Moss: As long as it's revenue-neutral.

Barbe: I think what we have to note here is that part of what is going on in the legislative front is part of a much bigger legislative package relating to you doing away with the AMT, doing away with the alternative minimum tax and some other very significant—

Shashaty: This is going to get lumped in with the tax overall?

Barbe: It is already lumped in.

Moss: I don't think it will. John Shiner clearly doesn't—the AMT reform bill would be a huge cost and would be the biggest tax bill—reform bill since 1986, and they are just not going to do that in presidential election.

Barbe: I agree with that, but I think the current state of the legislation—and we had lunch with Member McCreary yesterday that there is this larger tax package that includes the full AMT repeal, a cut of the corporate tax rate, and nobody should underestimate, a cut of the corporate tax rate affects this industry pretty profoundly and then it has some of the low-income housing aspects included in that. The perspective of all public housing lawmakers is that that won't pass, it won't fly that way and that Chairman Rangel will introduce a separate one-year AMT patch and a tax extender package to deal with some of these larger issues. But I think our perspective is the big bill will go nowhere, but all of this is going to then get, in part, affected by a much larger tax reform discussion on the scale of the 1986 reform discussion, that could happen in 2008, and that AMT is going to be front and center on it, as well as a reduction of the corporate tax rate. So I think that could play out in all of this.

Shashaty: Well, we could spend a lot of time speculating on what Congress will do, but that is not very fruitful. Watch our magazine and our Web site, as we will try to follow this as it goes. Let's go back to something that we can talk about that is here and now. You can answer this question either way, in a positive way, which is whether the most helpful change in a qualified allocation plan that you have seen this year, or you can answer it the other way, what the most misguided change that you have seen in a qualified allocation plan this year. Who wants to start? I'm sure David has something to say about it.

Peterson: The helpful changes are, real briefly, elimination of lotteries in some states, increase in basis limits, and site visit is a novel idea. I think on the most misguided changes, I will just name a few. One, states trying to dictate to developer occupants who their equity partners will be. Go figure. Two, unfunded mandates such as requiring a certain percentage of units in every single deal to serve people either at 30 percent or below or special needs populations without having the funding available. Three, requiring Davis-Bacon wages to be paid on every development. Four, moving away from preservation. Then I will stop there.

Heller: We have an upcoming session on QAPs, but I have to say that going out and looking at the real estate was the biggest positive and grading the deals on how good the land is, how good the development is, is something that I would encourage all states to do. And then on the negative side, you know, the lotteries, that they still exist. We need to do everything we can to get rid of them everywhere, and then the whole Davis-Bacon thing is just—I don't get it. It is just not—it served a period of time in this country that was extremely important, but we are in 2007. We need to change.

Shashaty: Okay. Who else? Pat Sheridan.

Sheridan: A couple. One that we ran across last year was a statement that a maximum on the allowable per unit per annum operating costs. It was actually set so low that even we could not justify going down to that level to make a deal work. I know a lot of people that will reduce their rates, made things worse, so this was ridiculously low. I think that was totally misguided. The other piece is the states where permanent supportive housing or special needs are top priority. I think that is good, but the piece that is not being done there a lot of times is the total underwriting. There might be enough sources to get the building built, but the other two pieces that have to come along is you need a deep subsidy of the tenants, whether that is an allocation of a project-based vouchers or whatever, you ultimately need services dollars for the actual services. I want to see those two pieces being reviewed and underwritten into the deals when a lot of these states are awarding credits. I think that is important.

Shashaty: Who else?

VanAmerongen: I am happy to notice none of the misguided ones thus far are New York's, and I'm happy about that. One thing that we are going to be doing in our communiqué, which I would like to think is a really good approach is we used to score very highly on project readiness. While it is obviously important to move a deal from funding through construction into occupancy, we felt it penalized developers who were trying to do things with municipalities where there was resistance to affordable housing. So, instead, we are going to change the scoring criteria, and if the developer is doing everything on their end, to try to move along it to approval and the municipality is getting in the way of affordable housing development, we are not going to penalize them on those readiness scoring.

Shashaty: Sounds good. Anybody on QAPs? Sean.

Thomas: First of all, there are no misguided changes in Ohio.

Shashaty: I know that.

Thomas: I don't want to imply that Ohio's QAP is perfect. I want to thank David for the compliment, and one of the things, in addition to site reviews, that we are trying to do is get away from sort of check-the-box syndrome. And I think in an ultra-competitive environment that we have had, it is very easy to defer our expertise to rules and point scoring, and what we are trying to do is utilize our expertise of our staff to give their opinion of the site and use that in a transparent manner, based on specific criteria on how they give a score on a site. We want to try to do more of that in the future. I think this year was a big success for us, and we want to build on that. And I think our QAP in the future will be more based on staff expertise and looking at the site and setting up a laundry list of points.

Shashaty: Okay. What would the board members advise states to do with their QAPs that are late? That is printable. It has to be a printable statement. Rob Hoskins.

Hoskins: It is 2007, and affordable housing unfortunately does have the—in communities, a misnomer of having a bad rap of being a credit for low-income driven areas. The reason I say that is that in some states, specifically the state of Texas requires all sorts of support at the state rep level, state senator level, the local level, essentially signing up a political process to get a deal done and not this affordable housing because it is needed in a particular area. I would suggest, there are varying degrees of that throughout a lot of the other states' QAPs. I would recommend doing away with that particular type of policy and allowing it to go to the land-use plan the local municipalities dictate it should be and make that affordable housing available for the developer and with the use of the tax credits.

Shashaty: Bob Moss.

Moss: I agree. I think it is time to peel back the layers. You know, we have had a couple generations now of tax credit directors at the agencies. A lot of them are removed from 1986, and the layers of the onion have not been peeled back to the basics of what we are trying to achieve with the program. So as much simplification as possible; it is easy to say, it is hard to do. If you have ever tried to write a QAP and come up with a scoring system on your own, it is easier said than done. But peel back the layers and try to simplify would be my suggestion.

Shashaty: Everybody else seems to be running out of steam over here. David, you must have one.

Heller: A relatively simply one on the HOPE VI front. I would like to see more of the HOPE VI taken out of the 9 percent program and shifted to the 4 percent program.

Shashaty: We had a number of people—I suggested the topic of how states could encourage more development of family housing. We had a very interesting commentary on that in the magazine by Trudy McFall. I don't recall when it ran, but she contrasted two states, one that works hard to encourage development of family housing and one that really does not. And somebody made the comment earlier that green would help but then as long as it was a seniors project. The corollary of that is, a family project is not getting approved, so a number of people in our warm-ups for this discussion wanted to comment on the issue of how states could facility more production of family housing. I wonder if we want to—do you want to make some comments on that, Deb?

VanAmerongen: It is the same issue. We can call it workforce housing, and people still don't want it. So I think, again, where we are trying to go with it is to try to encourage people to work, so we are going to—I talked a little bit about project readiness, but we are actually going to try to drive some points to doing development in areas where there has not been development in a number of years, looking to—you know, we have large—we have large units for families, things like that. But I think it is also—people have talked about in terms of educating and public outreach, where we have legislators at local levels can be helpful, too.

Shashaty: Anybody else want to talk about that issue?

Barbe: I think the other side of it is, we have to fight. You know, I come to this having been—before coming to Sonnenschein, I was the general counsel to Thresholds for five years. For those of you that don't know, Thresholds is the nation's largest psychiatric service agency. So it does housing for individuals with severe persistent mental illness and sometimes substance abuse and sometimes homeless mothers with mental illness and children, and sometimes jail programs, the hardest populations in the world for certain. The NIMBYism was profound. I was assaulted at a community meeting, thrown up against a wall by a Chicago alderman, who is now in jail, but that is unrelated. But what we did always in the end is we fought and we brought in HUD's fair housing people, and in the end we brought in the Justice Department. And that is what they are there to do. And what we learned in certain communities, we brought somebody from the Justice Department in to speak to the City Council, a suburb of Chicago. We told them what they were trying to do was illegal in blocking this housing. They didn't listen. They refused to issue a building permit. We took them to court, and we won, and we take people to court repeatedly. And at some point—I'm all in favor of information. I'm all in favor of collaboration. I'm all in favor of working to build consensus in the community, but I also think that we, as a group, simply have to fight sometimes. And if you fight enough, eventually you win, and it goes away, because the law on this is very clear, and we do have the resources of the federal government to bring to bear.

Harris: Let me take the flip side of that, if I may. And I agree from the standpoint of what is right, you are right. From the standpoint of a coldhearted developer in this for cash, you know what, I went to court a couple of times to get a zoning change where I had NIMBY problems, and I won. And it took a long time, it was expensive, and it cost me money, and it cost me goodwill. Any time we run into that now, we run. From a coldhearted developer perspective, I don't want to fool with it.

Barbe: I understand. And at times the nonprofits are the better ones to police this because they are in a much better position, and they are holding the moral high ground in a way that serves them incredibly well. And I get it, that sometimes you have to live to fight another day, but sometimes you also have to fight.

Shashaty: That is a tough call.

Heller: Andre, we have to look at how we go to this point, too, and how the NIMBYs got to the point of such fervor in our society. We have a president that for the past seven years has called this the ownership society, so mentally in our minds, we have said, “Apartments is a bad thing, ownership is a good thing.” We have had the other side of the aisle saying, “Let's open up—banks, you are not doing enough to loan to families that probably should have been renters but now they are homeowners.” Hence, a lot of the problems that we have. So there is a lot of blame to go around, and I think we have to look back at what we have done in the past seven to 10 years, and say, we sort of created—or society created this problem that fed into the NIMBYs and now our industry and the multifamily market rent industry is really suffering. It is not a solution, but it helps us understand how we got to this point. And maybe when you understand how you got to that point, we can begin to work to improve it.

Shashaty: Well, I'm well aware of that dynamic, and I'm glad it was you that came close to criticizing the Republican administration and not me, because I would have heard from Lee. I have been very careful about that. I want to get another show of hands. It is my opinion that the NIMBY problem is getting worse, certainly in Northern California it is getting worse. The board of supervisors in my county is scared to death to upset anybody who—by proposing that affordable housing be sanctioned in their neighborhood, God forbid. So I think the political obstacle of NIMBYism, from where I'm sitting is much worse and getting worse. How many people think it is getting worse in their area?

(Show of hands.)

Shashaty: How many people think there is actually more acceptance or NIMBY is getting better?

(Show of hands.)

So the negatives—the pessimists have it by a small margin. Paul.

Purcell: In our QAP, we just put in—it is getting approved this month, that if a project is sued because of the 24-month time period for Sec. 42, that if a project is sued and the developer continues to make a good faith effort, they can give back their credits and be guaranteed, even if the QAP changes two years down the road when their case is resolved in their favor.

Thielen: To get a higher developer fee, too.

Sears: What state?

Purcell: Washington.

Reznick: Very good.

Purcell: But the point is not just the reality of it. The point is to remove the threat of the time because the time is what has killed several projects.

Reznick: Sure.

Peterson: That was actually true in Michigan starting about 15 years ago, as a matter of fact, that we allowed that to happen in certain circumstances when there were lawsuits and everything. I just want to say that with respect to your initial question on the subject, which was how do we get more family housing, I think the two words "inclusionary zoning" really need to be mentioned at this point in time. That is a real vehicle. To the extent that you have the political bill and those that are passing those ordinances, that it is being preliminarily used around the country.

Sheridan: I would second what Jeanne said. I think we definitely see more inclusionary zoning popping up. The problem comes when you have a project that you have presented to the board. I think that is probably where the disconnect is. It is encouraging to see more inclusionary zoning.

Heller: You know, Andre, when you asked whether it is getting better or worse with regard to NIMBYism, one of the challenges that I see out there is that we always had NIMBYism. It has always been a problem. The NIMBYs a lot times were in locations where you would have expected it. You knew you were going in for a challenge. What I'm seeing now is even more frightening, is going into areas where the very people that are arguing against our development are the very people that would be prospective residents in the community, and that is a challenge. And that is—it is frightening and ugly, and it is not called NIMBYism. A lot of times it is called racism, and that is scary. And as the population shifts in our society and the increase in our society of the immigrant population, that is lot of what we are dealing with, in areas with people that look a little bit different than the people in the room that you are presenting to and that is a really ugly factor.

Hoskins: Which means I really think you should be splitting the politics out of this situation. We are in the middle of a major lawsuit with a municipality up in northern Texas that we are winning. The project is finally done. They cancelled our deal at midnight the day before closing. We were flying people in from both sides of the coast to close, and we instituted a fair housing lawsuit against them. We finally got their attention, but if that is the only way we are going to do it, we are going to do it. As with the Kansas decision, we can try to swim up stream and work with the municipalities, but at some point when you know you have a good deal in an area where it needs it, you know you are going to get it. And if the politics—the voters are going to be the ones that are going to vote these folks in, we have to remove them from that particular perspective.

Shashaty: We are going to throw it over to the audience for a few minutes, and then David Reznick is going to do a wrap-up. Audience, what do you want to know? Nobody wants to know anything. Somebody behind me? I can't see.

Michael Liefer: Hi. Michael Liefer from Banner Acquisitions in Northbrook, Ill. We primarily specialize in preservation of project-based Sec. 8, 236-type properties. I have seen more and more prevalent that state housing authorities, in terms of their QAPs, are requiring more and more rehab per unit. And I guess my question is for the syndicators and investors as to, what is your kind of appetite for moderate-rehab projects that don't necessarily need $20,000 per unit?

Lacasse: I think AHIC periodically, as an organization, comments on the whole QAP process. Our comment on that is that to specify any level of rehab doesn't make any sense. It is what does the property need, and as you pointed out, some properties need less rehab than others. So I don't think it makes sense.

Liefer: I have seen a lot of states that require—I think Massachusetts is $25,000. Some states are $15,000, $20,000. What happens when a property may only need $10,000? It is just that maximum—are the investors still interested in those properties even though the rehab is still low?

Lacasse: If it only needs $10,000 or $15,000 a unit to sustain itself over the course of the tax credit period, yes, that would be fine, at least from my perspective, I should say.

Purcell: I would like to challenge investors. I mean, this is the whole issue of responsible investing because one of the things that we have seen in Washington is people who put in $3,000 to $5,000. They make a 40-year commitment to provide affordable housing and do a rehab minimum commitment. Because the investment market has been so hot for credits, they were chasing credits. They were getting 98 cents, and I think that is a—kind of a responsible underwriting issue of—we just added in Washington state again, there is going to be a required capital needs assessment. It is going to be a part of the tax credit application for rehab, and you have to look out for 20 years and then make those kinds of commitments so that that kind of turnaround does not happen.

Lacasse: I do grant that there probably are very few properties that fall into that category, but the point is that if there is one, then clearly I understand most of the deals that we all see need significant rehab. That is why they are coming into the program. So don't get me wrong about that, but it just seems to me that flexibility is—you know, is helpful in many ways.

Moss: It needs to be an adequate amount of rehab to reset the clock for the next 15 years.

Shashaty: Okay. One more audience question, and we have got one.

Mary Buczynski: Good afternoon. I'm Mary Buczynski from Milwaukee, Wis., and I have heard your discussion about the need to address family housing, but I'm seeing in our urban areas a way of doing that by first addressing the seniors housing, bringing up some of their homes for families. The problem with that, though, is site assemblage. You know you have got a threshold for seniors housing at 60, 80 units in order to provide the services that are there. We have seen the Supreme Court come down with the squashing the eminent domain, use of that. What are you seeing around the country to address that, to get the sites available for development?

Harris: One thing, particularly, is not necessarily new construction, but, certainly, the act of rehab on the historic site. There are a number of types of buildings that are adaptive for reuse. We have done old hospitals, old schools. Very, very, very expensive, but you have additional sources of funds with your federal historic credits. Many states have state historic credits, and in the urban areas, seniors housing in a rehabbed historic building works pretty nifty.

Moss: We have one, too. We probably have an advantage being a big nonprofit, but we have partnered successfully with a few churches. And you can find churches that have had land donated at some point or the other, and, obviously, the parishioners in many cases are elderly themselves and are seeing elderly housing as a priority in their community. So think as developers, there is that opportunity there.

Shashaty: I think we are going to have to wrap up. David Reznick wanted to have the last word, and as usual, he shall.

Reznick: What I would like to challenge this group for is to come up with everything that we have heard today, two of the most important things to help preserve low-income housing going forward into '08, '09, to make it more feasible and to forward those to Andre so that Andre can utilize the magazine and other organizations, whatever we can to get those enacted. We heard a lot of very, very interesting and exciting things, but we can't just get out and walk out of this room and not carry it forward. So Andre is the funnel for it. Please do that. Two from each of you.

Shashaty: Let me conclude by thanking our board. Let's all give them a round of applause.