Monday 25 November 2013
DeMontford University and Places for People study of LIHTC
Last Wednesday, 20th November, I attended a roundtable session organised by Places for People (PfP) which are to consider the study into Tax Credit funding by DeMontfort University. PfP are jointly funding this study with the Economic and Social Research Council (ESRC). The session was chaired by Places for People’s Chief Executive, David Cowans. There was a wide range of representatives from different parts of the development industry present including representatives from:
The Royal Town Planning Institute,
The National Home Builders Federation
The Royal Institute of Chartered Surveyors
Shelter
The Building and Social Housing Foundation
HM Department of Communities and Local Government (DCLG)
Respublica (a think tank)
A number of Staff from DeMontfort University also attended the session including Dr.Tim Brown. Tim is Director of Research at DeMontfort University's Centre for Comparative Housing Reasearch. He is also a member of the Chartered Institute of Housing’s advisory panel for my WCMT funded study of the US LIHTC system.
Tim and Mike Oxley, also from DeMontfort, led the discussion. They presented the principles of the French and US systems which both use tax credits to fund affordable housing. There were important differences between the two systems. The French system was mainly funded through individuals investing in housing tax credits and is based on a series of individual tax credit initiatives. Whereas The US system is based on corporations investing in housing projects in return for tax credits. The present US LIHTC system has operated since 1986.
The session involved a discussion of the basic principles of LIHTC with the panel. This dicussion assisted the members of the panel becoming more familiar with tax credits. The panel raised a number of questions about the principles involved in the operation of LIHTC. I was able to make some useful contributions to the debate based on my experience from my Churchill Fellowship study; including answering some of the more technical questions that were raised about the operation of the system, e.g. year 15 re-syndication, the failure rate, equity pricing, etc.
Sunday 3 November 2013
New York's Banks, its Largest Non Profit Developer and Help from New York University.
For my last few days in New York I met with Dan Nissenbaum and John Olson of Goldman Sachs, Andy Ditton of Citi Bank and Adam Weinstein who is the director of New York's largest non profit developer, Phipps Houses. I also met with Katherine O'Regan, Ingrid Ellen, Mark Willis and Becky Koepnick of New York University.
I discussed Goldman Sach's LIHTC operation with Dan and John. GS have a modest investment in LIHTC (c. 40 deals pa) which is managed within a larger team who manage range of other Community banking and investment. Goldman Sach's team are funding the Social Impact Bond linked to Reiker prison. (A version of this is being run in the UK at Peterborough prison). Dan outlined some of the issues the banking industry has had with LIHTC. Many banks made losses during the market crash and are still carrying these losses forward. This means in turn that investment in Tax Credits does not work for them as they need to be making a taxable profit for the Tax Credits to create a return on their investment. Dan also advised that where a corporation is claiming tax deductions there are strict rules in which order these deductions are taken. Unfortunately, Low Income Housing Tax Credits are not very highly prioritised, so are more risky to investors than investments in other tax exempt investments that are more highly prioritised.
Andy Ditton at Citi Bank explained their strategy. Citi Bank had incurred significant losses during the market crash and on the face of it, based on Dan's analysis would not benefit from Tax Credits. However, the effect of the Community Reinvestment Act (CRA) encourages Citi Bank to continue to participate in the LIHTC programme. Citi Bank, like many banks in the US, needs to maintain a high CRA rating to ensure it minimises regulatory resistance around merger and acquisition activity in the US. Citi Bank has been setting up Low Income Housing Tax Credit deals and quickly selling the tax credits on to other investors before construction completion. Citi Bank are well placed to do this as they are the largest trader of municipal bonds in the US.
Andy also outlined Citi Bank's work more generally in community investment. They recently set up a fund with sponsor Andre Agassi to invest in the development of charter schools, and have also been investing in developing community health centres in poorer areas. Andy sees a potential programme of Community Health Centre's in poorer areas because of the medical Assistance Act (Obama Care). Andy also mentioned a very successful meeting Citi Bank had hosted with 70 billionaires to develop proposals and funds for social impact investment (including affordable housing).
Both Dan Nissenbaum and Andy Ditton expressed an interest in discussing further a possible UK Tax Credit system for affordable housing. Both City bank and Goldman Sachs have operations in the UK (also Bank of America who I met in Washington DC has UK operations and would be interested in discussing a possible UK system as well).
I met with Adam Weinstein at Phipps Houses. Phipps is New York's largest non profit developer. It was founded back in the early 20th Century. Phipps owns and manages more than 6,000 homes, has 1,000 in construction and has a further 3,000 in various stages of planning.
Adam explained how the affordable housing development system worked in New York. Developers needed to have a reasonable level of net worth as an organisation in order to satisfy investors and New York City and/or state.
Nearly all the sites Phipps has secured within their development and construction programme have been secured through city or state requests for proposals. The only sites that they are buying from the market are sites to assist with land assembly around sites acquired from the City and state. A developers experience of the LIHTC and low income bonds is also seen as vital by New York City when it is allocating funds.
I met a group of academics from New York University - Mark, Becky, Kathy and Ingrid to discuss their views on the US LIHTC system and what they could identify in terms of publications, papers and other materials that might be useful to my work. There is surprisingly few studies in the US of the overall impact and performance of the LIHTC programme. However, there are a small number of useful papers. In addition, some further contacts were identified including one at the US Treasury that I will follow up. I had heard prior to the meeting that congratulations were in order as Kathy (O'Regan), who was one of the group I met, was in the process of being ratified by Congress for a very senior post as Assistant Secretary for Policy Development and Research at the Government Department of Housing and Urban Development (HUD).
I discussed Goldman Sach's LIHTC operation with Dan and John. GS have a modest investment in LIHTC (c. 40 deals pa) which is managed within a larger team who manage range of other Community banking and investment. Goldman Sach's team are funding the Social Impact Bond linked to Reiker prison. (A version of this is being run in the UK at Peterborough prison). Dan outlined some of the issues the banking industry has had with LIHTC. Many banks made losses during the market crash and are still carrying these losses forward. This means in turn that investment in Tax Credits does not work for them as they need to be making a taxable profit for the Tax Credits to create a return on their investment. Dan also advised that where a corporation is claiming tax deductions there are strict rules in which order these deductions are taken. Unfortunately, Low Income Housing Tax Credits are not very highly prioritised, so are more risky to investors than investments in other tax exempt investments that are more highly prioritised.
Andy Ditton at Citi Bank explained their strategy. Citi Bank had incurred significant losses during the market crash and on the face of it, based on Dan's analysis would not benefit from Tax Credits. However, the effect of the Community Reinvestment Act (CRA) encourages Citi Bank to continue to participate in the LIHTC programme. Citi Bank, like many banks in the US, needs to maintain a high CRA rating to ensure it minimises regulatory resistance around merger and acquisition activity in the US. Citi Bank has been setting up Low Income Housing Tax Credit deals and quickly selling the tax credits on to other investors before construction completion. Citi Bank are well placed to do this as they are the largest trader of municipal bonds in the US.
Andy also outlined Citi Bank's work more generally in community investment. They recently set up a fund with sponsor Andre Agassi to invest in the development of charter schools, and have also been investing in developing community health centres in poorer areas. Andy sees a potential programme of Community Health Centre's in poorer areas because of the medical Assistance Act (Obama Care). Andy also mentioned a very successful meeting Citi Bank had hosted with 70 billionaires to develop proposals and funds for social impact investment (including affordable housing).
Both Dan Nissenbaum and Andy Ditton expressed an interest in discussing further a possible UK Tax Credit system for affordable housing. Both City bank and Goldman Sachs have operations in the UK (also Bank of America who I met in Washington DC has UK operations and would be interested in discussing a possible UK system as well).
I met with Adam Weinstein at Phipps Houses. Phipps is New York's largest non profit developer. It was founded back in the early 20th Century. Phipps owns and manages more than 6,000 homes, has 1,000 in construction and has a further 3,000 in various stages of planning.
Adam explained how the affordable housing development system worked in New York. Developers needed to have a reasonable level of net worth as an organisation in order to satisfy investors and New York City and/or state.
Nearly all the sites Phipps has secured within their development and construction programme have been secured through city or state requests for proposals. The only sites that they are buying from the market are sites to assist with land assembly around sites acquired from the City and state. A developers experience of the LIHTC and low income bonds is also seen as vital by New York City when it is allocating funds.
I met a group of academics from New York University - Mark, Becky, Kathy and Ingrid to discuss their views on the US LIHTC system and what they could identify in terms of publications, papers and other materials that might be useful to my work. There is surprisingly few studies in the US of the overall impact and performance of the LIHTC programme. However, there are a small number of useful papers. In addition, some further contacts were identified including one at the US Treasury that I will follow up. I had heard prior to the meeting that congratulations were in order as Kathy (O'Regan), who was one of the group I met, was in the process of being ratified by Congress for a very senior post as Assistant Secretary for Policy Development and Research at the Government Department of Housing and Urban Development (HUD).
Wednesday 30 October 2013
New York's Neighbourhod Improvement Non Profits
New York is a patch work of non profit neighbourhood organisations. They grew up during the 1970s and 80s as a response to, what at the time, looked like the terminal demise of much of the inner city of New York. During this time the effects of 'white flight' were materialising with devastating consequences on the urban fabric. As middle income people moved out of urban neighbourhoods to the suburbs private landlords let properties to increasingly poorer households. The returns from property declined and investment declined. Properties became vacant and derelict. Utilities bills and property taxes were not paid by landlords. Ultimately these derelict or close to derelict buildings became the property of New York City. Whole neighbourhoods became depopulated, crime rose to intolerable levels and some areas became no-go areas dominated by drugs and gangs.
A number of people I have talked to have shown me photographs of this time and also directed my to the NYC website which has photographs of every building in New York taken in the 1980s. There are photographs of Harlem where I am staying showing derelict and blackened buildings, piles of rumble, burned out cars and deserted streets. Something akin to an apocalypse movie.
Out of this time grew voluntary tenants rights groups and neighbourhood development corporations. With the backing of the City and philanthropists these groups fought to save their neighbourhoods one building at a time. The link below is to a video of the history of 'Banana Kelly', a neighbourhood improvement group that successfully fought the urban dereliction of their South Bronx neighbourhood.
http://www.bkcianyc.org/?page_id=29
As well as the neighbourhood groups dealing with this problem at a local level, at a National level the Government were putting pressure on banks to invest in these areas. Banks avoided investing in the so called 'red lined' areas, so not only were these areas suffering massive decline and dereliction, there was little prospect of any investment in them either. In 1977 the Community Re-investment Act was passed which resulted in assessments and grading of banks performance in respect of investing in neighbourhoods in their area of operation. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act, changed the rules on interstate banking. This allowed banks to merge with or buy other banks in different states. However, these mergers and acquisitions had to be vetted and approved. Crucially, banks had to have an Outstanding CRA rating in order to be certain that their acquisition or merger would be approved. This had the affect of banks taking their community banking activity very seriously. Banks upped their game and increased their work with the non profit groups in the formerly redlined neighbourhoods to supply financial services and investment including investing equity into new affordable housing under the LIHTC programme.
The non profits were active in their communities and often had strong links with local politicians which encouraged New York City and State to support the investment activity with soft loans, gifts (or disposal for $1) of land and buildings from the City who had acquired them due to dereliction and non payment of property taxes. They also supported preservation and redevelopment through zoning approvals.
This combination of activity - banks, local community improvement associations and the supply of property and support from the City has transformed New York over the last 20 years.
Returning to Harlem and the situation now. Harlem is being rapidly gentrified. This process has a geographical component with the most gentrified streets near Central Park and the area from 110th Street to 125th Street. Real estate prices in these areas are rocketing with new blocks and rehabilitated blocks being built. I am staying in a very beautiful apartment in an upgraded brownstone on 132nd Street. This is the next wave of gentrification. The first young professionals are moving into the area and it is starting to change. The facilities in the high street are changing too with some higher end restaurants opening - Red Rooster (apparently a favourite of President Obama) and Maison Harlem. I can personally attest to their high standards having now eaten at both. The super market near 125st sells more speciality foods including gluten free and organic etc.
The role of neighbourhood improvement non profits when neighbourhoods are improved
I visited Chris Cirillo, the Executive Director of Lott Community Development. Lott work in North Manhattan and their office is in Spanish Harlem. Spanish Harlem is less gentrified than the central Harlem area I described above. Lott own and manage just under 700 homes. They were founded 25 years ago by Father Lott who is a catholic priest. At the time Spanish Harlem was suffering many of the familiar problems of dereliction and abandonment typical of many of the poorer neighbourhoods in New York. During the last 20 years Lott worked as a community development organisation and was effective in improving the neighbourhood. Spanish Harlem is now 'stabilised'. Developers are starting to build new buildings in Spanish Harlem and not just around the subway and rail stops.
There are hundreds of non profits through out New York that were created in the same way as Lott Community Development but now things are changing. New York City has run out of land and buildings to pass to non profits to develop and areas have been improved. The for profits and larger non profits are undertaking most of the new affordable housing development in New York. The many smaller neighbourhood non profits are developing only irregularly or not at all. These non profits who's business model use to involve securing developer fees from development are now more dependent on margins from cash flows from the revenue side of their activity and grants for non development activity e.g. employment projects.
Essentially, there are too many small non profit organisations in New York. The reasons for their formation have been significantly tackled and the development income that had supported their business plans and growth has reduced dramatically. A new model is needed for their on going operation. The big challenge moving forward is preserving affordable housing in their neighbourhoods as real estate values soar and the existing population is displaced. There are too many small organisations essentially doing the same activity. Without development income operational efficiency becomes a major issue and size of operation becomes crucial .
Lott recently teamed up with 4 other non profits in north Manhattan with 3,200 homes in ownership between them. They received a grant from Enterprise Communities to determine proposals on how they want to fund themselves and operate going forward.
A number of people I have talked to have shown me photographs of this time and also directed my to the NYC website which has photographs of every building in New York taken in the 1980s. There are photographs of Harlem where I am staying showing derelict and blackened buildings, piles of rumble, burned out cars and deserted streets. Something akin to an apocalypse movie.
Out of this time grew voluntary tenants rights groups and neighbourhood development corporations. With the backing of the City and philanthropists these groups fought to save their neighbourhoods one building at a time. The link below is to a video of the history of 'Banana Kelly', a neighbourhood improvement group that successfully fought the urban dereliction of their South Bronx neighbourhood.
http://www.bkcianyc.org/?page_id=29
As well as the neighbourhood groups dealing with this problem at a local level, at a National level the Government were putting pressure on banks to invest in these areas. Banks avoided investing in the so called 'red lined' areas, so not only were these areas suffering massive decline and dereliction, there was little prospect of any investment in them either. In 1977 the Community Re-investment Act was passed which resulted in assessments and grading of banks performance in respect of investing in neighbourhoods in their area of operation. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act, changed the rules on interstate banking. This allowed banks to merge with or buy other banks in different states. However, these mergers and acquisitions had to be vetted and approved. Crucially, banks had to have an Outstanding CRA rating in order to be certain that their acquisition or merger would be approved. This had the affect of banks taking their community banking activity very seriously. Banks upped their game and increased their work with the non profit groups in the formerly redlined neighbourhoods to supply financial services and investment including investing equity into new affordable housing under the LIHTC programme.
The non profits were active in their communities and often had strong links with local politicians which encouraged New York City and State to support the investment activity with soft loans, gifts (or disposal for $1) of land and buildings from the City who had acquired them due to dereliction and non payment of property taxes. They also supported preservation and redevelopment through zoning approvals.
This combination of activity - banks, local community improvement associations and the supply of property and support from the City has transformed New York over the last 20 years.
Returning to Harlem and the situation now. Harlem is being rapidly gentrified. This process has a geographical component with the most gentrified streets near Central Park and the area from 110th Street to 125th Street. Real estate prices in these areas are rocketing with new blocks and rehabilitated blocks being built. I am staying in a very beautiful apartment in an upgraded brownstone on 132nd Street. This is the next wave of gentrification. The first young professionals are moving into the area and it is starting to change. The facilities in the high street are changing too with some higher end restaurants opening - Red Rooster (apparently a favourite of President Obama) and Maison Harlem. I can personally attest to their high standards having now eaten at both. The super market near 125st sells more speciality foods including gluten free and organic etc.
The role of neighbourhood improvement non profits when neighbourhoods are improved
I visited Chris Cirillo, the Executive Director of Lott Community Development. Lott work in North Manhattan and their office is in Spanish Harlem. Spanish Harlem is less gentrified than the central Harlem area I described above. Lott own and manage just under 700 homes. They were founded 25 years ago by Father Lott who is a catholic priest. At the time Spanish Harlem was suffering many of the familiar problems of dereliction and abandonment typical of many of the poorer neighbourhoods in New York. During the last 20 years Lott worked as a community development organisation and was effective in improving the neighbourhood. Spanish Harlem is now 'stabilised'. Developers are starting to build new buildings in Spanish Harlem and not just around the subway and rail stops.
There are hundreds of non profits through out New York that were created in the same way as Lott Community Development but now things are changing. New York City has run out of land and buildings to pass to non profits to develop and areas have been improved. The for profits and larger non profits are undertaking most of the new affordable housing development in New York. The many smaller neighbourhood non profits are developing only irregularly or not at all. These non profits who's business model use to involve securing developer fees from development are now more dependent on margins from cash flows from the revenue side of their activity and grants for non development activity e.g. employment projects.
Essentially, there are too many small non profit organisations in New York. The reasons for their formation have been significantly tackled and the development income that had supported their business plans and growth has reduced dramatically. A new model is needed for their on going operation. The big challenge moving forward is preserving affordable housing in their neighbourhoods as real estate values soar and the existing population is displaced. There are too many small organisations essentially doing the same activity. Without development income operational efficiency becomes a major issue and size of operation becomes crucial .
Lott recently teamed up with 4 other non profits in north Manhattan with 3,200 homes in ownership between them. They received a grant from Enterprise Communities to determine proposals on how they want to fund themselves and operate going forward.
Sunday 27 October 2013
New York, New York - City and State
Since Tuesday I have been in New York working on the next leg of my Winston Churchill Memorial Trust Fellowship (www.WCMT.org.uk)
I met with Tom Eastman from Enterprise Communities, together with David Rowe, Sharon Browne and Margaret Taddy of CAMBA. Enterprise are a syndicator that supports the development of affordable housing. I met with Scott Hoekman from Enterprise when I visited Washington DC.
David and Sharon showed me around a recently completed scheme and another scheme which was a few weeks away from Practical Completion. CAMBA have worked in New York for more than 30 years and supplied a wide range of services including, financial literacy, legal aid, social work support etc. In 2005 they moved into the development of affordable housing as tackling homelessness has always been a major plank of their mission. Enterprise have acted as their syndicator for each of these projects.
The scheme at CAMBA Gardens was being developed on land that CAMBA had purchased from a hospital. It was an old psychiatric hospital that had housed, before it was closed, the serial killer 'Sam' of 'Summer of Sam' fame.
The new building is phase one of a £67m scheme. Phase one contains for 209 apartments of which 60% are for formerly homeless. The scheme comes with a large staff team of 8 case workers, a part time psychiatrist, as well as security and a building management team. The revenue for the project was coming from project based section 8 revenue funding as well as a series of New York City and State grants to support people with a range of support needs. Most of this is derived from a tariff with a specific annual support grant for people with a particular types of support needs. Different needs attract a different tariff and this gives rise to a matrix. The vast majority of the individual households living in the project do not work and all of the residents will receive Assistance. There was some very significant research undertaken by New York University that revealed that the cost to the state of the homeless population was higher when they were not housed compared to when they were. This was due to them needing emergency care, police intervention, social services intervention etc. Although there are a lot of revenue grants going into to the project it is still less expensive than not supporting this population in this way.
The quality of the scheme was very high. The 2 bedroom apartments were c. 900 ft in floor area, 1 bedroom apartments were 700 square feet and 3 bedroom apartments were 1,200 square feet. Ceilings were high at 12 feet on the ground floor and 9 ft on upper stories. The scheme had polished terrazzo kitchen counter tops as well as heating and air conditioning. In addition, the scheme had a number of outside play areas for children, underground parking and an office base for the workers. Unusually for New York the scheme also had fairly large an outside open garden area at ground level. The entrance lobby at which there was a security presence 24 hours per day, was highly specified with a green living wall and 'high end' reception area. The project is LEED Platinum standard.
Despite the specialist nature of the scheme, it had attracted a tax credit investor who had invested £24m into the project. The remainder of the capital cost was mainly covered with New York City and New York State grants and loans.
I met with Chris Allred, Eric Enderline an Miriam Colon from New York City on Wednesday. They took me through some of the strategic challenges of working in New York where build and land costs are very high and market rents are extremely high. There is also the challenge of improving and redeveloping their public housing stock. New York City's proposals for improving the public housing in the State are the subject of a legal challenge by a tenants group. Chris helpfully sent me a number of documents and links on the LIHTC programme and the affordable housing programme in New York.
I met with Carl Wise from Hunt Capital Partners. Carl helpfully took me through his work as a private sector syndicator, including trading Low Income Housing Tax Credits
pricing and market rates. Carl has promised to send on an example on an excel spreadsheet.
I met with Arturo Suarez and Pierre Downing of LISC (Local Initiative Support Corporation). Arturo and Pierre told me about the work of LISC and their sister organisation National Equity Fund (NEF); and about the realities of working in New York City. Local politics is very important in decision making in respect of Low Income Housing Tax Credit allocation and re-syndication in year 15. We also discussed some of the complications in respect of working with land donated from the City to non profit developers and the margins they are expected to work within compared with the higher margins of the for profit developers. We also discussed the challenges of working often with small inexperienced community groups.
I met with Tom Eastman from Enterprise Communities, together with David Rowe, Sharon Browne and Margaret Taddy of CAMBA. Enterprise are a syndicator that supports the development of affordable housing. I met with Scott Hoekman from Enterprise when I visited Washington DC.
David and Sharon showed me around a recently completed scheme and another scheme which was a few weeks away from Practical Completion. CAMBA have worked in New York for more than 30 years and supplied a wide range of services including, financial literacy, legal aid, social work support etc. In 2005 they moved into the development of affordable housing as tackling homelessness has always been a major plank of their mission. Enterprise have acted as their syndicator for each of these projects.
The scheme at CAMBA Gardens was being developed on land that CAMBA had purchased from a hospital. It was an old psychiatric hospital that had housed, before it was closed, the serial killer 'Sam' of 'Summer of Sam' fame.
The new building is phase one of a £67m scheme. Phase one contains for 209 apartments of which 60% are for formerly homeless. The scheme comes with a large staff team of 8 case workers, a part time psychiatrist, as well as security and a building management team. The revenue for the project was coming from project based section 8 revenue funding as well as a series of New York City and State grants to support people with a range of support needs. Most of this is derived from a tariff with a specific annual support grant for people with a particular types of support needs. Different needs attract a different tariff and this gives rise to a matrix. The vast majority of the individual households living in the project do not work and all of the residents will receive Assistance. There was some very significant research undertaken by New York University that revealed that the cost to the state of the homeless population was higher when they were not housed compared to when they were. This was due to them needing emergency care, police intervention, social services intervention etc. Although there are a lot of revenue grants going into to the project it is still less expensive than not supporting this population in this way.
The quality of the scheme was very high. The 2 bedroom apartments were c. 900 ft in floor area, 1 bedroom apartments were 700 square feet and 3 bedroom apartments were 1,200 square feet. Ceilings were high at 12 feet on the ground floor and 9 ft on upper stories. The scheme had polished terrazzo kitchen counter tops as well as heating and air conditioning. In addition, the scheme had a number of outside play areas for children, underground parking and an office base for the workers. Unusually for New York the scheme also had fairly large an outside open garden area at ground level. The entrance lobby at which there was a security presence 24 hours per day, was highly specified with a green living wall and 'high end' reception area. The project is LEED Platinum standard.
Despite the specialist nature of the scheme, it had attracted a tax credit investor who had invested £24m into the project. The remainder of the capital cost was mainly covered with New York City and New York State grants and loans.
I met with Chris Allred, Eric Enderline an Miriam Colon from New York City on Wednesday. They took me through some of the strategic challenges of working in New York where build and land costs are very high and market rents are extremely high. There is also the challenge of improving and redeveloping their public housing stock. New York City's proposals for improving the public housing in the State are the subject of a legal challenge by a tenants group. Chris helpfully sent me a number of documents and links on the LIHTC programme and the affordable housing programme in New York.
I met with Carl Wise from Hunt Capital Partners. Carl helpfully took me through his work as a private sector syndicator, including trading Low Income Housing Tax Credits
pricing and market rates. Carl has promised to send on an example on an excel spreadsheet.
I met with Arturo Suarez and Pierre Downing of LISC (Local Initiative Support Corporation). Arturo and Pierre told me about the work of LISC and their sister organisation National Equity Fund (NEF); and about the realities of working in New York City. Local politics is very important in decision making in respect of Low Income Housing Tax Credit allocation and re-syndication in year 15. We also discussed some of the complications in respect of working with land donated from the City to non profit developers and the margins they are expected to work within compared with the higher margins of the for profit developers. We also discussed the challenges of working often with small inexperienced community groups.
Friday 25 October 2013
North Carolina
I travelled down to North Carolina over the weekend to visit Mark Shelburne and the North Carolina Housing Finance Agency. I am very grateful for the immense hospitality Mark and his colleagues showed me. I arrived on Saturday evening. Mark picked me up from the station, took me out for an evening meal and brought me to my hotel. On Sunday commencing at 8.15am Mark and Rus also from the NCHFA picked me up from the station and we went for a Southern breakfast including bacon and biscuits and gritts at the Cracker Barrel, a famous southern food outlet. We visited a number of recently completed projects and one under construction.
Rus is the NCFHA's building compliance officer. He inspects the properties on site to make sure that they are built correctly and to the agency's standards. The agency have their building requirements a little like the HCA. These standards include quality and design standards. The agency will not allow payment of tax credits until these standards are met. Rus had quiet a few stories of some of the issues he has had to deal with in respect of contractor non compliance. This sounds so familiar.
The design standards were interesting. NCHFA like the urban FHA's standard encourages apartments. Typically Eightplexes - 8 apartments leading from one central core. The density standard in Raleigh is very low. Houses in the central area of Raleigh are often located within 1/4 of an acre plots and even larger plots in the suburbs. In the very centre of Raleigh the density increases and there are historic warehouse and tower blocks with a mix of commercial and residential apartments.
In the parts of the US I have visited affordable housing is usually in the form of apartments and this is accepted as the normal standard.
The apartments we visited were much larger in terms of floor area than their UK equivalents. a 2 bedroom apartment has a floor area of 890sq feet, compared with the UK between 570 to 670 sq feet. Also ceiling heights were much higher at over 8 feet. Developments are usually 50 or more dwellings and have an office and residents lounge as well as a play ground with play equipment and a barbecue (which is essential to Southern life).
This visit was followed by lunch with Martha from the Department of Health and Human Services. Martha deals with people with support needs and took me through the operation of the State's system and how this interacts with the affordable housing delivery system. The State had recently had a notice from the Ministry of Justice saying that the State had to improve its access to housing for people with support needs and disabilities. This has created new obligations on the state which it has to fund. This is interesting and quiet different to the way in which the UK system works.
In the evening I was invited to dinner with Carley Ruff of the North Carolina Affordable Housing Coalition, Will and Mark who are officers of the NCHFA and one of their Board members, Gene Davis. I was introduced to more Southern Food. The evening and the food was very enjoyable.
The following morning I visited the agency and met with the compliance staff of which there are 15. This staff group visit and inspect all of North Carolina's affordable housing stock every 1 or 3 years. 1 year if there is agency lending gone into the project, 3 if it is a straight LIHTC investment. The meeting was very illuminating. Essentially every affordable housing property in the state will be inspected about 7 times per year as the investor and syndicator will visit once per year and the operator 4 times per year.
Rus is the NCFHA's building compliance officer. He inspects the properties on site to make sure that they are built correctly and to the agency's standards. The agency have their building requirements a little like the HCA. These standards include quality and design standards. The agency will not allow payment of tax credits until these standards are met. Rus had quiet a few stories of some of the issues he has had to deal with in respect of contractor non compliance. This sounds so familiar.
The design standards were interesting. NCHFA like the urban FHA's standard encourages apartments. Typically Eightplexes - 8 apartments leading from one central core. The density standard in Raleigh is very low. Houses in the central area of Raleigh are often located within 1/4 of an acre plots and even larger plots in the suburbs. In the very centre of Raleigh the density increases and there are historic warehouse and tower blocks with a mix of commercial and residential apartments.
In the parts of the US I have visited affordable housing is usually in the form of apartments and this is accepted as the normal standard.
The apartments we visited were much larger in terms of floor area than their UK equivalents. a 2 bedroom apartment has a floor area of 890sq feet, compared with the UK between 570 to 670 sq feet. Also ceiling heights were much higher at over 8 feet. Developments are usually 50 or more dwellings and have an office and residents lounge as well as a play ground with play equipment and a barbecue (which is essential to Southern life).
This visit was followed by lunch with Martha from the Department of Health and Human Services. Martha deals with people with support needs and took me through the operation of the State's system and how this interacts with the affordable housing delivery system. The State had recently had a notice from the Ministry of Justice saying that the State had to improve its access to housing for people with support needs and disabilities. This has created new obligations on the state which it has to fund. This is interesting and quiet different to the way in which the UK system works.
In the evening I was invited to dinner with Carley Ruff of the North Carolina Affordable Housing Coalition, Will and Mark who are officers of the NCHFA and one of their Board members, Gene Davis. I was introduced to more Southern Food. The evening and the food was very enjoyable.
The following morning I visited the agency and met with the compliance staff of which there are 15. This staff group visit and inspect all of North Carolina's affordable housing stock every 1 or 3 years. 1 year if there is agency lending gone into the project, 3 if it is a straight LIHTC investment. The meeting was very illuminating. Essentially every affordable housing property in the state will be inspected about 7 times per year as the investor and syndicator will visit once per year and the operator 4 times per year.
Saturday 19 October 2013
Buildings, HUD, Leading Syndicators and Lobbyists.
I have had an eventful couple of days in DC.
On Thursday, Michael Weincek Associates (architects who specialise in affordable housing and community buildings) took me around to visit three of their projects. The first was a project where work had just started on redeveloping a partially destroyed historic building following a fire. Part of the building was just a façade now supported by steel, the other part which was more complete, had been stripped back to the bear brick and the studwork. Prior to the fire the property had been a notorious overcrowded slum which the city and other agencies had been trying to tackle for a number of years. This was clearly going to be a very expensive project. We then visited a 140 unit sheltered scheme where the property had been refurbished a couple of years before and extensive facilities added to the building, including a cinema, lounge, laundry, guest suit, activity areas, a gym, large reception area as well as new offices for NCBA who run the scheme. It was an impressive scheme. However, not as impressive as the next scheme we visited which was a block of 70 apartments (all affordable) which had been completed one year ago. The scheme had a high end timber finish externally and a 'designer' atrium. The building had a manger based in the building who worked during working hours, two full time maintenance men and underground parking for 25 cars. it also had a rear furniture access corridor so that you do not have to move furniture through the front entrance. We were shown a one bed apartment of 700ft2. This is at least 200ft2 larger than what we would build in the UK under Design and Quality Standards.. In addition, the ceiling height was 14ft and the kitchen had granite work tops. All the apartments had air conditioning. The scheme was funded using LIHTC and cost $160k per unit.
In the afternoon I met with Robert Rozen who is a lobbyist based at Ernst and Young and worked with Senator Mitchell in drafting the LIHTC legislation. Robert took me through his views on the LIHTC scheme and its strengths and weaknesses politically.
The US debt ceiling was lifted and on Thursday HUD re-opened. I managed to secure my meetings with folk at HUD on Friday. I met with Margret Salazar who is the Director of Affordable Housing Preservation programmes including the Rental Assistance Demonstration (RAD) project. I also met separately with Michael Hollar who is a senior policy analyst and with Kurt Usowski, who is the Deputy Assistant Secretary or Economic Affairs.
In the afternoon Scott Hoekman from Enterprise Communities kindly spent about 2 hours discussing the LIHTC programme including walking me through a worked example showing how the credits and depreciation are accounted for in order to arrive at a rate of return.
I have just arrived in Raleigh after a 6 hour train ride from Washington DC. Mark Shelburne from the North Carolina Housing Finance Agency met me at the station and we went for a Southern meal - mashed sweet potato, onion rings, fried okra, beef and black eyed peas with sweet iced tea. Delicious. Tomorrow we are visiting rural affordable housing schemes in North Carolina with Russ from the NCHFA who deals with the building side of the HFAs operation. We kick off at 8.15am with Southern breakfast - bacon and biscuits.
On Thursday, Michael Weincek Associates (architects who specialise in affordable housing and community buildings) took me around to visit three of their projects. The first was a project where work had just started on redeveloping a partially destroyed historic building following a fire. Part of the building was just a façade now supported by steel, the other part which was more complete, had been stripped back to the bear brick and the studwork. Prior to the fire the property had been a notorious overcrowded slum which the city and other agencies had been trying to tackle for a number of years. This was clearly going to be a very expensive project. We then visited a 140 unit sheltered scheme where the property had been refurbished a couple of years before and extensive facilities added to the building, including a cinema, lounge, laundry, guest suit, activity areas, a gym, large reception area as well as new offices for NCBA who run the scheme. It was an impressive scheme. However, not as impressive as the next scheme we visited which was a block of 70 apartments (all affordable) which had been completed one year ago. The scheme had a high end timber finish externally and a 'designer' atrium. The building had a manger based in the building who worked during working hours, two full time maintenance men and underground parking for 25 cars. it also had a rear furniture access corridor so that you do not have to move furniture through the front entrance. We were shown a one bed apartment of 700ft2. This is at least 200ft2 larger than what we would build in the UK under Design and Quality Standards.. In addition, the ceiling height was 14ft and the kitchen had granite work tops. All the apartments had air conditioning. The scheme was funded using LIHTC and cost $160k per unit.
In the afternoon I met with Robert Rozen who is a lobbyist based at Ernst and Young and worked with Senator Mitchell in drafting the LIHTC legislation. Robert took me through his views on the LIHTC scheme and its strengths and weaknesses politically.
The US debt ceiling was lifted and on Thursday HUD re-opened. I managed to secure my meetings with folk at HUD on Friday. I met with Margret Salazar who is the Director of Affordable Housing Preservation programmes including the Rental Assistance Demonstration (RAD) project. I also met separately with Michael Hollar who is a senior policy analyst and with Kurt Usowski, who is the Deputy Assistant Secretary or Economic Affairs.
In the afternoon Scott Hoekman from Enterprise Communities kindly spent about 2 hours discussing the LIHTC programme including walking me through a worked example showing how the credits and depreciation are accounted for in order to arrive at a rate of return.
I have just arrived in Raleigh after a 6 hour train ride from Washington DC. Mark Shelburne from the North Carolina Housing Finance Agency met me at the station and we went for a Southern meal - mashed sweet potato, onion rings, fried okra, beef and black eyed peas with sweet iced tea. Delicious. Tomorrow we are visiting rural affordable housing schemes in North Carolina with Russ from the NCHFA who deals with the building side of the HFAs operation. We kick off at 8.15am with Southern breakfast - bacon and biscuits.
Wednesday 16 October 2013
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac.
An interesting day today. I met someone who used to work for Fannie Mae and another who used to work for Freddie Mac.
Freddy's real name is: The Federal Home Loan Mortgage Corporation and Fanny's is the Federal National Mortgage Association.
Both are in receivership after the crash as both of them had bad mortgage debt. However, both organisations were involved in the affordable housing rental market and funded affordable housing and bought Low Income Housing Credits - about 40% of all the LIHTC available between them.
When they started making losses they did not need Tax Credits as in order to benefit from them they needed taxable income which they did not have. Their withdrawal from the LIHTC market had a detrimental effect.
The Community Re-investment Act (CRA)was introduced in the 1980's to counter the impact of so called 'red lining' where financial institutions avoided operating in areas of economic deprivation. They were happy to take people's deposits but were not happy to support businesses in the same area. This behaviour, whether it was intentional or not, had the effect of being racist. The CRA set up a system of rating how well banks performed in terms of community banking. This was important as banks required a high CRA rating in order to be allowed to take over other banks. During the 1980s there was a drive by banks to merge and acquire other banks; but they need approval of the Office of the Commissioner of Currency to acquire or merge. If the bank's CRA rating was insufficient they were prevented from acquiring or merging. Banks therefore took a keen interest in the CRA. Investment in affordable housing via LIHTC counted towards and increased CRA rating. Therefore banks were keen to acquire LIHTC to support their wider business. Different banks have different operating areas. In some areas there is a concentration of banks and where this is the case LIHTCs will be bought at a very high level (anecdotally, up to $1.17 per $1 of tax credit). Where there was not competition LIHTC will sell for a low level say 85c per $1 tax credit. Typically, the coastal areas have higher LIHTC prices than areas further inland.
This is where Fannie Mae and Freddie Mac come in. They were not subject to the CRA so bought LIHTC more evenly across the country. As they bought such a high percentage of LIHTC (40%) this dampened the impact o LIHTC prices caused by the CRA. When Fannie and Freddy left the market the prices of LIHTC's became more variable.
I also met some folks from the Tax Credit Coalition which is an advocacy group who are supported by and work for the law firm Nixon Peabody. The Tax Credit Coalition lobbies Government and advocates on behalf of its 140 members drawn from different parts of the LIHTC industry. There is non profit and for profit support for affordable housing. Their is a danger that LIHTC will cease to exist. There is work going on in Congress at present to review the tax laws. Tax Credits could be abolished or tax liabilities generally could be reduced, making tax credits less valuable or reducing demand.
An interesting day today. I met someone who used to work for Fannie Mae and another who used to work for Freddie Mac.
Freddy's real name is: The Federal Home Loan Mortgage Corporation and Fanny's is the Federal National Mortgage Association.
Both are in receivership after the crash as both of them had bad mortgage debt. However, both organisations were involved in the affordable housing rental market and funded affordable housing and bought Low Income Housing Credits - about 40% of all the LIHTC available between them.
When they started making losses they did not need Tax Credits as in order to benefit from them they needed taxable income which they did not have. Their withdrawal from the LIHTC market had a detrimental effect.
The Community Re-investment Act (CRA)was introduced in the 1980's to counter the impact of so called 'red lining' where financial institutions avoided operating in areas of economic deprivation. They were happy to take people's deposits but were not happy to support businesses in the same area. This behaviour, whether it was intentional or not, had the effect of being racist. The CRA set up a system of rating how well banks performed in terms of community banking. This was important as banks required a high CRA rating in order to be allowed to take over other banks. During the 1980s there was a drive by banks to merge and acquire other banks; but they need approval of the Office of the Commissioner of Currency to acquire or merge. If the bank's CRA rating was insufficient they were prevented from acquiring or merging. Banks therefore took a keen interest in the CRA. Investment in affordable housing via LIHTC counted towards and increased CRA rating. Therefore banks were keen to acquire LIHTC to support their wider business. Different banks have different operating areas. In some areas there is a concentration of banks and where this is the case LIHTCs will be bought at a very high level (anecdotally, up to $1.17 per $1 of tax credit). Where there was not competition LIHTC will sell for a low level say 85c per $1 tax credit. Typically, the coastal areas have higher LIHTC prices than areas further inland.
This is where Fannie Mae and Freddie Mac come in. They were not subject to the CRA so bought LIHTC more evenly across the country. As they bought such a high percentage of LIHTC (40%) this dampened the impact o LIHTC prices caused by the CRA. When Fannie and Freddy left the market the prices of LIHTC's became more variable.
I also met some folks from the Tax Credit Coalition which is an advocacy group who are supported by and work for the law firm Nixon Peabody. The Tax Credit Coalition lobbies Government and advocates on behalf of its 140 members drawn from different parts of the LIHTC industry. There is non profit and for profit support for affordable housing. Their is a danger that LIHTC will cease to exist. There is work going on in Congress at present to review the tax laws. Tax Credits could be abolished or tax liabilities generally could be reduced, making tax credits less valuable or reducing demand.
Monday 14 October 2013
Summary of Boston Visit
My trip and this research is thanks to a Travelling Scholarship from the Winston Churchill Memorial Trust (www.WCMT.org)
I spent the second half of the Boston visit meeting with a couple of developers as well as Mass Housing and the State's Department of Housing and Community Development.
There are more bodies involved in affordable housing delivery than is first apparent. The people I met who are involved in Affordable Housing Delivery talk of an 'ecosystem' that has grown up to support its delivery. I have summarised some of the main player's functions and purpose below.
Mass Housing is a non profit that was set up based on funds and commitments from banks during the period of bank take overs in the 1980s. If a bank wanted to take over another bank they had to demonstrate a commitment to community banking and the shortcut to doing this was to make commitments to support Mass Housing. Mass Housing is an affordable housing bank who's mission is to do what others will not. It has powers to raise funds through tax exempt bonds and lends the on to developers at preferential rates. Mass Housing also issues mortgages specifically to assist households on low incomes. Mass Housing last year made $369m in loans to 30 affordable housing projects (including refinancing) and $1.2b in mortgage loans.
The Department of Housing and Community Development is a state agency which allocates Tax Credits and other Federal and State subsidies. It often supplies soft loans to developments. These are loans at the Federal minimum interest rate of 4% but the principal and interest is rolled up and not paid until the property is 're-syndicated' or refinanced after 15 years when the Tax Credits come to an end.
Massachusetts Housing Partnership. (MHP) This is a non profit that was founded n 1990 via the State Interstate Banking Act. This required banks that purchased Massachusetts banks to make funds available to MHP for affordable housing. MHP lends money as hard debt to affordable housing developers at low rates (5.5% was quoted by one developer) to cover about 20% of the development costs of low income housing projects. They specifically can only lend up to a maximum of $15m on an individual transaction.
Larger non profit developers who develop affordable housing themselves, but also in conjunction with other smaller local non profits, typically Neighbourhood Development Corporations. e.g. Community Builders Inc
The Neighbourhood Development Corporations are defined in law and operate to undertake a wide range of activities (not just affordable housing) to assist those on low incomes in their neighbourhoods. e.g. Jamaica Plain Neighbourhood Development Corporation.
Private for profit developers. I have not yet met with one of these organisations
Management operators. I have not yet met with one of these organisations
The Syndicators - these organisations put funds of investors together to invest in affordable housing and gain the benefits of Tax Credits. essentially the investors buy the tax credits. Usually at 90c + per $1. In some markets the purchase price is over $1. e.g. R4 Capital
Investors - these are usually banks, but were corporations for a while during the period after the housing crash. I have not yet met with one of these
Other bodies such as CEDAS which supports non profits by funding feasibility studies, fees etc.
Some issues that emerged from the discussions
i) the management operation requirements have a strong tax compliance requirement. If their is a failure to comply then this could effect the availability of Tax Credits and the investor will loose money and will be fined by the IRS. Therefore about 80% of the management of affordable housing is undertaken by about 5 specialist for profit management organisations in Massachusetts. Each with a minimum of 2,000 properties under management.The Non profits manage about 20% of the stock.
ii) The smaller non profits rely on fees from deals to fund their real estate operations and these occur may be once every 3 years. This means that these organisations struggle developing and/or retaining their development skill and rely on consultants or larger non profits to help them deliver the schemes
iii) The state generally distributes Tax Credits so that their is no concentration of funds into one or a small number of developers. This means that developers receive funds irregularly. In respect of the funding round last year, there were 80 projects submitted in the preliminary round, 40 in the second round and 25 were selected from these.
iv) the cost of preparing a funding bid is very high as it has to be ready to commence in 6 months from the allocation. This means all zoning (planning) soil reports design approvals etc. have to be in place. Costs at risk of $200k would not be unusual.
v) Tax Credits have to be spent within 24 months or they are withdrawn. This is a very serious penalty and creates a focus on delivery.
vi) the state limits the Tax Credits being invested into one deal to $1m. This essentially limits the LIHTC funding to just under $10m and total development costs to about $20m. This financial limit in turn limits the size of projects. (average total development costs are $375k).
vii) Transaction costs for lawyers and accountants per scheme are very high - between $250k to $350k.
viii) Project size is pushed up in order to achieve economies of scale due to the transaction cost. The maximum size is limited because of the limits on the amount of Tax Credits that are allocated per scheme by the state. LIHTC projects tend to be around 50 to 75 units per scheme as a result.
I spent the second half of the Boston visit meeting with a couple of developers as well as Mass Housing and the State's Department of Housing and Community Development.
There are more bodies involved in affordable housing delivery than is first apparent. The people I met who are involved in Affordable Housing Delivery talk of an 'ecosystem' that has grown up to support its delivery. I have summarised some of the main player's functions and purpose below.
Mass Housing is a non profit that was set up based on funds and commitments from banks during the period of bank take overs in the 1980s. If a bank wanted to take over another bank they had to demonstrate a commitment to community banking and the shortcut to doing this was to make commitments to support Mass Housing. Mass Housing is an affordable housing bank who's mission is to do what others will not. It has powers to raise funds through tax exempt bonds and lends the on to developers at preferential rates. Mass Housing also issues mortgages specifically to assist households on low incomes. Mass Housing last year made $369m in loans to 30 affordable housing projects (including refinancing) and $1.2b in mortgage loans.
The Department of Housing and Community Development is a state agency which allocates Tax Credits and other Federal and State subsidies. It often supplies soft loans to developments. These are loans at the Federal minimum interest rate of 4% but the principal and interest is rolled up and not paid until the property is 're-syndicated' or refinanced after 15 years when the Tax Credits come to an end.
Massachusetts Housing Partnership. (MHP) This is a non profit that was founded n 1990 via the State Interstate Banking Act. This required banks that purchased Massachusetts banks to make funds available to MHP for affordable housing. MHP lends money as hard debt to affordable housing developers at low rates (5.5% was quoted by one developer) to cover about 20% of the development costs of low income housing projects. They specifically can only lend up to a maximum of $15m on an individual transaction.
Larger non profit developers who develop affordable housing themselves, but also in conjunction with other smaller local non profits, typically Neighbourhood Development Corporations. e.g. Community Builders Inc
The Neighbourhood Development Corporations are defined in law and operate to undertake a wide range of activities (not just affordable housing) to assist those on low incomes in their neighbourhoods. e.g. Jamaica Plain Neighbourhood Development Corporation.
Private for profit developers. I have not yet met with one of these organisations
Management operators. I have not yet met with one of these organisations
The Syndicators - these organisations put funds of investors together to invest in affordable housing and gain the benefits of Tax Credits. essentially the investors buy the tax credits. Usually at 90c + per $1. In some markets the purchase price is over $1. e.g. R4 Capital
Investors - these are usually banks, but were corporations for a while during the period after the housing crash. I have not yet met with one of these
Other bodies such as CEDAS which supports non profits by funding feasibility studies, fees etc.
Some issues that emerged from the discussions
i) the management operation requirements have a strong tax compliance requirement. If their is a failure to comply then this could effect the availability of Tax Credits and the investor will loose money and will be fined by the IRS. Therefore about 80% of the management of affordable housing is undertaken by about 5 specialist for profit management organisations in Massachusetts. Each with a minimum of 2,000 properties under management.The Non profits manage about 20% of the stock.
ii) The smaller non profits rely on fees from deals to fund their real estate operations and these occur may be once every 3 years. This means that these organisations struggle developing and/or retaining their development skill and rely on consultants or larger non profits to help them deliver the schemes
iii) The state generally distributes Tax Credits so that their is no concentration of funds into one or a small number of developers. This means that developers receive funds irregularly. In respect of the funding round last year, there were 80 projects submitted in the preliminary round, 40 in the second round and 25 were selected from these.
iv) the cost of preparing a funding bid is very high as it has to be ready to commence in 6 months from the allocation. This means all zoning (planning) soil reports design approvals etc. have to be in place. Costs at risk of $200k would not be unusual.
v) Tax Credits have to be spent within 24 months or they are withdrawn. This is a very serious penalty and creates a focus on delivery.
vi) the state limits the Tax Credits being invested into one deal to $1m. This essentially limits the LIHTC funding to just under $10m and total development costs to about $20m. This financial limit in turn limits the size of projects. (average total development costs are $375k).
vii) Transaction costs for lawyers and accountants per scheme are very high - between $250k to $350k.
viii) Project size is pushed up in order to achieve economies of scale due to the transaction cost. The maximum size is limited because of the limits on the amount of Tax Credits that are allocated per scheme by the state. LIHTC projects tend to be around 50 to 75 units per scheme as a result.
Thursday 10 October 2013
Boston Progress to Mid week
Progress so far Monday 7th to Wednesday 9th
I am renting a room through AirBnB in a house in Jamaica Plain. This is a gentrifying area of Boston consisting of leafy streets and clapboard houses. Robert, my host, who works in commercial real estate, could not have been more welcoming including inviting me to a dinner party with some of his friends. This evening I am attending an evening celebration of the 100th anniversary of the Hibernian Institute with another of Roberts friends who is the CEO of a for profit affordable housing developer.
Since Monday I have met with:
Clark Zeigler and Mark Curtiss of Massachusetts Housing Partnership (MHP is a non profit who lend soft loans to LIHTC and affordable housing schemes)
Tom Bledsoe of Housing Partnership Network - trade based body with c 100 members. HPN's aim is to represent their interests, give advice, and promote innovation
David Smith, Recap Advisors - gives advice to clients on LIHTC and other affordable housing schemes (link with R4 Capital)
Peter Dion, R4 Capital - syndicator
Charlie Rhuda, - Novogradac accountants
Bart Mitchell - CEO Community Builders Inc
Everyone I have met has been generous in giving their time to discuss their insights into the LIHTC system. These meetings have increased my understanding of the workings of the US affordable housing system and the issues, risks, and dysfunctional operations that it gives rise to.
I will be circulating the notes to the CiH Advisory group as I write them up. At the end of this week I will review what I have learned from the discussion during the week and assess to what extent this answers the questions posed in the September meeting of the Advisory Group.
I am renting a room through AirBnB in a house in Jamaica Plain. This is a gentrifying area of Boston consisting of leafy streets and clapboard houses. Robert, my host, who works in commercial real estate, could not have been more welcoming including inviting me to a dinner party with some of his friends. This evening I am attending an evening celebration of the 100th anniversary of the Hibernian Institute with another of Roberts friends who is the CEO of a for profit affordable housing developer.
Since Monday I have met with:
Clark Zeigler and Mark Curtiss of Massachusetts Housing Partnership (MHP is a non profit who lend soft loans to LIHTC and affordable housing schemes)
Tom Bledsoe of Housing Partnership Network - trade based body with c 100 members. HPN's aim is to represent their interests, give advice, and promote innovation
David Smith, Recap Advisors - gives advice to clients on LIHTC and other affordable housing schemes (link with R4 Capital)
Peter Dion, R4 Capital - syndicator
Charlie Rhuda, - Novogradac accountants
Bart Mitchell - CEO Community Builders Inc
Everyone I have met has been generous in giving their time to discuss their insights into the LIHTC system. These meetings have increased my understanding of the workings of the US affordable housing system and the issues, risks, and dysfunctional operations that it gives rise to.
I will be circulating the notes to the CiH Advisory group as I write them up. At the end of this week I will review what I have learned from the discussion during the week and assess to what extent this answers the questions posed in the September meeting of the Advisory Group.
Monday 7 October 2013
A meeting of the LIHTC Project Advisory Group was held on 20th September
A meeting of the LIHTC Project Advisory Group was held on 20th September. The Advisory Group consisted of Finance Directors and Development Directors from a number of leading Housing Associations together with Gavin Smart of the CIH and Tim Brown who is leading a significant academic research project that covers the operation of LIHTC. Tim's research project is being undertaken by DeMontfort University and supported by Places for People.
Minutes of the meeting of the LIHTC Poject Avisory Goup held at the Chartered Institute of Housing, 236 Gray’s Inn Road at 11.00am 20th September 2013
Present
John Brace, Aster Group
Tim Brown, De Montfort University
Mike Donaldson, London and Quadrant Housing Association
Martin Huckerby, Sovereign Housing Association
Tim Jackson, GreenSquare Group
Mark Jones, Derwent Living
Colin Lissenden, Town and Country Housing Group
Vic O'Brien, GreenSquare Group
Gavin Smart, Chartered Institute of Housing
Apologies
Mark Allnutt, Thames Valley
Steve White, The Hyde Group
Tim Brown, De Montfort University, is part of a team working on a significant research project funded by the ESRC looking at ways of boosting the supply of affordable housing in the UK. It involves reviewing the affordable housing finance system in 9 other countries. The work is principally focussing on the US and French systems which appear to have the most promising and replicable funding systems for the UK. Both are based on tax incentives with conditions. The research is to be undertaken over a six month period and will employ the equivalent of £150k of ESRC funding. The research is being undertaken as part of the knowledge exchange in conjunction with Places for People between July and December 2014. The final report will be produced by January 2014. The research will be reviewed in December 2014 to measure the policy impact of the research. A challenge of the ESRC research is to determine how ideas can be transferred from other countries that are politically acceptable in the UK.
Vic O’Brien US LIHTC research
1. There are a number of areas/questions that the advisory group thought should be considered within the research:
i) The operation of the US LIHTC system should be understood
ii) What challenges would a LIHTC system need to overcome to operate properly in the UK
iii) Discuss the potential for investment in affordable housing in the UK under a UK version of a LIHTC system with potential investors.
iv) What are the key issues and challenges of the US LIHTC system?
v) Develop clarifications of the LIHTC system within the research
vi) Who should Vic be talking to: Any further suggestions from the group?
Questions and Clarifications of the LIHTC system:
Low Income Tax Credits support long term funding.
Tax credit figures cover 33%. 40-45% are development loans. Usually, 20-25% from other subsidy
What happens to the homes developed using LIHTC funding after 15 years?
How do investors determine the quality of the revenue stream?
What happened during 2007/8 with the LIHTC system with AIG and Lehman Brothers failing. How did the system recover?
UK – bond purchasers take a view on rating. How are ratings and pricing arrived at in the US?
What is the level and percentage of fees and other costs earned by the various professionals and investors in the LIHTC system?
There is £2.5 million affordable homes in US – what is this as a percentage of the total.
100,000 affordable homes built last year. What was this as a percentage of total house production.
Research should review and compare how the relationship of EIB/THFC operate in the UK and the way in which US syndicators work
Can/does LIHTC work with REITs?
How much tax is foregone by US treasury because of the LIHTC system?
Can more properties be produced compared to present grant for the tax forgone if a LIHTC system was introduced to the UK?
There is a general dislike of public housing in US. There is political consensus in US to support LIHTC. What are factors behind this?
Vic to talk to Piers Williamson of THFC for there view of the US LIHTC system
Argument for tax foregone important to HMRC. Work is required on what is the real rate as many companies who might invest in LIHTC in the UK would move their money off shore as an alternative. Also the tax credits will support economic activity by generating house building.
How are tax credits allocated?
What is the scale of schemes funded under LIHTC?
How do States establish a pipeline of projects?
Mixed income housing – not much of it as most LIHTC is 100% low income and are located in poorer areas. What are the reasons behind this?
Eric Belsky at Harvard has undertaken work on the question of preservation of Low Income Housing in the US. Vic to review his work in this area.
Review a scheme/schemes. How did they pan out? What was the impact on the scheme from US planning and development regulations?
What is the level public support for affordable housing (rather than political support by politicians)?
Positioning of the research e.g. HMRC positively support the rent deposit scheme as the UK Government’s ceases to retain a financial commitment when the rent deposit paid. But quality of outcome and its effectiveness is important.
Assess the effectiveness of the LIHTC scheme in terms of additionality and displacement of existing homes.
There has been some research into the PRS market in the US by L+Q and Savills. The Montague report revealed that there a number of US pension funds looking to invest in UK rented housing. Vic to establish contacts with US financial institutions who are involved in LIHTC in the US but have existing financial operations in the UK.
Risks and Challenges
1. How is a pipeline of schemes established
2. The high level of fees creamed off by agents and consultants
3. Trading LIHTC – how does the market work, who is involved, how large is the market and how regularly are LIHTC schemes traded?
4. Rent control within the LIHTC system how does this work?
5. LIHTC is bureaucratic and complicated. But if it is taken out of its context what is its cultural portability? Does the whole LIHTC system need to work like this? Research to take LIHTC out of its cultural context and determine the essence of it.
6. DCLG were interested in changes in taxation to support social enterprises for investors. Are there mechanisms within this that could be used to support a UK LIHTC system?
7. There is evidence of QAPs being influenced politically. How prevalent/significant is gerrymandering
8. Group are to meet at the end of November/December and report back in February/March
9. LIHTC is a potential source of funding for affordable housing. CIH’s are interested in ways of increasing the supply of affordable housing. CIH have identified a major source of potential funding of affordable housing. This is the equity contained within UK council housing.
Minutes of the meeting of the LIHTC Poject Avisory Goup held at the Chartered Institute of Housing, 236 Gray’s Inn Road at 11.00am 20th September 2013
Present
John Brace, Aster Group
Tim Brown, De Montfort University
Mike Donaldson, London and Quadrant Housing Association
Martin Huckerby, Sovereign Housing Association
Tim Jackson, GreenSquare Group
Mark Jones, Derwent Living
Colin Lissenden, Town and Country Housing Group
Vic O'Brien, GreenSquare Group
Gavin Smart, Chartered Institute of Housing
Apologies
Mark Allnutt, Thames Valley
Steve White, The Hyde Group
Tim Brown, De Montfort University, is part of a team working on a significant research project funded by the ESRC looking at ways of boosting the supply of affordable housing in the UK. It involves reviewing the affordable housing finance system in 9 other countries. The work is principally focussing on the US and French systems which appear to have the most promising and replicable funding systems for the UK. Both are based on tax incentives with conditions. The research is to be undertaken over a six month period and will employ the equivalent of £150k of ESRC funding. The research is being undertaken as part of the knowledge exchange in conjunction with Places for People between July and December 2014. The final report will be produced by January 2014. The research will be reviewed in December 2014 to measure the policy impact of the research. A challenge of the ESRC research is to determine how ideas can be transferred from other countries that are politically acceptable in the UK.
Vic O’Brien US LIHTC research
1. There are a number of areas/questions that the advisory group thought should be considered within the research:
i) The operation of the US LIHTC system should be understood
ii) What challenges would a LIHTC system need to overcome to operate properly in the UK
iii) Discuss the potential for investment in affordable housing in the UK under a UK version of a LIHTC system with potential investors.
iv) What are the key issues and challenges of the US LIHTC system?
v) Develop clarifications of the LIHTC system within the research
vi) Who should Vic be talking to: Any further suggestions from the group?
Questions and Clarifications of the LIHTC system:
Low Income Tax Credits support long term funding.
Tax credit figures cover 33%. 40-45% are development loans. Usually, 20-25% from other subsidy
What happens to the homes developed using LIHTC funding after 15 years?
How do investors determine the quality of the revenue stream?
What happened during 2007/8 with the LIHTC system with AIG and Lehman Brothers failing. How did the system recover?
UK – bond purchasers take a view on rating. How are ratings and pricing arrived at in the US?
What is the level and percentage of fees and other costs earned by the various professionals and investors in the LIHTC system?
There is £2.5 million affordable homes in US – what is this as a percentage of the total.
100,000 affordable homes built last year. What was this as a percentage of total house production.
Research should review and compare how the relationship of EIB/THFC operate in the UK and the way in which US syndicators work
Can/does LIHTC work with REITs?
How much tax is foregone by US treasury because of the LIHTC system?
Can more properties be produced compared to present grant for the tax forgone if a LIHTC system was introduced to the UK?
There is a general dislike of public housing in US. There is political consensus in US to support LIHTC. What are factors behind this?
Vic to talk to Piers Williamson of THFC for there view of the US LIHTC system
Argument for tax foregone important to HMRC. Work is required on what is the real rate as many companies who might invest in LIHTC in the UK would move their money off shore as an alternative. Also the tax credits will support economic activity by generating house building.
How are tax credits allocated?
What is the scale of schemes funded under LIHTC?
How do States establish a pipeline of projects?
Mixed income housing – not much of it as most LIHTC is 100% low income and are located in poorer areas. What are the reasons behind this?
Eric Belsky at Harvard has undertaken work on the question of preservation of Low Income Housing in the US. Vic to review his work in this area.
Review a scheme/schemes. How did they pan out? What was the impact on the scheme from US planning and development regulations?
What is the level public support for affordable housing (rather than political support by politicians)?
Positioning of the research e.g. HMRC positively support the rent deposit scheme as the UK Government’s ceases to retain a financial commitment when the rent deposit paid. But quality of outcome and its effectiveness is important.
Assess the effectiveness of the LIHTC scheme in terms of additionality and displacement of existing homes.
There has been some research into the PRS market in the US by L+Q and Savills. The Montague report revealed that there a number of US pension funds looking to invest in UK rented housing. Vic to establish contacts with US financial institutions who are involved in LIHTC in the US but have existing financial operations in the UK.
Risks and Challenges
1. How is a pipeline of schemes established
2. The high level of fees creamed off by agents and consultants
3. Trading LIHTC – how does the market work, who is involved, how large is the market and how regularly are LIHTC schemes traded?
4. Rent control within the LIHTC system how does this work?
5. LIHTC is bureaucratic and complicated. But if it is taken out of its context what is its cultural portability? Does the whole LIHTC system need to work like this? Research to take LIHTC out of its cultural context and determine the essence of it.
6. DCLG were interested in changes in taxation to support social enterprises for investors. Are there mechanisms within this that could be used to support a UK LIHTC system?
7. There is evidence of QAPs being influenced politically. How prevalent/significant is gerrymandering
8. Group are to meet at the end of November/December and report back in February/March
9. LIHTC is a potential source of funding for affordable housing. CIH’s are interested in ways of increasing the supply of affordable housing. CIH have identified a major source of potential funding of affordable housing. This is the equity contained within UK council housing.
Wednesday 31 July 2013
Housing Associations, the Limitation of Asset Cover and LIHTC
For nearly 30 years I have worked for UK Housing Associations and for 20 of those years specifically in development. During that time I have witnessed huge change. The Housing Association sector has developed from a cottage industry with its roots in the housing philanthropy of the 19th century into a huge highly professional sector of the housing industry. Housing Associations are one of the most successful elements of the not-for-profit sector of the economy. They have been endlessly innovative, dynamic and successful. They mix public investment with private funding and deliver high quality housing to tackle the desperate shortage of affordable housing in the UK.
Housing Associations perform a vital function. They act as a major force in tackling the scourge of homelessness and poor quality housing which undermines all aspects of a decent life. A lack of a decent home results in poor health, lower educational achievement for children, lower chances of employment and prevents a normal family life.
Housing is becoming in shorter and shorter supply. Recent figures show that house production was 98,000 homes last year, the lowest figure since 1923. Household formation over the same period was running at 232,000. The gap between household formation and housing production has been present for a decade and there is now a shortage of 1 million homes in the UK.
Many households that would have purchased a house 5 years ago are now priced out of the housing market because of high deposits. Although the Government's Help to Buy scheme may go some way to tackling this issue in the short term, many economists and housing commentators are concerned that the initiative is not targeted at new homes or people on lower incomes (the scheme can be used to purchase houses up to 600,000 pounds in value). It will result chiefly in a housing price bubble rather than increased housing supply. If the bubble bursts it will cost the UK Government a great deal in lost equity. This outcome, if it occurs, is not dissimilar to the problems the US Government faced with Fannie Mae and Freddie Mac during the US housing market crash in 2008.
Many households no longer have an aspiration to buy a house because they see Home Ownership as out of reach. A recent report by the Halifax Building Society identified 'Generation Rent'. Of the 8,000 households they interviewed with a head of household between 20 and 45 years of age, only 5 % would consider saving for a deposit. These households will rent in the private sector and face insecurity because of the usual form of tenancy i.e. a 6 month Assured Shorthold Tenancy (AST), variable quality of the accommodation and often poor housing management. The poor offer from the private rented sector is unsurprising because of the sector is overwhelmingly dominated by small private landlords who own one or two properties. The work of Housing Associations as professional corporate landlords that build affordable housing has never been more relevant.
Housing Associations are facing the challenge of developing new homes with low grant rates. They have responded by creating cross subsidy from commercial activities including house sales. As grant is reduced Housing Associations are increasingly reliant on higher levels of loan and bond finance which is secured on their asset base. As a result asset cover is acting as an increasing constraint in Housing Associations delivering affordable housing. The emerging challenge is therefore: How can UK Housing Associations deliver more affordable housing and counter the limitation of asset cover?
The US Low Income Housing Tax Credit system is based on securing private equity investment into low income housing and is worth looking at in detail in the context of this challenge. LIHTC is based on giving tax credits to investors to make their investment into low income housing viable. It works by tax liabilities being reduced by $1 for every $1 invested in low income housing. LIHTC effectively creates a subsidy for equity investment. The equity invested can be used to lever further debt funding. A UK version of this system could make a significant contribution to increasing affordable housing production.
My research into LIHTC, which this blog will follow, is aimed at establishing how well the US Low Income Housing Tax Credit (LIHTC) system works and whether a LIHTC system would work in the UK.
I am very grateful to the Winston Churchill Memorial Trust (www.wWCMT.org.uk) who have granted me a traveling scholarship to visit the US to research the US LIHTC system. This blog will give an account of the visit as it happens.
The Chartered Institute of Housing is supporting this research and will be publishing the final report on their website, hopefully, in January 2014
Housing Associations perform a vital function. They act as a major force in tackling the scourge of homelessness and poor quality housing which undermines all aspects of a decent life. A lack of a decent home results in poor health, lower educational achievement for children, lower chances of employment and prevents a normal family life.
Housing is becoming in shorter and shorter supply. Recent figures show that house production was 98,000 homes last year, the lowest figure since 1923. Household formation over the same period was running at 232,000. The gap between household formation and housing production has been present for a decade and there is now a shortage of 1 million homes in the UK.
Many households that would have purchased a house 5 years ago are now priced out of the housing market because of high deposits. Although the Government's Help to Buy scheme may go some way to tackling this issue in the short term, many economists and housing commentators are concerned that the initiative is not targeted at new homes or people on lower incomes (the scheme can be used to purchase houses up to 600,000 pounds in value). It will result chiefly in a housing price bubble rather than increased housing supply. If the bubble bursts it will cost the UK Government a great deal in lost equity. This outcome, if it occurs, is not dissimilar to the problems the US Government faced with Fannie Mae and Freddie Mac during the US housing market crash in 2008.
Many households no longer have an aspiration to buy a house because they see Home Ownership as out of reach. A recent report by the Halifax Building Society identified 'Generation Rent'. Of the 8,000 households they interviewed with a head of household between 20 and 45 years of age, only 5 % would consider saving for a deposit. These households will rent in the private sector and face insecurity because of the usual form of tenancy i.e. a 6 month Assured Shorthold Tenancy (AST), variable quality of the accommodation and often poor housing management. The poor offer from the private rented sector is unsurprising because of the sector is overwhelmingly dominated by small private landlords who own one or two properties. The work of Housing Associations as professional corporate landlords that build affordable housing has never been more relevant.
Housing Associations are facing the challenge of developing new homes with low grant rates. They have responded by creating cross subsidy from commercial activities including house sales. As grant is reduced Housing Associations are increasingly reliant on higher levels of loan and bond finance which is secured on their asset base. As a result asset cover is acting as an increasing constraint in Housing Associations delivering affordable housing. The emerging challenge is therefore: How can UK Housing Associations deliver more affordable housing and counter the limitation of asset cover?
The US Low Income Housing Tax Credit system is based on securing private equity investment into low income housing and is worth looking at in detail in the context of this challenge. LIHTC is based on giving tax credits to investors to make their investment into low income housing viable. It works by tax liabilities being reduced by $1 for every $1 invested in low income housing. LIHTC effectively creates a subsidy for equity investment. The equity invested can be used to lever further debt funding. A UK version of this system could make a significant contribution to increasing affordable housing production.
My research into LIHTC, which this blog will follow, is aimed at establishing how well the US Low Income Housing Tax Credit (LIHTC) system works and whether a LIHTC system would work in the UK.
I am very grateful to the Winston Churchill Memorial Trust (www.wWCMT.org.uk) who have granted me a traveling scholarship to visit the US to research the US LIHTC system. This blog will give an account of the visit as it happens.
The Chartered Institute of Housing is supporting this research and will be publishing the final report on their website, hopefully, in January 2014
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