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.
Wednesday 30 October 2013
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.
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