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The future of US affordable housing: 

The future of US affordable housing “I skate to where I think the puck is going to be.” -- Wayne Gretzky David A. Smith 617-338-9484 x215 dsmith@recapadvisors.com Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

Topic areas: 

Topic areas About Recap (obligatory) Economic fundamentals of housing affordability Government’s role and the four kinds of money What’s happening today What is coming tomorrow

1. About Recap: 

1. About Recap “You can observe a lot just by watching.” -- Yogi Berra, G W Bush Professor of Linguistication Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

About Recap: capacities: 

About Recap: capacities Develop, implement innovative financial transactions on affordable housing Revitalize and optimize affordable housing properties Recapitalization, refinancing, preservation, sale of properties and portfolios Work nationally for nation’s leaders Sponsors, lenders, investors, policy makers In 17 years, closed 500 properties, 62,500 apartments, $1.75 billion value Economic outcomes: healthy properties Social outcomes: enhanced affordability

About Recap: customers: 

About Recap: customers For sponsors, recapitalize, refinance Better economics, better affordability Position for maximum Net Operating Income Optimize subsidy resources Work all over the nation For lenders, create, originate, service Specialized underwriting (e.g. M2M) Specialized asset management Underperforming or high-complexity properties Solve specific property cohorts Preservation in all its many forms

About Recap: customers: 

About Recap: customers For investors, unlock or increase equity value Post-mature properties/ partnerships Intra-partner negotiations (buyouts?) Strategic asset management Exit strategies Interest valuation, fairness opinions For policymakers, advise, analyze, design, advocate Favorably shape the affordable housing market Extensive pro bono work Ongoing free research and analyses Web Updates, affordable housing blog

About David A. Smith: 

About David A. Smith 30 years (gasp) in affordable housing finance Personally consummated ~100 transactions Founder of Recap (1989), CEO Thought leadership in affordable housing finance Leader in preservation, mark-to-market, renewed affordability 1996 US Senate mark-to-market design group 100+ articles, 50+ Web Updates, daily housing blog Founder of Affordable Housing Institute Non-profit consultancy for public-policy stakeholders Work beyond US: UK, Ireland, S Africa, Kenya, Egypt World’s foremost housing blog (pending other entries) www.affordablehousinginstitute.org/blogs/us/index.html

2. Economic fundamentals of housing affordability: 

2. Economic fundamentals of housing affordability “Mr. President, we cannot allow … an affordability gap!” -- initial transcript of General Buck Turgidson, Doctor Strangelove Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

Household economics  housing destiny: 

Household economics  housing destiny How much your household makes  How much your household will pay for housing How much you pay for housing  Configuration. What kind of housing Tenure. How you hold it: rental, homeownership, and variations The band of ‘affordable’ housing is widening Market housing: affordability running away Public housing: viability crumbling Affordable: everything in between But where is the money to cover the cost-value gap?

Slide10: 

Resulting Rent/ housing cost Income (as percent of median) Median income, §8 household Minimum income, renters Starter single family home Local ‘market’ rent Operating costs (zero NOI) 0% 30% Moderate income Income-to-Rent-to-Value-to Tenure Option Affordable cost at 30% of income

Slide11: 

Resulting Rent/ housing cost Income (as percent of median) Median income, §8 household Minimum income, renters Starter single family home Local ‘market’ rent Operating costs (zero NOI) 0% 30% Moderate income The market will produce high-end supply … Affordable cost at 30% of income Market rental Market homeownership

Slums are economically rational: 

Slums are economically rational What are they? “Spontaneous communities”? “Informal settlements”? They arise when: What people can afford for housing Is less than it costs to maintain quality affordable housing A slum is a giant wealth-extraction machine They are economically rational when: Job growth outpaces housing supply growth Families are separated, workers remitting back to the countryside Examples? Every major urbanizing city Africa, South America, South Asia … Spontaneous communities cannot be eradicated – Disappear only when the economic conditions change

Slide13: 

Kenya, Nairobi: Kibera

Slide14: 

Resulting Rent/ housing cost Income (as percent of median) Median income, §8 household Minimum income, renters Starter single family home Local ‘market’ rent Operating costs (zero NOI) 0% 30% Moderate income Public housing targets the lowest incomes, highest costs Affordable cost at 30% of income Public housing

Slide15: 

Resulting Rent/ housing cost Income (as percent of median) Median income, §8 household Minimum income, renters Starter single family home Local ‘market’ rent Operating costs (zero NOI) 0% 30% Moderate income In between is the realm of affordable housing Affordable cost at 30% of income Affordable housing (multiple tenures, incomes possible)

3. Government’s role and the four kinds of money: 

3. Government’s role and the four kinds of money “Any kind you want so long as it’s green.” -- Henry Ford’s banker Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

Housing finance as a complex ecosystem: 

Housing finance as a complex ecosystem Country environment GDP, demography municipal infrastructure Statutes Title, ownership, eminent domain Financial products Loans, mortgages, securitization Government programs Grants, loans, tax credits, stimuli Significant participants Owners, managers, lenders, investors

Four rings of housing finance: 

Four rings of housing finance Efficient capital finance Means of raising large sums Homeownership facilitation Means for families to become homeowners Rental facilitation Investment advantages to build more Affordable public-private facilitation Making it worthwhile to be affordable

Roles of government, Part 1: 

Roles of government, Part 1 Law Respect of property rights Clear, transferable title Enabling environment for capital Macroeconomic policy (interest rates) Long-term lending Primary markets Originators and specialists

Roles of government, Part 2: 

Roles of government, Part 2 Public-private partnership Pure private  slums Pure public  slower, well-intentioned slums Three-way bargain Government sets rules, provides rewards Private sector makes money by giving social outcomes Subsidy Capital: four kinds of money Debt, equity, soft, hard Operating

Affordable housing: The three-way relationship: 

Affordable housing: The three-way relationship Government Has money Writes rules Seeks housing Private sector (FP or NP) Needs capital Implements rules Develops housing Runs rental stock Residents/ community Needs housing Program beneficiary Protects housing Builds community

Financing and affordability: 

Financing and affordability Properties are viable only if they can finance 100% or more of their total development cost (TDC) Hard costs (acquisition, construction, rehab) Soft costs (fees, transition costs) Compensation and contingency Only two basic sources: Debt (as before) Equity (but this creates a paradox) Affordability always costs government money There are no shortcuts … Money can come in multiple forms

Gap is closed with soft money: soft debt, soft equity: 

Gap is closed with soft money: soft debt, soft equity Soft debt Deferred, contingent repayment Often at favorable interest rate Typically junior to (paid after) first loan Funded by government through appropriations Soft equity Capital contributed by private investors for non-cash return Typically tax benefits (such as tax credits) US uses Low Income Housing Tax Credit, historic credits Transfers risk to private sector Usually sold to an investor (large financial institution Soft debt usually evolves earlier than soft equity Soft equity often used to create deeper affordability

Four kinds of money: Affordable housing types: 

Four kinds of money: Affordable housing types

Soft debt: what is it?: 

Soft debt: what is it? “A loan on favorable terms with deferred repayment” Loan: interest, term, security, collateral Favorable terms: government rates Deferred payment: Cash flow “if available,” some share Residual value “when it occurs” Normally (not always) junior to hard debt Hard debt comes from a private bank Gov’t receives long-term affordability

Investment tax credits: 

Investment tax credits Future direct (1 for 1) reduction of taxes payable Via a chit issued by Treasury Not cash – forward commitment for cash … if you fulfill Based on certifications provided by allocator Transfers risk to private sector Sold to investor (bank) for cash up front Fiscal tool, not a welfare benefit disguised as a tax credit Factoring the “receivable” Investor takes all the performance risk (gov’t none) Credits sell for a discount from par That’s the price you pay for risk/ administrative transfer Amount set by legislation Sponsors compete for the award (virtuous evolution!)

US examples: 

US examples Historic tax credit (1985) Listed buildings, approved individually 20% of development cost, 1 payment Any use, tenure, income mix Effective for urban regeneration Low Income Housing Tax Credit (1987) Capitated ($1.90 per capita per year), allocated by states Rental only, 30-60% of median income 70% of dev cost, 10-year level delivery Long-term affordability (30+ years) New Markets Tax Credit (2003) Urban regeneration targeted, capitated Allocated by intermediaries Mostly non-housing 25% of development cost, 5-year delivery

What an investment tax credit fiscal tool buys: 

What an investment tax credit fiscal tool buys Risk transfer Government only pays for performance Market forces Sold to an investor for cash Tension between investor and sponsor actually benefits government Evolutionary system: adaptability Can target particular use, tenure, income Broader sponsor eligibility (developers) Automaticity

Milestones in the US housing finance ecosystem: 

Milestones in the US housing finance ecosystem

4. What’s happening today: 

4. What’s happening today “Where the future begins tomorrow!” -- Corporate motto of Yoyodyne Propulsion Systems Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

The widening affordability gap: 

The widening affordability gap Four natural bands of housing affordability Market homeownership (80% AMI+) Market rental (60-80%) Capital-subsidy rental (30-60%) Income-subsidy required (0-30%) For most of America, these bands nicely overlap But in strong economy markets with restrictions on development, a gap opens up It correlates with red state/ blue state

The affordability gap has opened … in urban areas: 

The affordability gap has opened … in urban areas

5. What is coming tomorrow?: 

5. What is coming tomorrow? “Tomorrow – is another day!” -- Scarlett O’Hara, planning her rehab Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

HUD? What HUD?: 

HUD? What HUD? Exiting stage left No new program authority Reducing funding for existing programs “Starve ‘em until they start dying.” Devolving allocation decisions Block-granting what it can Contracting as many functions as possible Nexus of decision-making shifts to the states LIHTC, volume-cap HOME, CDBG Political response shifting to the states 15 states have their own tax credit Housing trust funds Inclusionary zoning

The great unvoiced fear: Recession  shakeout: 

The great unvoiced fear: Recession  shakeout 1995-2005, ideal environment: Stability (of programs) Higher prices (for equity) Lower interest rates Result? Everyone’s a genius What if … Tax credit prices back up? Interest rates blip up? Some sponsors bust out of obligations? Many fear this; none voice their fears He who voices fear loses Red Queen’s Race?

Workforce housing is the ‘new’ affordability: 

Workforce housing is the ‘new’ affordability Increasingly divided patterns: Growth-embracing: lower prices, expanding urban areas, higher population growth Restricted growth: high prices, high costs, long commutes, “first responders” far away Restricting supply  workforce housing Higher income limits (115% of AMI) “Community workers” Strong political resonance “First responders” not “those people” Not just rental, homeownership Permanent affordability, or family ‘signing bonus’?

Public housing: Christmas Yet to Come?: 

Public housing: Christmas Yet to Come? Delivery system is breaking down Seven big trends Asset based accounting Negative NOI Deep income concentration of poverty Rejection of pure-public ownership model Breakdown of ‘command-and-control’ think Funding cuts below equilibrium Looming functional obsolescence of stock >50 years old

What do you think?: 

What do you think?

Keep in touch!: 

Keep in touch! Recap Web Updates Register, free David’s weblog Links below Send an email! “Please, O wise one” www.recapadvisors.com/learn/WebUpdates.asp www.affordablehousinginstitute.org/blogs/us/index.html dsmith@recapadvisors.com

The future of US affordable housing: 

The future of US affordable housing “I skate to where I think the puck is going to be.” -- Wayne Gretzky David A. Smith 617-338-9484 x215 dsmith@recapadvisors.com Trusted advisors who create and execute innovative solutions to complex financial challenges in existing affordable housing

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