Taking Steps to Reduce Texas' Affordable Housing Challenge

As housing costs in Texas place more burden on the state's growing population—a clear trend reflected across the country—the state is in need of ramping up housing of all stripes, but affordable options are key.


Transcription:

Clayton Chandler (00:09):

So good morning and appreciate you for taking the time out of your Friday morning to attend this panel. The title for this morning's panel is Taking Steps to Reduce Texas Affordable Housing Challenge. We have an excellent seasoned panel here with us this morning to discuss the affordable housing landscape primarily here in Texas, but also with some highlights on the national affordable housing finance market. Again, I'm Clayton Chandler. I'm a Partner here in the Austin office of McCall Parkhurst & Horton. Joining me today are right to my immediate left Jim Shaw. Jim is Executive Director of the Capital Area Housing Finance Corporation.

(01:01):

He served as the executive director for 28 years and has recently transitioned into an of counsel role as deputy director in support of the recently appointed executive director C-A-H-F-C in terms of his nine county region surrounding Austin and Travis County. Under Mr. Shaw's leadership, C-A-H-F-C has issued over 2 billion in tax exempt and taxable bonds to provide assistance to over 5001st time home buyers and construct or rehabilitate over 9,500 rental units while fulfilling the owner co-developer role in over 3,300 units. Mr. Shaw played a key role in working with US Treasury, FHFA, Fannie Mae and Freddie Mac to create the new issue bond program in 2009. This program played a major role in the rejuvenation of the national housing market after the recession of 2007 2008. Mr. Shaw has over 40 years of economic development, real estate development, planning and public finance experience, and has been responsible for the planning, financing, and development of projects totaling over $4 billion.

(02:15):

Mr. Shaw is a graduate of the University of Texas at Austin. He is past President of the Board of Directors of the Texas Association of Local Housing Finance Agencies and past President of the Board of Directors of the National Association of Local Housing Finance Agencies. Next at the very end, I'll continue with the Texas speakers. Here is Tim Alcott. Tim is Executive Vice President of Development and General Counsel for Opportunity Home. Tim serves as the Executive Vice President and General Counsel. He formerly served as Opportunity Homes Chief Legal and Real Estate Officer. He has been in the housing industry for more than 20 years, both in the private and public sectors. Most recently serving as Director of Real Estate Development for Cory Development Group. Tim returned Opportunity Home in August of 2024. He has served the organization for more than 17 years. During his tenure, he worked with the organization to ensure the successful financing, construction and rehabilitation of apartments and homes.

(03:23):

Tim developed thousands of affordable housing units valued at more than $1 billion in the city of San Antonio. He's a member of the Urban Land Institute, the US Court of Appeals for the Fifth Circuit, the Federal Bar Association, housing Development Law Institute, San Antonio Bar Association, and served as vice President and Secretary of the Association of Corporate Counsel. He's been named as one of the top in-house counsel in San Antonio by the San Antonio Business Journal. Tim holds a Bachelor of Business administration and accounting from St. Mary's University and a Juris Doctorate from OCU School of Law. Then finally here in the middle we have Peter Weiss. Peter Weiss is a Managing Director at Loop Capital Markets. He's very seasoned, well-known nationally in the affordable housing space and has been practicing in this area for a number of years on the finance side. With that introduction, I thought I would turn it over to Peter. I thought it would make sense if he could lead us off with a discussion of what you were seeing at the federal level as far as economic impact on the affordable housing market. I'm curious how tariffs and other headline items may be impacting the general interest rate environment and market more generally. And I was also hoping you could touch on the state of the tax exemption and its importance to the affordable housing market.

Peter Weiss (05:02):

Thanks, Clayton. Good morning everybody and Clayton, thank you for not calling me old seasoned. I like that certainly better. Yes, I've been doing this for over 35 years and I thank the panel. I thank you all for allowing the carpet bagger to be up here. So as Clayton suggested on federal level, I'll just walk through a handful of things. The house yesterday passed budget bill, which is the first step. There's obviously going to have to be a lot of reconciliation with the Senate, but the TCJA extensions, that doesn't happen. Without that first step there's going to be accounting discussions which will thrill everybody, but that had to happen and so now they'll move forward from there.

(05:59):

Concern about tax exemption broadly and private activity bonds that obviously affects the housing sector dramatically. There's been a tremendous amount of advocacy from various stakeholders nationwide, letting folks locally, letting folks nationally in both houses know how important all of that is, and so please keep up that good work. The interesting thing about tax exemption is I think most of us here in this room think about it just as it relates to municipal bonds. That's what affects us most dearly. One of the big things that has come up that doesn't get a lot of coverage, credit unions are tax exempt entities and the banks, traditional commercial banks are not happy about that. Over the last decade, credit union assets have more than doubled and the estimate estimates are what they are from the tax subsidy and federal subsidy from their not-for-profit status is a cost of approximately $21 billion per year. So we obviously want to protect tax exemption for municipal bonds, but there's still a chance that something related to tax exemption gets removed, but it may not hopefully directly impact us tariffs. Clayton, thanks for teeing that up. I don't know what's happening. I don't think anybody knows what's happening.

(07:48):

That's before the pause, after the pause. I don't think anything we've seen in the last nine 10 days suggests it's going to be good. I think we'd all be shocked if construction costs at a minimum don't go up. National Association of Home Builders came out with an estimate that they envision the cost of construction of a new single family home going up by as much as 25,000 per home. So you're waiting for the positives. One interesting thing that has come out of this, it's had support for a while. Now we're hearing more about on a national level, manufactured housing, modular housing, and that is in both blue and red states. A lot of support there and that's all done domestically. So I think that certainly could have continued support in DC more on point here. On Tuesday, the house introduced a bipartisan bill who's called the Affordable Housing Credit Improvement Act.

(09:05):

Lots of great provisions that when you're thinking, wait, why do I feel like I've heard about this before? And it's because you have, this is the sixth time that this has been introduced. First time was 2016, and so yeah, it keeps coming back, but we're hopeful that it takes hold this time because really wrapping this into a tax bill, which obviously we're going to have this year, seems likely and it's certainly encouraging. The general provisions remain the same. You've got talk of reducing the 50% test for 4% bond deals from the current 50%. The house introduced 25%, we've seen 25, we've seen 30, we'll take 4%. Anything obviously will be an improvement there. Then you've got the permanency of the 9% increases to that formula, and then some of the basis boosts associated with the 4% including for ELI, extremely low income tenancy. The Senate is expected, again, on a bipartisan basis to introduce the same bill after the Easter recess. The most recent estimate that I had seen was the provisions in the ACT would produce approximately 1.6 million additional affordable housing units, and we know there's bipartisan support for this. We just have to do everything we can to hopefully make sure it makes it into whatever tax bill we ultimately see. So with that as the backdrop on a national level, Clayton, where do you want to take it from here?

Clayton Chandler (11:02):

Yeah, well. Yeah, thank you Peter. I thought from there I would take it over to Jim, let him discuss his organization at a high level or however deep he wants to discuss his organization and what it does to address the affordable housing issues and market in Texas and the capital area more specifically. So Jim, with that, thank you.

Jim Shaw (11:32):

Thank you. We heard earlier Capital Area is a nine county regional housing finance corporation operating under Texas local government code 394. Having sat on an alpha board now for 25 years or so, we're very aware of what's going on in Washington and I keep trying to say, guys, get off my side and help us anymore. It's a challenging environment, but we talk about what's happening here. There are multiple things occurring in Texas and certainly in our market area that are making these deals tougher to get done. One, Texas is very overbuilt in the multifamily space. Our market area and the area surrounding Austin is certainly, we refer to it as tragically overbuilt and we're seeing some feedback from that, some negative things that are happening in the state with what are called traveling HFCs. We are in a battle royal at the legislature this session, so we can get back to that in a minute.

(12:41):

But there's several things happening here. Obviously borrowing cost and market volatility impact. I'm looking at tariffs and fondly remembering the $2 million change orders for lumber that I was signing three years ago the last time we went through this. So to say the deals are getting tougher to get done is tough when the markets is overbuilt is our area. It's a little tough to line up equity and certainly if you do get it lined up, the price point for tax credits is going to be different than it was a year ago, two years ago. And that kind of a segue into one of the things that we've talked about that's been is a huge, huge issue in this state right now. I was a private developer back in the eighties. I was a single family developer and if the market moved away from you, the deals didn't pencil you went to your lender, your investors, and you tried to work something out and if you couldn't, then really your bailout was filed Chapter 11.

(13:45):

So I'm a UT graduate where people walk around and do the hook 'em horn sign and people would go, oh, you too. Chapter 11. It was a standing joke in the industry at that time. What we have been seeing over the past year or a little over a year and certainly blossomed and picked up speed in August of last year or the creation of some small housing finance corporations. It tends to be the same legal group and bankers and all doing this, but they have now been dubbed traveling HFCs the state law, and I don't agree with their analysis, but the state law is a little vague on the state law says that we can only issue our tax exempt securities in our service area. It's vague on where we can own real estate. So we have some small communities that are about five and I think maybe a sixth one has just been created going around the state, working to take existing market rate properties off the tax rolls without saying anything to anybody claiming exemption under 394.905 and to date, they have pulled somewhere in the neighborhood of $5.5 billion off the tax rolls.

(15:07):

One of our counties, Williamson County just north of here, filed a lawsuit against Cameron County HFC and secured the TRO. One day before my scheduled testimony, they reached a rule 11 settlement and that TRO is going to stay in place through the end of this year or until the lawsuit is settled. I wish more people were doing that. So what's happening obviously is the legislature is we've told people in Texas that overall exemption is a very, very powerful tool that was granted by the legislature. That also means we have to practice good stewardship as it relates to its use. We have spent a lot of time in our organization going around the state training other HFCs about how to do these partnerships properly. We've helped them do that rather than going outside our jurisdiction to do any of these deals, frankly, I just seen somebody else not mow my grass.

(16:08):

We'd like to do the deals in our own backyard. I don't want to go do anything in anybody else's backyard. These housing issues are best dealt with at the local level, but be there as it may. We're seeing this a huge issue. So I always tell people if you practice good stewardship, do it correctly every time, then you don't have to rely on the legislature to come fix it for you because I'm pretty sure you're not going to like how they fix it for you. And that's what we're dealing with today. There are several bills around moving forward slowly in the legislature to fix the out of jurisdiction issue, but of course they want to fix a whole lot of other things that don't need fixing. They have got solutions in search of a problem in these bills that are not going to be helpful in any way, shape or form to our industry.

(17:07):

But that's what we're dealing with and that's a direct result of these outer jurisdiction deals. This really blossomed sentiment ago that this Austin area is the most overbuilt luxury market in the country. So people are finding a way to go make the deal work when it won't work otherwise. And that is because in my world, there are only two capital stacks. There's a tax credit bonds or 9% tax credit structure and then market rate financing. It's private debt, private equity, but if the deals won't pencil, if they won't underwrite because the market's moved away, and market rate wrench in our area are very close in some cases to tax credit rents, they're almost identical in some communities. So you go take it off the tax rolls and that's about a $2 million a year tax bill that you get to take out of your proforma on the expense side and suddenly the deal makes a lot more sense.

(18:08):

And that's exactly what we're seeing is these deals that are not Penn, we've looked at over 50, our phone rings off the hook and we've not done one for the exact reason we're talking about today. So I'm not sure yet how bad it's going to be, what the final bills will look like in about 60 days. But beyond that, we're already seeing the implications of this at the local political level, which is local leadership. You're kind of painting everyone with the same brush. We just had meetings over the last three weeks in a community that just now has the world's largest construction project in its community with the Samsung. And believe me when I say it's a tough sell to try to make them understand that we're trying to do this the right way. That's why we're sitting down face-to-face talking about it, and our affordability levels will be consistent over time.

(19:06):

All these other deals, the market rate deals are getting pulled off the rolls, they're going to be affordable as long as market rate rents are close to tax credit rents. But as we're explaining to these cities over the next three or four years, the market's going to recover it. I'm guessing two years, everybody's guess is probably better than mine, but I'm looking at slowing in migration rates in this area that's going to delay that recovery in the market. But anyway, it is a very, very, very challenging time to be in this business in Texas. So that's about all the good news I have to share this morning. If there's any questions we'll be happy to tell.

Tim Alcott (19:49):

I'm going to add on to that just a little bit. Yeah, so in San Antonio with these traveling HFCs we've seen, and this is information's about a month owe, but about $10 million in, excuse me, $10 million worth of tax revenue has taken off an annualized basis and that are long term from traveling HFCs. And so I knew when I just saw it come up was in talk, and I never heard of that as a city. I had a Google map it, and it's in the south Texas 3,300 people. And that little town has an HFC and is taking off apartment complexes that bring in over a million dollars a year in tax revenue. They're taking it off the tax rolls. And what's unfortunate a lot of these properties is that there's no new affordability being provided. So it may already be naturally affordable. So on a PFC deal or an HFC deal, to have a tax exemption, you have to have 50% market.

(20:42):

You don't have to, but it's typically 50% market rate and at least 50%, at 80% mi, they change that. We also have 10% at 60% AMI or air minimum income. But whenever you do a deal with a local government entity, they negotiate terms. And some portion of that is going back to the housing authority in my case or a different entity, an HFC. But these small groups, they come in and they're undercutting the local criminal entity. So they're giving away the tax exemption with not a big return back for the value of the tax exemption. In my opinion, a lot of it is just generate fees for the law firms, the professional institutions that are doing it. I promise you that those small towns of Pecos, Texas in talk that I mentioned, they're not mixed finance experts there. So someone is going there and telling 'em, Hey, this is how you can do it.

(21:40):

This is how you can fill your budgetary gaps. But what is happening is the bigger cities, Dallas, Houston, San Antonio, were paying for those small towns for their budget gaps, but we are still paying for the people who lived in those apartment complexes, all the city services, and there's no money staying local for that. So it is a big problem. And so the other thing I want to mention about is they typically have either a 75 or 99 year ground lease. So that exemption will be in San Antonio, looked at it a month ago, it's a million and a half dollars that's going approximately to these small towns for the next 75 to 99 years. It increases with the tax rate. So it's a long-term deal. So on some of the bills that Jim was talking about, I said, we should, I'd like to amend the bill to say these deals have already closed, but that economic benefit that's going to the outstate HFC should be transferred to a local city or HFC or housing authority going forward. So that way you may be correcting the problem now, but that money is still leaving for, according to the ground lease, 75 to 99 years. So we're not undoing the transaction. There's some constitutional issues there, Texas State constitutional issues, but if we could keep the monies local going forward, it would stop the bad actors from continuing to get the fruit from the poison street.

Jim Shaw (23:11):

Yeah, I was just reading another article this morning on my way here and what's happening, this money goes into, say the Pecos HFC, it's immediately moved into the general fund for the city. City managers stood up recently and bragged about how they froze water rates for the next five years. So you've got a city like San Marco subsidizing the utility rate structure in a town 300 miles away. So I'm trying to figure out is it a Robinhood syndrome or what, but it's pretty blatant and they're standing up and talking about this in public.

Tim Alcott (23:53):

And the other challenge I just will mention is there's been some really good bills filed and there's, I call 'em some of the clean bills, the bell bill, whereby you're stopping the traveling HFCs. There's other bills that when they're trying to fix the problem, sometimes they use a sledgehammer instead of a scalpel. And so what happens is there's bills out there that would really hurt the HFCs and they say whatever they say, I'm hearing that whatever legislative changes they make to housing finance corporations or HFCs, they'll put 'em on top of PFCs as well. And so a lot of folks that if you look at these bills that not only are they killing the traveling HFCs, which I'm in favor of, but then they go further and they're saying that one of the bills has 60% of the tax savings that is computed annually has to go to affordable housing rent reduction. Now, the challenge with that is from the government entity standpoint is that you're effectively killing the program. And the reason is oftentimes in San Antonio, we're getting 15 to 25% of the tax savings, and then you also are reducing the rent by 60%, excuse me, reducing the rents, but also the tax savings is going to the affordable units that there's really no money left over. You might as well just do a market rate financing. I mean, it doesn't make any sense.

Jim Shaw (25:26):

Yeah, I mean, the thing that I am continually amazed we meet with our local communities all the time is there's very consistently a lack of knowledge about how these things get put together. And I keep trying to explain to people, these are real estate transactions. You have to sell 'em in the market, somebody else to buy the bonds, somebody else to buy the tax credit, the deal has to underwrite, it has to make economic sense. It's not a giveaway in any way, shape or form. It's a real estate transaction that must stand on its own merits economically, and nobody really understands what that means. So when you start talking about what Tim's just talking about, I don't know how you get one of these deals to pencil, you get to that point, right? Making it underwrite it is going to be extraordinarily difficult. Not only that, you have to figure out how to do that calculation and everything on an ongoing basis in a market.

(26:21):

Every year it's volatile and rents are changing on an ongoing basis. So like I said earlier, it's a or a solution in search for a problem, I think. But this started with the public facilities, corporations which started bleeding over and these rogue HFCs, I say that with all due respect, all they did was just pour fuel on the fire and now who's left, they're going to be looking back at PHAs perhaps. So look at that. This is going to continue to grow legs as they say, I'm afraid. And he knows what the future is going to hold. And we only meet legislature meets what, 150 days every two years we've been trying to get that change made for two days every 150 years unsuccessful to date. And I'm always joking about that. But the problem is if something comes out of here, we've got to figure out how to live with it for at least two years until we get another shot at it in the legislature.

(27:25):

So that's why we are all working night and day this session to try to pull out some of the more problematic language and breach a reasonable compromise, something that will not put us out of business and will let us keep doing the good work we've been doing. It might be worth mentioning something that people don't really think about much. We have this conversation all the time. When you talk about something coming off the tax rolls, nobody thinks beyond that. What happens after that? Well, what happens in our case being a locally, we have a 10 member board, have a member appointed from each of the jurisdictions that created our organization. The local government go 3 94 section oh three six if you're interested, does allow an HFC to make grants or loans for the public welfare for charitable purposes, educational or scientific purposes. So we turn around and reinvest our money through down payment assistance.

(28:29):

We were just talking about this earlier. We partner with T-D-H-C-A to provide additional down payment in our service area for first time home buyer programs. And that has been extraordinarily successful. We've spent probably three and a half, probably $4 million at this point, doing that over the last three years. But we have a grant program where we can also reinvest in the communities through food banks, other organizations dealing with child sex trafficking, whatever. So there are other ways that we can help serve that community and its residence, and we do that, but nobody really talks about that that much. But there are multiple ways that you can give back and reinvest the funds that we make for doing these transactions. So maybe we ought to do a better job of telling that story.

Clayton Chandler (29:22):

Tim, this is geared more towards Tim and Jim and Jim just touched on it, but I did want to, and you've already touched a good bit on some of the bills that are pending this session, but if you could elaborate a little bit more on the role of some of the state entities, the TDHCAs and the tacks type entities, and how you may interact with those state level agencies and their role in the solution to the affordable housing situation here.

Jim Shaw (29:58):

We've,

Clayton Chandler (29:59):

Already touched on that a little bit, but that was something I thought might be, you go ahead.

Jim Shaw (30:04):

We actually have a good relationship with both those organizations, but when it comes down to doing a multifamily transaction, they can go to TDHG and get the bonds issued. In fact, I think that a couple of these out of jurisdiction deals were actually bond deals where T-D-H-C-A was a bond dish. Were most of those, all of them I think, except maybe those two are conventionally financed deals. But I think we have a very good working relationship with both of them. They respect our service area. We do the deals in our service area. I want to repeat, we have never done a transaction outside our service area, never will. We have spent a lot of time training other housing finance corporations how to do these partnerships. They've brought us in, they've hired our lawyers in some cases and all, but I've helped them put together documents, structure the deal and understand the business side of the deal so that they are a good, solid, reasonable partner.

(31:11):

So T-D-H-C-A-I was mentioning this a little earlier today. We actually partnered with 'em on single family. They have a much more efficient mortgage delivery system than locals do because if we put together a single family, and we have, we've done a lot of single family deals, but we have our rules in our nine counties. And then if Travis County does one, they've got their rules and their documents and every local united own set of rules. So if I'm a lender and I've got loan officers across the state, I've got to have loan officers learning 15 or 20 different sets of rules and documents, et cetera. So TDHCAs rules apply statewide. So what we've simply done is negotiated an agreement with them. We've actually done a transfer of our single family bond allocations to them on two occasions, and we provide with our own funds additional down payment grants through them.

(32:08):

So whatever DPA the T-D-H-C-A has in their program, they can add ours to it. And the goal there is, back in the day, 30 years ago, we would put together a single family bond transaction and you would have 4% down payment assistance and local could put that together and not spend 10 or $20,000 doing it. To do that today, you're going to spend a million to a million, 3,000,004 to get that program off the ground. So it's much more difficult today for smaller ratio HFCs to go out and indeed that. So that partnership's working very well. T-D-H-G-A is ecstatic as we are, and we've had better success through that program, originating loans in our more rural counties. We have four of the five MSA counties, but we have more rural counties to the east and west, and we are getting more loan origination and penetration out in those areas than we've ever been able to do.

(33:05):

So as far as we're concerned, it's all good. So it's a regular love fest on the single family side. Now that's working great. Tisha, we've really, we know and respect them, don't have any issues with them. We tend to not do much work with them directly, but David and his group are doing a great job. But we do try to encourage, if you're going to do a multifamily deal, encourage the developer to come to us for obvious reasons. One of the things that we have, and there's a lot of reasons to do that. We have worked very, very, very diligently over the years to maintain a very good relationship with our sponsoring entities. We exist basically based on their goodwill and we have very close working relationships. So if you're going to go do a bond transaction that's going to require a little education, you're probably better off using the people who are on a first name basis with every county, judge, mayor, commissioner, et cetera in the area. And that's worked well. That's the other thing about these traveling guys. I mean, they don't know anybody. They're not local. So that's the story with TDHC and Tack were times, I will say when I thought, I think that there may still be some we're competitors, but I would like to think friendly competitors. They got a lot to do. We work very closely with T-D-H-C-A and really seriously appreciate this partnership in the single family world.

Clayton Chandler (34:41):

Thank you Jim. I see we're down under five minutes. I'll open it up to the panel for any additional points or insights they may want to give. Otherwise I'll open it up to the floor for any Q&A. If there are any questions you'd like to direct, any of the panelists.

Audience Member 1 (35:04):

Hey guys, at the state level, we're going to see our first recycled private equity bond issuance shortly. Do you know for the locals, or is there going to be a critical mass at any point where we might start to see recycled PABs?

Tim Alcott (35:23):

I'm not sure you said that.

Peter Weiss (35:25):

Yeah, sorry. You're talking about recycled PABs, you said much of that is really controlled at not much. All of it's controlled at the federal level and provisions in the code single family recycling. And I'm not sure if, I suspect you're talking more about multifamily recycling. I mean, single family recycling has been going on for the longest time and what we tend to refer to it in the financing space is sort of replacement refunding of it. You're able to reallocate the bonds and make new first time home buyer mortgages out of those. The multifamily side is much trickier. It came into being out of the 2008 para Act, but it's very, very challenging. The bonds have to be reissued within six months of mortgage prepayment coming in on multifamily project. It's got to be defferary already has to be out there. So it's very difficult to do on a local level because there usually isn't the stable of projects ready to go. And I don't know to what extent T-D-H-C-A has been focused on that to try and pull it at the state level. There aren't New York City. New York State has a fairly successful program, but it's challenging.

Clayton Chandler (37:22):

Any other questions? If not, we'll hand you back about a minute and a half and can start your break early.