Recently, I have been exposed to government financing of real estate. Frankly, it seems a little weird, but there are some interesting features. The word "interesting" does not mean good or bad........just "interesting."
A little background: Whether you observe a house or a 20 story office building, if construction is still underway, it is all made possible by borrowed funds. Nobody builds anything out of "cash on hand." In 99% of the time, if not more, a lending institution is involved in providing funding for plumbers, electricians, HVAC tradesmen, etc. while the project is under construction. This financing is called "interim" or "construction" financing. After the construction project is complete, the "construction" lender is paid off by the "permanent," or "mortgage" lender. Then, monthly payments are made to the "permanent" lender until the debt is retired.
Both lenders are motivated by the profit motive. They must earn income "over the cost of money" in order to stay in business. When you deposit money into a bank, the bank pays you interest; not much now a days, but some. The bank must make money over their cost of paying out money. Rent has to be paid. Employees have to be paid, etc.
There is a reason for writing about the above "quick study" on a part of the real estate financing business. That reason is to help you understand that lenders are motivated by "income" possibilities, or "reduction of risk" possibilities. I guess you've always known that, but maybe not any of the "specifics."
I want to write about one of the "specifics."
In the real estate world, we have encountered an unusual situation; particularly in North Central Texas, but in other places around the USA, also. We have the value or cost of real estate outpacing the ability to buy or rent a place to live.
For example, an average workforce family in Rowlett finds it extremely difficult to secure financing to purchase an average house. When purchasing a house is not possible, the families turn to rental projects for a place to live, but the rents are so high on newly constructed apartments, the ability to save for down payments are severely limited. Furthermore, the senior citizens have their own problems paying for a place to live. Even if the senior has paid off their house, the cost of owning (insurance, taxes, utilities, etc.) continues to climb, but the income does not.
That is the situation that Rowlett now finds itself. It's incumbent upon all city leaders, Rowlett and beyond, to try to find some solutions.
We have excellent builders that know how to build the houses, however the problem is financing them. How do you entice a lender into making the necessary loans to provide housing to those that need it. Certainly the interest rates are low. They can't be reduced much more. Right now they are the lowest I have seen in 40 years.
Some years ago, legislation was passed that if banks or lenders entered into certain types of development, Community Reinvestment Act (CRA) credits were earned. These credits earned by banks put them on some kind of "good guy" list. I don't know what the banks get for this, but they all want them, and they entered high risk areas for loans, so I presume something good happens to banks that participate. More recently, legislation was passed whereby tenants were subsidized with Section 8 or Walker Vouchers. This helped the low income populations needing housing, but they missed the workforce and seniors populations.
We need something for the Seniors and Workforce populations. We have something. It's called Housing Finance Corporations. Actually, it's been around for a good while, since early 1980's, but there has never been such a need as now. Therefore, it has been relatively unused in most areas of Texas. It certainly exists in some more urban locations, but many smaller towns have not been active in seeking HFC's. Since passage of the legislation, 70 municipalities, or counties, in Texas have created a HFC.
I started researching this lending vehicle.
Below is a copy of part of an email I sent to Rowlett's City Manager and Mayor regarding HFC's.
I have been researching other municipalities. Rowlett is not unique in their under served citizens. It's nobody's fault. Everywhere, the Senior and Workforce real estate markets have been surprisingly and unexpectedly ignored by events favoring upscale real estate development. These are not "low income" people. They are policemen, firemen, staff in city offices, small business operators, and retired people on Social Security. They are the absolutely essential lubrication that make any community work. This adverse condition has been created because of the extraordinary good economic conditions that have spurred the economic explosion for Texas. Costs of housing have simply outdistanced many citizens ability to pay for suitable housing. It is incumbent upon city governments to address this problem. It is not felt that Section 8 and Walker Vouchers are the best way to address the under served market problem. These programs are more utilized in "low income" markets. This is not to be confused with workforce markets.
HFCs offer a more diversified, yet more targeted, alternative to Section 8. There is no use of subsidies such as Section 8 or Walker Vouchers. The HFC vehicle is the financing vehicle offered to Lenders and Investors. Lenders receive tax credits and CRA credits for their willingness to participate in financing the projects. There are rules, but very acceptable rules.
I have talked to experts in legal, financial, and administration of HFCs. I can share with you my findings, then provide you the contact information to verify my observations.
Essentially, two markets are addressed:
1. Senior housing
2. Workforce housing
Four advantages of Rowlett using HFCs in lieu of Dallas Housing Authority:
1. More control of who occupies and/or finances housing for selected market
2. Near 75%-80% of typical normal tax revenue with contract with city to offset tax exempt status.
3. No risk to city after HFC organized and running.
4. Political ties with HFC severed. No "blow back" to elected officials.
The way the HFC's work is simply sell bonds. The city has no liability attached to the bonds. Only the HFC. The government issues "Tax Credits" to purchasers of the bonds. These "tax credits" can be sold to anyone wanting or needing tax relief. This could be any company that has a lot of income to shelter. The revenue from the sale of the "tax credits" goes toward retiring debt on the development. Plus, the lender gets CRA credits. By reducing the debt, the rents can be lowered, and/or down payments reduced in the case of buying a house. This can be a substantial savings to someone needing an apartment or buying a house.
You must remember, this is not a subsidy to a tenant. There are no Section 8 or Walker Voucher payments. This is strictly an inducement to a lender to lend money to build a house and/or an apartment project. Of course, there are rules. This program is not designed for high income users. You can't make $150K a year and come in and take advantage of lower than market rate rents. That's okay with me.
After sending the above email, I prepared a 36 page proposal and submited to Brian and Todd and to any city officials that they may want distribute, and then proposed a meeting. We had the meeting on November 10. Brian, the City Manager, and Marc Kubansade, the Director of Planning, were present. Todd could not make it.
The meeting seemed to have gone well. Brian said he was interested in looking further into HFC's. Marc was kinda non committal, and Todd was gone.
I asked Brian to advise me after he met further with other members of staff. I wanted to ask the Directors of the two Austin based HFC professional organizations to come the Rowlett to answer any questions the City Council had regarding HFC's. The organizations volunteered this help without me asking asking for it. I have also talked to a lawyer in Chicago who is an expert on HFC's and a Financial Advisor in Austin who is considered by the two organizations mentioned above as the "best in the business."
I fear that after all the research, it has been sent into a black hole. I am a very qualified real estate analyst. I don't know who the analyst the city is going to use might be.......or the "in house" experts that may be available. Those thoughts scare me a bit. Why ask someone who is not in the business?
I will call Brian tomorrow and inquire about where we stand regarding going forward with this. I trust Brian, but I don't want this thing to get bogged down in the bowels of "officialdom" because no one wants to make a decision.
Sorry for the long post, but this "stuff" isn't Facebook chatter.