Speaker 1: Hello, and welcome to another episode of The Odd Lads Podcast.
Speaker 2: I'm Joe Wasental and I'm Tracy Allaway.
Speaker 1: Tracy, Uh, let's do another housing episode?
Speaker 2: Why not? Let's do it?
Speaker 1: No, you know, I think I've said it before to you.
Speaker 1: I don't know if I've said it like on the show.
Speaker 1: One thing I like about housing episodes is like, no
Speaker 1: matter what, it is, just like this permanent source of
Speaker 1: anxiety for everyone.
Speaker 2: Everyone has an opinion on it.
Speaker 1: Yeah, and where everyone was born short housing, you know,
Speaker 1: they need to cover their housing short at some point.
Speaker 1: And if you have, you know, if you don't have
Speaker 1: a house, you're anxious about rent and house prices going up.
Speaker 1: If you have a house that you own, you might
Speaker 1: be anxious about it going down, et cetera. Like there's
Speaker 1: just there will never be an era of any market
Speaker 1: in which I don't think like some people are like
Speaker 1: anxious about housing in.
Speaker 3: One way or another.
Speaker 2: Well, okay, so housing is a perennial source of interest
Speaker 2: for sure. But I also so I think we're kind
Speaker 2: of in this unusual moment for housing as well, because
Speaker 2: no one, as we've discussed on multiple episodes, at this point,
Speaker 2: no one is quite sure what's going to happen to
Speaker 2: the market. And there's been this discussion of perpetual supply
Speaker 2: shortages of housing, but at the same time there's this
Speaker 2: discussion of as interest rates go up, whether or not
Speaker 2: we're going to start to see an impact on prices.
Speaker 2: It just feels like there's a lot of uncertainty at
Speaker 2: the moment, combined with these sort of long term structural issues.
Speaker 1: Totally, and it feels like there's something you said, structural,
Speaker 1: and it feels like one particular structural flaw.
Speaker 3: In sort of the way we do.
Speaker 1: Housing development in this country, which is that you know
Speaker 1: and we see it right now, which is that you know,
Speaker 1: the FED has been trying to fight inflation, cool things down.
Speaker 1: A big source of inflation over the last few years
Speaker 1: have been rent prices. So you want to get down
Speaker 1: rent so you raise interest rates and hopefully that cool
Speaker 1: things down, and maybe that works, maybe it doesn't. But
Speaker 1: one effect that seems to have is it seems to
Speaker 1: impair the supply side as well, right, and then you like, okay,
Speaker 1: maybe in the short run cool things down and rents
Speaker 1: go down a little bit, but you actually set yourself back.
Speaker 1: It would seem in the long term goal of having
Speaker 1: affordable housing abundance.
Speaker 2: Yes, so, I remember Jerome Powell specifically said that they
Speaker 2: wanted to bring house prices down. Well, I don't know
Speaker 2: if he explicitly said that, but you know, something along
Speaker 2: those lines. They wanted to impact the housing market, bring
Speaker 2: prices down in order to bring inflation down, which makes
Speaker 2: a lot of sense. But on the other hand, people
Speaker 2: want affordable housing for obvious reasons, and if you're sort
Speaker 2: of crushing that market, you can imagine a lot of
Speaker 2: people are going to be upset.
Speaker 3: Right.
Speaker 1: There was a question to Powell. It was sometime early
Speaker 1: this year, maybe last year. I think it must have
Speaker 1: been last year, and someone's like, oh, what would you
Speaker 1: say to someone who wants to buy a house and
Speaker 1: they see mortgage rates shooting up? And he's like, well, yeah,
Speaker 1: it's tough, but then we'll cool things down and then
Speaker 1: things will be better. But all that's really happened is
Speaker 1: prices are still really high, supply is impaired, rates are up,
Speaker 1: so housing affordability is basically the worst level in like
Speaker 1: five decades.
Speaker 3: Yes, maybe ever so, no.
Speaker 2: I think on record, According to Jim Egan over at
Speaker 2: Morgan Stanley.
Speaker 1: Yeah, yeah, I think you're right, And so then the
Speaker 1: questions like, what are we doing here?
Speaker 3: Do we need a.
Speaker 1: Different model of housing development beyond what we have in
Speaker 1: the country right now where we have like developers and
Speaker 1: home builders sort of fluctuating how much they build based
Speaker 1: on various markets.
Speaker 2: Well, absolutely, and I think historically there have been sort
Speaker 2: of two dominant ways of tackling the affordability problem in
Speaker 2: the US housing market. And it's either we build more
Speaker 2: houses more supply, which, as you just pointed out, can
Speaker 2: be difficult in the current interest rate environment. And even
Speaker 2: if we do build more housing, because developers are a
Speaker 2: savvy bunch, they tend to build more expensive houses for
Speaker 2: people who are going to pay a higher price so
Speaker 2: that developers can make more money. And then the other
Speaker 2: way we tend to deal with affordability is I think
Speaker 2: through voucher programs like Section eight and maybe building public
Speaker 2: housing to some extent. But as you point out, there
Speaker 2: is a third way.
Speaker 3: There's a third way.
Speaker 1: There may even be a fourth or fifth way, but
Speaker 1: let's at least talk about a third wave. So I
Speaker 1: am excited. We have two guests today who are have
Speaker 1: been working for a while, and think about are the
Speaker 1: other models for housing development beyond the two that Tracy
Speaker 1: just laid out. I'm very excited we're going to be
Speaker 1: speaking with Zach Marx. He is the chief real estate
Speaker 1: officer at the Housing Opportunities Commission Montgomery County, Maryland, as
Speaker 1: well as Paul Williams. He's the executive director for the
Speaker 1: Center for Public Enterprise who's also working on these issues
Speaker 1: alongside Zach. A little bit of a personal disclosure that
Speaker 1: I have to get out off the bat right at
Speaker 1: the beginning of the episode.
Speaker 3: Paul and I are friends. We play music together.
Speaker 2: Oh, I thought you guys were joking. I didn't realize
Speaker 2: you were actually in a bandage. So you are actually
Speaker 2: a member of Light Sweet Crewed.
Speaker 4: Yeah.
Speaker 1: Yeah, Paul plays I write songs and play guitar together.
Speaker 1: So if you want to just ignore this entire episode
Speaker 1: because you've perceived there to be a glaring conflict of interest,
Speaker 1: you're welcome to turn off the episode right now.
Speaker 2: Paul, do you know I've been forced to buy tickets
Speaker 2: for your upcoming show? Joe won't calp me. I had
Speaker 2: to buy them.
Speaker 5: That's fantastic, it's good for the economy.
Speaker 1: It hurts snow walk exactly Zach and Paul, Thank you
Speaker 1: guys both for coming on the podcast.
Speaker 4: Thanks for having me.
Speaker 3: What do we start with you?
Speaker 1: Zach, you've been working in this area. What does the
Speaker 1: Chief real estate Officer at the Housing Opportunities Commission of
Speaker 1: Montgomery County, Maryland do? Or if you just want to say,
Speaker 1: what is the Housing Opportunities Commission do?
Speaker 3: That's fine too.
Speaker 6: Yeah, you know, fancy name for really the Housing Authority
Speaker 6: for Montgomery County, so fairly typical governmental entity. We also
Speaker 6: happen to be the Housing Finance Agency, which is a
Speaker 6: lot less typical. Typically those are two separate governmental unities
Speaker 6: and these are both combined and contained under the HOC shingle.
Speaker 4: If you will.
Speaker 6: And so for a bunch of decades, HOC has been
Speaker 6: providing affordable how housing in different ways. It started as
Speaker 6: a pure play public housing authority, so just building public
Speaker 6: housing in the seventies, but over those decades, because of
Speaker 6: where it's located, and you know, we can sort of
Speaker 6: get into some of those drivers if you wish, but
Speaker 6: because of where it was located, the combination of the
Speaker 6: Housing Authority and Housing Finance Agency, it has sort of
Speaker 6: continually innovated around how to deliver affordable housing. And they've
Speaker 6: basically developed a large portfolio of real estate assets, which
Speaker 6: many public housing authorities across the country kind of own
Speaker 6: public housing.
Speaker 4: And that's it, hoc ouns.
Speaker 6: I think we're somewhere in the vicinity of ninety four
Speaker 6: hundred units, and it happens to be that Montgomery County
Speaker 6: real estate is very valuable, and so my job is
Speaker 6: really to figure out how to further expand that portfolio
Speaker 6: through acquisition, through new development, and to also make sure
Speaker 6: that the existing portfolio is continually reinvested in and maximized
Speaker 6: for its potential.
Speaker 2: I'm going to start with an even more basic question, potentially,
Speaker 2: but what is it that Montgomery County is actually doing
Speaker 2: that is different to the way we've traditionally dealt with
Speaker 2: housing affordability issues.
Speaker 6: Yeah, so Montgomery County has answered that question kind of
Speaker 6: a few times, and then the things that it's done
Speaker 6: have become more standard practice. It started as I think
Speaker 6: arguably the first to implement inclusionary zoning several decades ago,
Speaker 6: so that was a that was an inflection point of innovation.
Speaker 6: They also were among the first to begin to use
Speaker 6: a condominium regime. This starts to get super technical, but
Speaker 6: a condominium regime in the way in which li tech
Speaker 6: low income housing tax Credit equity could be used to
Speaker 6: finance mixed income buildings.
Speaker 2: What's the word you said, condominium regime.
Speaker 3: Condominium regime, Yeah, okay.
Speaker 6: So, typically, the Low Income Housing Tax Credit Program, which
Speaker 6: is the standard way in which affordable housing is produced
Speaker 6: in this country at this point, generally speaking, because of
Speaker 6: the rules and the structure of the program, will generally
Speaker 6: force a building that's somewhere between eighty percent and one
Speaker 6: hundred percent affordable. And what HSC did was it began
Speaker 6: to basically develop mixed income buildings where the majority of
Speaker 6: the units in the building were market rate. It would
Speaker 6: basically form a condominium for the market rate units and
Speaker 6: condominium for the low income Housing Tax Credit units and
Speaker 6: effectively execute two transactions even though they're you know, they're
Speaker 6: effectively in the same building. And so that was a
Speaker 6: really important innovation because it was a way in which
Speaker 6: to deliver hsc's what's become hsc's mixed income model, where
Speaker 6: you have this affordability being delivered in what are otherwise
Speaker 6: Class A plus majority market rate socioeconomically mixed buildings.
Speaker 2: So let me make sure that I've got this straight.
Speaker 2: So historically, the government either built public housing or they
Speaker 2: encouraged private developers to build housing, a portion of which
Speaker 2: would then be dedicated to lower income households. But what
Speaker 2: Montgomery County is doing is somewhat different in that their
Speaker 2: finance saying sort of a mix of private income and
Speaker 2: lower income residences.
Speaker 1: Is that right?
Speaker 6: Yeah, it's really the taking an ownership position in a
Speaker 6: building that has market rate ents is not something that's
Speaker 6: widely practiced, and so it's really taking the position that
Speaker 6: we should also really be a majority or outright owner
Speaker 6: of these assets. That's really kind of what's the core
Speaker 6: of what they did and what was at the core
Speaker 6: of this latest I guess innovation that we're I think
Speaker 6: here to talk about.
Speaker 3: So Paul, let me bring you in here.
Speaker 1: So, in addition to your music, you're also the executive
Speaker 1: director for the Center for Public Enterprise. Tell us from
Speaker 1: your perspective what it is about the work being done
Speaker 1: at Montgomery County that feels different to you and your
Speaker 1: work and sort of spreading the gospel to other public
Speaker 1: authorities that could do something similar.
Speaker 5: Yeah, the core way I look at the kind of
Speaker 5: innovative programs that HC has come up with is that
Speaker 5: currently all affordable housing that gets built in the United
Speaker 5: States is funded with either the Lonecome Housing Tax Credit
Speaker 5: or Section eight vouchers. That's it, and in basically every
Speaker 5: state in the country, every jurisdiction in the country, those
Speaker 5: programs are fully oversubscribed. Every dollar that Congress appropriates gets
Speaker 5: used to build that housing, and the wait list for
Speaker 5: you know, eligible households, you know, we have to build
Speaker 5: at the current level for seventy five years right to
Speaker 5: get there. It's not going to happen. So the tool
Speaker 5: that HOC has come up with is something that allows
Speaker 5: them to, in addition to using all of those current
Speaker 5: programs from the federal government, they can self finance and
Speaker 5: build mixed income properties on top of everything that they're
Speaker 5: already doing. So a lot of times in kind of
Speaker 5: affordable housing policy circles, what happens is, you know, you
Speaker 5: want to take the same pie of federal subsidies and say,
Speaker 5: how can we chop it up a little bit differently
Speaker 5: to make it a little bit better for this person
Speaker 5: or that person. But this is is just completely separate pie,
Speaker 5: and the model is essentially just going out and being
Speaker 5: a participant in the housing market, right and building these
Speaker 5: mixed income projects because of the tools, access to capital,
Speaker 5: statutory authorities that an agency like HOC has. And that's
Speaker 5: what's kind of new and innovative that not very many
Speaker 5: people are doing. And so what my organization has been
Speaker 5: doing on this is essentially take it's a really simple model, right,
Speaker 5: it's not all that much work to do, not very
Speaker 5: many complicated financial pieces, and we can get into it,
Speaker 5: but it's relatively simple. Take this model to other agencies
Speaker 5: that are seeing the same kind of housing market constraints
Speaker 5: and say, this is a pretty simple approach you could
Speaker 5: be using to expand overall production, affordable production and for
Speaker 5: really a kind of deminimous upfront investment. All you really
Speaker 5: need to do is kind of think a little bit
Speaker 5: differently about how you operate as a public agency. Right,
Speaker 5: you might want to participate in the market and.
Speaker 4: Shape it a little bit more.
Speaker 2: Can we talk more about the money aspect of this
Speaker 2: and the financing arrangements, So you just use the term
Speaker 2: self financing. It's government agencies, So I guess they can
Speaker 2: go out and raise money through the bond market and
Speaker 2: then just loan that to themselves.
Speaker 6: Is that the idea, Yeah, I mean that really is
Speaker 6: generally the idea that I think Paul's right, like, mostly
Speaker 6: what we're doing is conceptually very simple. It's really just
Speaker 6: sort of a tweak to how we're employing it. And
Speaker 6: so to start with, HOC, as the housing finance agency,
Speaker 6: is able to be a lender to its projects and
Speaker 6: has been for a long time. You know, the FHA
Speaker 6: Risk Share program is a really a standard tool provided
Speaker 6: by HUD to certain sophisticated housing finance agencies that you know,
Speaker 6: is for the express purpose of producing affordable housing faster
Speaker 6: and more efficiently. And so HOC has been for a
Speaker 6: long time the senior permanent lender sometimes construction lender on
Speaker 6: its projects, and so that was already a part of
Speaker 6: the toolkit. And so the next piece is really that
Speaker 6: equity piece. Where does that chunk of equity come from,
Speaker 6: the part that the debt won't cover. And effectively, what
Speaker 6: we you know, we worked with our local council to
Speaker 6: do is to use municipal finance as the source of
Speaker 6: our construction equity, which typically it comes from two places,
Speaker 6: one below income housing tax credit.
Speaker 4: And as as Paul mentioned, that's.
Speaker 6: Very limited we're already doing all that basically, or it
Speaker 6: comes from the private market, and that is a particularly
Speaker 6: expensive piece of capital.
Speaker 2: Can you give us an idea of the difference in
Speaker 2: the cost of capital between public and private and maybe.
Speaker 1: If you could just sort of give us like a
Speaker 1: I don't know if it's a stylized financial model. I mean,
Speaker 1: I get the different pieces both, I don't know, So
Speaker 1: maybe pencil it out in words if it's possible, like
Speaker 1: what a deal looks like.
Speaker 6: So one of these essentially is taking the it's really
Speaker 6: taking the conventional American private equity real estate model, and
Speaker 6: it's just pulling it over the private side, so the
Speaker 6: way in which the public side to the public side,
Speaker 6: yes to the public side, and so you know, typically
Speaker 6: the private sector, conventional finance is a private bank loan
Speaker 6: for the construction debt, and then a huge pile of
Speaker 6: equity because the bank's typically only giving you somewhere between
Speaker 6: fifty to sixty percent of what you need. And then
Speaker 6: maybe a private developer puts a tiny bit in of
Speaker 6: their own, often not but maybe a little bit. But
Speaker 6: for the most part, it's that big thirty five percent
Speaker 6: chunk that's going to come from all the folks that
Speaker 6: inhabit the big tall buildings around the one we're in
Speaker 6: that fund those projects, and really our thought was, really
Speaker 6: take that model.
Speaker 4: Pull it in.
Speaker 6: Instead of using that capital, we can use our municipal
Speaker 6: finance tools to basically lower the cost of that capital substantially.
Speaker 6: And most importantly from our view, is the put HC
Speaker 6: in the position as a majority or outright owner of
Speaker 6: the project, which has all the knock on effects that
Speaker 6: everybody likes.
Speaker 5: And I think to stylize it a little bit more
Speaker 5: and to give some kind of examples, sure Zach sometimes
Speaker 5: talks about this project that was built six seven years
Speaker 5: ago where it was a mixed income project. HOC was
Speaker 5: involved in the deal, and this was before these new tools,
Speaker 5: and so so you had a private equity investor who had,
Speaker 5: you know, wanted double digit returns and wanted to you know,
Speaker 5: significant ownership stake and all of that. And that building
Speaker 5: performed very well, and HOC saw very little of the
Speaker 5: benefit of that really high performing building that they had
Speaker 5: put this money in and you know everything, and so
Speaker 5: they kind of went back to the drawing board. How
Speaker 5: do I get in a better position in a project
Speaker 5: like this that I'm building. Right, because I have these
Speaker 5: social goals. I want to provide these affordable units. I
Speaker 5: want to have this long term, permanent affordability. How can
Speaker 5: I further that goal by being in a better position
Speaker 5: on the deal. Well, the way to do that is
Speaker 5: to bring your own source of capital to replace that
Speaker 5: source of capital that's pushing you into a bad position.
Speaker 5: Bring your own. And so they created this Housing Production Fund,
Speaker 5: which is the tool that facilitates this kind of new
Speaker 5: model of mixed income development. And really what it's doing
Speaker 5: is it's making short term construction loans. You know, it's
Speaker 5: essentially replacing what would be private construction equity in a
Speaker 5: conventional deal, but you loan it from your fund to
Speaker 5: yourself to your project at a much lower interest rate,
Speaker 5: and so you're kind of taking on a little bit
Speaker 5: more of the risk.
Speaker 4: Right.
Speaker 5: Why does private equity want really high returns for their investment, Well,
Speaker 5: because that's what they price the risk at job. Right,
Speaker 5: it's their job, and that's what they price the risk up.
Speaker 5: But as the public developer and owner, you're not just
Speaker 5: like eating that risk, right, you also bring things to
Speaker 5: the table that lower the risk of the project.
Speaker 4: Right.
Speaker 5: You're a governmental agency, so a lot of the kind
Speaker 5: of barriers regulatory things to some kinds of development, you
Speaker 5: can get past those sometimes in a little bit easier way.
Speaker 5: And the other really big thing is one of the
Speaker 5: biggest risks from the construction to kind of permanent operating
Speaker 5: phase of a building is the lease up period. Once
Speaker 5: you're done, how long to take you to get people
Speaker 5: in that building and pay rent. And when you do
Speaker 5: a project like this, if you have a third of
Speaker 5: your building at these affordable levels, HOC has a line
Speaker 5: out the door of thousands of households who are waiting
Speaker 5: for affordable Like lease up for affordable units is like
Speaker 5: the snap of a finger compared to market rate units,
Speaker 5: and so you're reducing that lease up time risk too.
Speaker 5: And there's other kind of risk reduction things that you
Speaker 5: bring to the table.
Speaker 2: I take the point about risk reduction and the lease
Speaker 2: up period and things like that, but my next statement
Speaker 2: is going to be somewhat facetious, but the pee pricing
Speaker 2: does seem a little bit ridiculous when housing at this
Speaker 2: point almost seems like a sure thing, like when do
Speaker 2: rents ever go down? I have yet experience time, Seriously,
Speaker 2: I've yet to experience that phenomenon in my lifetime.
Speaker 5: You know, I actually saw a Bloomberg chart on Twitter
Speaker 5: this morning showing market rents going down, deflation in rents
Speaker 5: in some of the cities that had the highest supply
Speaker 5: increases over the past.
Speaker 3: Not New York City.
Speaker 5: Not New York City, right right, I mean Boise Boys
Speaker 5: rents went down something like five percent.
Speaker 2: Yeah, some rents are so the answer has moved to
Speaker 2: Poise Okay, Wait, I realized there is something I should
Speaker 2: have asked at the beginning of this conversation. But can
Speaker 2: you describe the types of housing or building?
Speaker 4: Nice?
Speaker 2: Yeah, that you're that you're creating a little bit more detail.
Speaker 6: So, and this is just historically the way that HC
Speaker 6: has approached things. We deliver affordable housing through what we
Speaker 6: call financing solutions, not construction solutions. And so the general
Speaker 6: ideas you produce and market competitive project. We need it
Speaker 6: to be market competitive because it's going to have a
Speaker 6: majority market rate component in it, but also because we
Speaker 6: want all of our residents to feel like they're living
Speaker 6: in a building that a lot of them.
Speaker 4: Don't even know.
Speaker 6: One of the refrains you'll see is that I didn't
Speaker 6: even know this was owned by hoc. It's a very
Speaker 6: common experience for our residents, both the residents of our
Speaker 6: rent restricted units and those in our market rate units.
Speaker 6: And so these are Class A buildings that are typically
Speaker 6: built to be competitive with the market. And I would
Speaker 6: say even in our more recent iterations, we are actually
Speaker 6: using the HPF platform to actually set some higher standards
Speaker 6: in the market around energy efficiency and even scale. So
Speaker 6: we really try to use the HPF platform for one
Speaker 6: of our things. But in general these are just as
Speaker 6: nice as the Class A. It is a Class A
Speaker 6: rental building. It may be kind of the high dens
Speaker 6: any garden or four over one where you have you know,
Speaker 6: four or five floors of wood frame over over a
Speaker 6: retail or parking podium, but we also do mid and
Speaker 6: high rise as well.
Speaker 1: You mentioned that Montgomery County has sort of a history
Speaker 1: of housing innovation and is the phenomenon essentially like we
Speaker 1: all know, like the DC economy has like boomed, but
Speaker 1: like there aren't a lot of like especially like people
Speaker 1: working in government, Like they're not like a lot of
Speaker 1: those people, like they don't become rich, Like the economy
Speaker 1: is like boomed, but they're not like maybe particularly high salary.
Speaker 1: So they need somewhere to live in a booming economy,
Speaker 1: but they also need to be like somewhere affordable. Is
Speaker 1: that sort of the general economic condition that has sort
Speaker 1: of like forced the hand of a county like I
Speaker 1: mean Montgomery.
Speaker 6: Montgomery County's challenge. It's one of the most affluent counties
Speaker 6: in the country, okay, but it is a It's also
Speaker 6: one of the most diverse counties, certainly in Maryland and
Speaker 6: in the country. And it's a relatively large county, certainly
Speaker 6: for Maryland, so I guess low bar, but you know,
Speaker 6: it's got distinct parts of the county and so you
Speaker 6: have you know, a significant amount of immigration, obviously in
Speaker 6: the DC area, and so you have you know, first
Speaker 6: generation families that are looking for, you know, their first
Speaker 6: affordable home, and they've often looked at Montgomery County schools
Speaker 6: as that first leg up, you know, into this country.
Speaker 6: You also have you know, lots of in many cases
Speaker 6: progressively minded but boomers who bought there. It's a relatively
Speaker 6: young county. A nineteen fifty there were a lot of
Speaker 6: fields and so it really was that expansion that you're
Speaker 6: talking about of the federal government where you have this
Speaker 6: wave of boomers who bought homes for you know, fifteen
Speaker 6: dollars and you know now they're worth you know, one
Speaker 6: point five million, and then everything between is kind of
Speaker 6: the range of challenges that we have of housing. And
Speaker 6: we have very urban centers. You know, we have taller
Speaker 6: buildings in Silver Spring and Bethesda and Rockville than there
Speaker 6: are in DC. So there are very urban locations where
Speaker 6: you have folks employed within a whole spectrum of different industries.
Speaker 6: So it's really trying to serve what is an extremely
Speaker 6: socioeconomically diverse environment and ethnically a diverse, racially diverse and
Speaker 6: so forth. And there have been successes and failures around
Speaker 6: that over the course of the decades, but that has
Speaker 6: definitely been the trend for Montgomery County over the last
Speaker 6: or twenty years.
Speaker 2: Maybe this is a question for Paul, but how replicable
Speaker 2: is this model outside of Montgomery County, because as Zach
Speaker 2: just described, you know, this is a relatively affluent place.
Speaker 2: I've seen some people make the argument that the county
Speaker 2: also has an advance because it's a municipality and so
Speaker 2: it's easier to do this model. I don't quite understand
Speaker 2: that argument, but maybe you can expound on that, But
Speaker 2: how easy is it to export this particular way of
Speaker 2: doing affordable housing to other parts of the US.
Speaker 5: Yeah, great question. I think the first thing to ask
Speaker 5: is does the financing work in other places? And I
Speaker 5: think the really nice thing about the approach is that
Speaker 5: really the test is if market rate rental construction pencils
Speaker 5: in your market, then this works because all you're doing
Speaker 5: is taking the market rate model, pulling the most expensive
Speaker 5: piece of capital out of that, putting in your own
Speaker 5: source of capital, and then all of a sudden you
Speaker 5: have more room to provide additional affordability. So if market
Speaker 5: rate is pencil and then you then you can just
Speaker 5: you can do this. As far as how do you
Speaker 5: get other agencies to find a way to do this
Speaker 5: or to use a tool like this, right there, there's
Speaker 5: more than one way to use a tool like this.
Speaker 5: The City of Atlanta recently stood up a program that's
Speaker 5: essentially they're trying to copy exactly what my Emory County student.
Speaker 5: And actually we hosted a kind of event last week
Speaker 5: in Montgomery County bringing together folks from housing agencies around
Speaker 5: the country. So you know, we're people out west, people
Speaker 5: in the South, people in Northeast, people in the Midwest
Speaker 5: who run agencies who are interested in figuring out how
Speaker 5: to do this. And you know, no two kind of
Speaker 5: programs are going to look identical because you know, everybody's
Speaker 5: kind of institutional environment in different jurisdictions looks a little
Speaker 5: bit different. But I think, and Zach talks about this,
Speaker 5: sometimes there's kind of two main kind of pipelines you
Speaker 5: can use for you know, how do you get projects
Speaker 5: in a pipeline for development with a tool like this.
Speaker 5: There's one where, like you know, you're housing authority, you
Speaker 5: own a piece of land. You say, you know what,
Speaker 5: I have this land, I'm going to develop it. I'm
Speaker 5: gonna's you an RFP. I'm going to find construction manager,
Speaker 5: engineered designed me the building. I'm going to you know,
Speaker 5: hire somebody as a fee developer and build me this thing.
Speaker 5: You have this other approach, which HOC recently did a
Speaker 5: project like this where there was a fully entitled project
Speaker 5: by a private developer that was sitting there on the dirt.
Speaker 5: Nothing was built because they couldn't get financing to close
Speaker 5: the deal. It's fully entitled, was ready to go. HOC
Speaker 5: came in and said, nice looking entitled project. You got there,
Speaker 5: how about I come in with my cool new capital.
Speaker 5: I'm going to come in with property tax relief because
Speaker 5: I'm a public agency. I'm going to come in and
Speaker 5: reduce the police up risk. And what you're going to
Speaker 5: give me is this increase in affordability that I want.
Speaker 5: And I'm going to be majority owner and private developer
Speaker 5: with entitled project that can't close on financing. And it's
Speaker 5: like absolutely, please real quickly.
Speaker 1: So there's no property taxes because it's the government developing
Speaker 1: on government land or government program. How big is that
Speaker 1: when you talk about like, Okay, we're going to make
Speaker 1: this pencil out, We're going to expand the supply of
Speaker 1: affordable housing.
Speaker 3: How big of a deal is that.
Speaker 1: Property tax component in terms of making things pencil out better.
Speaker 6: Definitely a key tool.
Speaker 4: It really is what allows us to do so.
Speaker 6: As an example of the Housing Production Fund, the Production
Speaker 6: Fund could still function with just the Housing Production Fund
Speaker 6: itself around producing the housing without any increased affordability, but
Speaker 6: it's really the ability to increase the affordability and to
Speaker 6: deepen the affordability as well, because many of the units
Speaker 6: we deliver are actually below our inclusionary zoning standards. So
Speaker 6: so the property tax abatement is probably something like maybe
Speaker 6: twenty percent, maybe fifteen to twenty percent of op X
Speaker 6: of operating expenses. And so it's that relief that feeds
Speaker 6: into the performer and allows us to go as far
Speaker 6: as we possibly can with affordability, with you know, with services,
Speaker 6: and you know, all the other types of things we
Speaker 6: layer in when we do these projects.
Speaker 1: What is your capacity constraint? Like, what is the source
Speaker 1: of Like in theory, I imagine there's a demand from
Speaker 1: any more apartments, there's probably still scarcity.
Speaker 3: What is the.
Speaker 1: Constraint on Hoc's side in terms of building out even more?
Speaker 6: I would say the primary constraint, especially as we've entered
Speaker 6: into this sort of economic environment where where you know,
Speaker 6: we have twenty projects to choose from that are from.
Speaker 4: The private sector that are all great, They're.
Speaker 6: All tremendous, and it would add tremendously to the county's
Speaker 6: housing stock. So I would say there are kind of
Speaker 6: three key both short and long term constraints for us.
Speaker 6: You know one and it's really I think the deepest
Speaker 6: part of it this discussion is simply building the staffing
Speaker 6: and the capacity and the competency around being able to
Speaker 6: manage how do you be a public limited limited partner investor, Like,
Speaker 6: how do you create the staff you need for that
Speaker 6: out of both sort of what I call found people,
Speaker 6: the people that were kind of already there, but also
Speaker 6: attracting the kinds of practitioners you need to be able
Speaker 6: to scale up like our council wants us to do,
Speaker 6: like the fund is designed for us to do. So
Speaker 6: there's that's certainly I think really one of the deepest
Speaker 6: parts of this discussion is is really just that, and
Speaker 6: then there are other you know, on the financing side. Obviously,
Speaker 6: our aim is to fully subscribe the revolving fund, so
Speaker 6: we've largely done that, and so to some extent it's
Speaker 6: just the size of the fund, and that's fine. That's
Speaker 6: probably the easiest thing to solve. It's just a budget adjustment.
Speaker 6: But then the last piece is things that start to
Speaker 6: get into things like guarantee capacity. So if we're using
Speaker 6: a private bank loan and the bank has come to
Speaker 6: us and said, you know, look, we really trust you guys,
Speaker 6: we think you're excellent practitioners, but while we're under construction,
Speaker 6: you know, we need you to guarantee x percent of
Speaker 6: the loan and across enough deals that starts to be
Speaker 6: an issue relative to a balance sheet, even as that
Speaker 6: balance sheet is growing because of the production. And so
Speaker 6: it's one of those things that you know, we watch
Speaker 6: very very carefully to make sure that not only are
Speaker 6: we thinking about, okay, how do we just finance this deal, but.
Speaker 4: We're also very very cautious.
Speaker 6: We work with our financial advisor extensively on really keeping
Speaker 6: an eye on that guarantee capacity and making sure that
Speaker 6: even from just because we're actually rated by Moodies, to
Speaker 6: make sure that you know, when Moody's comes in for
Speaker 6: their annual review, that we're always keeping that in mind
Speaker 6: so that there are no surprises. We obviously want to
Speaker 6: keep that capacity in a good place, and there are
Speaker 6: innovations elsewhere in the country that we definitely did not
Speaker 6: do that are good solutions for that. So yeah, it's
Speaker 6: really a host of things between just plain old people
Speaker 6: power and then some of the larger implications of taking
Speaker 6: a governmental energy and really supercharging it.
Speaker 2: Well, I'm going to ask a devil's advocate question, which
Speaker 2: I have a teensy bit of sympathy for as someone
Speaker 2: who has spent a lot of money on terrible apartments
Speaker 2: in New York for a long time. But what do
Speaker 2: you say to people who argue that it's unfair that
Speaker 2: the government is subsidizing people to be able to live
Speaker 2: And you know, as you describe it, these are nice
Speaker 2: buildings with a lot of facilities, and people on low
Speaker 2: incomes are able to live in places that they otherwise
Speaker 2: could not afford. And then related to this, in an
Speaker 2: ideal world, wouldn't the solution for this just be for
Speaker 2: companies to pay higher wages so that people could live
Speaker 2: in nice places well? And then on that note, like
Speaker 2: why do we have tax pacers who are subsidizing like
Speaker 2: someone who's earning minimum wage at Walmart so that they
Speaker 2: can actually live somewhere close to where they're supposed to live.
Speaker 5: I think there's a couple of answers to questions like
Speaker 5: this that you know. One is just kind of a
Speaker 5: moral answer of is it fair in a society for
Speaker 5: people to pay seventy percent of their income to rent?
Speaker 5: Some people have different answers to that question. I have
Speaker 5: my answer. The other one just done an economic growth
Speaker 5: point of view. I think it's important to consider it
Speaker 5: from the point of view of if you took ten
Speaker 5: twenty percent of all households in America and double their
Speaker 5: housing payments overnight, what would that do to consumer demand
Speaker 5: in America? That'd be very bad for consumer demand and
Speaker 5: be very bad for growth. It'd be very bad for
Speaker 5: broad economic growth. I don't think anyone who works in
Speaker 5: business wants to have a massive reduction in consumer demand
Speaker 5: by doubling people's rent payments over night. So I think
Speaker 5: there's moral reasons, and I think there's I think there's
Speaker 5: you know, economic reasons why you want to have housing
Speaker 5: supports for people, you know, and as far as you know,
Speaker 5: a fairness question, I think a really important way to
Speaker 5: look at this program is what are we doing to
Speaker 5: stabilize housing production across the business cycle?
Speaker 4: Right?
Speaker 5: One of the things that we're seeing now is that
Speaker 5: when we have a rates environment like we have today,
Speaker 5: we're just seeing housing not pencil at all. Nobody's being
Speaker 5: able to close deals. You have you know, entitled land
Speaker 5: ready to go, and it's just not going to get
Speaker 5: built even though there's housing demand. And so you know,
Speaker 5: when I talk to other agencies, what they're telling me is,
Speaker 5: my god, I have you know, dozens of entitled projects
Speaker 5: that I would love to see built around.
Speaker 3: Mind, what's an entitled project.
Speaker 5: It basically means you've gone through all of the archetel
Speaker 5: to get engineering right, You've gone through all these kind
Speaker 5: of approvals to get it ready to develop, and you're
Speaker 5: ready to move. You just need to close on your finance.
Speaker 6: Yeah, it's really a development application process. So every place
Speaker 6: has got.
Speaker 4: Some version of it.
Speaker 6: But it basically means that you've gotten through what's usually
Speaker 6: called something like a site plan approval. But it's basically
Speaker 6: if you go to the permitting agency, they're going to
Speaker 6: look at it and say, yeah, you've met all the
Speaker 6: conditions of the legal zoning of the property and you
Speaker 6: can now build.
Speaker 5: But you can't build if you don't have half the capital.
Speaker 5: And so that's where if you have a program that
Speaker 5: can scale to many agencies, many places around the country.
Speaker 5: I mean, obviously one building doesn't have a macro effect, right,
Speaker 5: but you have every state running a program like this,
Speaker 5: you maybe have lower dips in housing production kind of
Speaker 5: across your business cycle.
Speaker 6: Yeah.
Speaker 2: The idea of smoothing the cycle in a sort of
Speaker 2: classic Canesian fashion, I guess, is the interesting one for me.
Speaker 2: The other interesting pro argument I could see in this
Speaker 2: is the idea of avoiding enclaves of super rich people,
Speaker 2: so you get sort of high, middle and low income
Speaker 2: people all living together, which kind of goes some way
Speaker 2: to alleviating labor shortage worries, because it feels to me
Speaker 2: like so much of the labor shortage debate, this idea
Speaker 2: that oh we can't get waiters or waitresses or maids
Speaker 2: or cooks or whatever, is actually a housing shortage issue,
Speaker 2: and this could go some way towards solving it.
Speaker 1: Just on the point about building through the cycle, because
Speaker 1: that was one of the things we discussed in the intro.
Speaker 3: Is that true? I mean, in practice.
Speaker 1: Has it been your experience that this model is able
Speaker 1: to do that such that at a time when you're
Speaker 1: seeing entitled projects not get off the ground, you're not impaired.
Speaker 6: It's definitely tougher because again, all we're doing is getting
Speaker 6: any advantage. You know, we have that capital advantage, but
Speaker 6: there's obviously you're.
Speaker 2: Still impacted by higher rates.
Speaker 6: Absolutely we're impacted by higher rates. We have some built
Speaker 6: in you know, because we're using tax exempt financing.
Speaker 4: There are all these.
Speaker 6: Sort of different buffers that we have that further help
Speaker 6: us be this countercyclical agency. But there's no question it's harder.
Speaker 6: But we're about to close a very large transaction. It'll
Speaker 6: be our second housing Production Fund deal, and it's had
Speaker 6: to weather, you know, the entire run up of both costs.
Speaker 4: And rates, and it's still going to close.
Speaker 6: And having been in the private sector, I can tell
Speaker 6: you it's you know, it's just not a transaction that
Speaker 6: would have any prayer of closing in this environment.
Speaker 1: So just real quickly, other a lot of projects that
Speaker 1: you see right now in Montgomery County or Paul, that
Speaker 1: you see elsewhere that some ground was broken or some
Speaker 1: plan was set in motion in twenty twenty twenty one
Speaker 1: that's currently just not being worked on. Is this a
Speaker 1: huge thing that's unfinished entitled property development?
Speaker 6: Yeah, it's much more of like projects that basically are
Speaker 6: like prepared to pull building permits and start but can't
Speaker 6: get that financing. And we've seen that, you know, even
Speaker 6: six months ago, I was probably looking at maybe six
Speaker 6: to ten they have been presented and now it's it's
Speaker 6: got to be twenty to thirty.
Speaker 4: Wow.
Speaker 5: And I was talking to some folks in Massachusetts at
Speaker 5: one of their agencies who you're very interested and deploying
Speaker 5: a two like this who telling me dozens of entitled
Speaker 5: properties in the Boston metro area that seem like they're
Speaker 5: not going to move right now.
Speaker 3: Tracy. I think we have for the episodes to do.
Speaker 2: Of course on.
Speaker 1: Uncompleted housing that people desperately want, but that because of
Speaker 1: our attempt to fight inflation, housing is being kept scarce
Speaker 1: around the country. I think much more, much more to
Speaker 1: be done on that topic.
Speaker 2: This is the ultimate irony of fighting, you know, supply
Speaker 2: lad inflation with higher interest rates.
Speaker 1: Zach and Paul, thank you so much for coming on up.
Speaker 5: You're really happy to.
Speaker 7: Be here, Tracy.
Speaker 1: Actually, that last point about just the surge in noncompletion
Speaker 1: of developments is pretty alarming. The fact that it's significantly
Speaker 1: different than it even was six months ago at a
Speaker 1: time when people are frustrated by rants, at a time
Speaker 1: when people are frustrated by housing shortage, and the fact
Speaker 1: that in the last six months planned completions have gotten
Speaker 1: worse is pretty It's pretty damning.
Speaker 2: I would say, yeah, that was kind of a crazy number,
Speaker 2: but also I guess it gets to the whole point
Speaker 2: of maybe doing this sort of public private financing. This
Speaker 2: idea of having a smoothing effect on the housing cycle
Speaker 2: or having a sort of backstop for capacity at a
Speaker 2: time of higher interest rates. But then to that point
Speaker 2: there are limits. And even Montgomery County, you know, Zach
Speaker 2: was talking about the guarantees and having to present their
Speaker 2: finances to Moody's every year and get a rating for
Speaker 2: unibonds and things like that, But there is an impact
Speaker 2: of higher rates there as well.
Speaker 1: By the way, it looks like they have a triple
Speaker 1: A rating, at least Montgomery County does. That's the nice
Speaker 1: thing looking at the terminal while we were doing this,
Speaker 1: so very well rated across all three of the major
Speaker 1: credit rating agencies. But yeah, you know, this idea of
Speaker 1: using the public balance sheet in some way is really interesting. Also,
Speaker 1: I thought Zach's point about one of the major constraints,
Speaker 1: and again I think people tend to maybe abstract these
Speaker 1: types of things away. Is Okay, you could have a
Speaker 1: public sector or a public authority, be a lan lord
Speaker 1: in some capacity, be the owner of what looks like
Speaker 1: normal market rate construction, But do you have the personnel capacity.
Speaker 2: Yeah, it's not the government's expertise, right right. Typically, the
Speaker 2: big advantage of the government or the big specialty of
Speaker 2: the government is basically a lower cost of capital. Yeah,
Speaker 2: not actually execution on a lot of things. There are
Speaker 2: some exceptions, like you know, when we talk to the
Speaker 2: Department of Energy, they have a lot of energy experts
Speaker 2: who are able to evaluate projects. But in general, I
Speaker 2: think the big advantage of the government is that lower
Speaker 2: cost of capital, and this kind of puts it to
Speaker 2: best effect.
Speaker 3: Yeah.
Speaker 1: No, it's really interesting to think about. Yeah, personnel is
Speaker 1: a constraint, and hiring is a constraint right now, and
Speaker 1: public sector hiring is a constraint right now, and it's
Speaker 1: one area in which public sector authorities across the country
Speaker 1: have had issues hiring. So it's interesting to see how, okay,
Speaker 1: you can transfer the ownership of the financing to the
Speaker 1: public sector in some way or another. But then still
Speaker 1: it doesn't mean that you don't have some of these
Speaker 1: key constraints. Construction is another one, and it doesn't matter
Speaker 1: who it is. If labor is scarce, some materials are scarce.
Speaker 1: If you're waiting on you know, cooling equipment or whatever,
Speaker 1: it's going to be tough.
Speaker 2: Yeah, So pros smooth the housing cycle, expand housing capacity,
Speaker 2: create more vibrant communities where there's a mix of low
Speaker 2: income and higher income residents. And I guess cons some
Speaker 2: people are inevitably gonna think this is unfair or someone
Speaker 2: is always no, no, okay, wait, can I just say
Speaker 2: I'm in a bad housing mood because my toilet has
Speaker 2: been broken for like six months right now? Yeah, I am.
Speaker 2: And also my neighbor drilled a hole in the partition
Speaker 2: wall and yeah, and I didn't have any hot water
Speaker 2: on Sunday either. Oh, and the intercom's not working.
Speaker 3: Yeah, this is all true. I've been hearing a lot
Speaker 3: about that.
Speaker 1: Yeah, I'm sorry, that's right.
Speaker 4: No, it's okay.
Speaker 1: But for listeners, this is why Tracy is resentful of.
Speaker 3: Other people getting a good deal out nice apartment.
Speaker 2: Okay, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Oddlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me Tracy Alloway.
Speaker 3: And I'm Joe Wisenthal. You can follow me at The Stalwart.
Speaker 1: Follow Paul Williams on Twitter. He's at pe Williams Underscore.
Speaker 1: Follow our producers Carmen Rodriguez at Carmen armand Dashel Bennett
Speaker 1: at Dashbot and kel Brooks at Calebrooks and special thanks
Speaker 1: to producer Moses Ondam And For more odd Laws content,
Speaker 1: go to Bloomberg dot com slash odd Lots, where we
Speaker 1: have transcripts the blog in a newsletter and you can
Speaker 1: talk about this episode in our discord twenty four to
Speaker 1: seven with fellow listeners. Maybe we'll get up Paul or
Speaker 1: Zach or both of them to come in and answer
Speaker 1: follow up questions when this comes out.
Speaker 4: To go check it out.
Speaker 3: We have a very.
Speaker 1: Vibrant real estation on their discord dot gg slash out.
Speaker 2: And if you enjoyed this episode, if you want us
Speaker 2: to do more on affordable housing, or if you want
Speaker 2: us to have all the members of Light Sweet Crude
Speaker 2: on the podcast eventually, then please leave us a positive
Speaker 2: review on your favorite pot or.
Speaker 1: If you want or if you want Tracy to be
Speaker 1: able to afford a place where someone isn't going to
Speaker 2: Be drilling a that too, I'd appreciate it all right,
Speaker 2: Thanks for listening,