A Developer’s Best Friend: Tax Increment Financing (TIF)

By Duke Dennis Overview: What is a TIF? Tax Increment Financing (TIF) is a form of subsidy offered by municipalities to encourage and support private development Read more

Single Family Rentals: Commercial Real Estate’s Newest Frontier

By Justin Laub For those unaware, a new asset class has come into being in commercial real estate: single-family rentals.  Prior to the Great Recession, Read more

What is the Deal with FNMA and Freddie Mac??

By Todd McNeill There has been a lot of speculation going around on the current status of FNMA and Freddie Mac in the marketplace.  As Read more

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Retail Tenants in Mixed-Use and Lifestyle Developments: An Underwriting Paradox

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The IRR Waterfall: Splitting Real Estate Profits - Lenders, Investors, and Developers

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How to Turn a Dud into a Stud: Using Legislation to Reduce the Liability and Costs Associated With Groundwater Contamination

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A Developer’s Best Friend: Tax Increment Financing (TIF)

By Duke Dennis

Overview: What is a TIF?

Tax Increment Financing (TIF) is a form of subsidy offered by municipalities to encourage and support private development and redevelopment by reducing the cost of the development, thus making it cheaper and easier for the developer to complete the project.  This form of public financing is regularly used to encourage new development along city growth paths, development of blighted areas, and cleanup of contaminated areas (i.e. brownfields).  The first TIF was created in California in 1952; since then, TIF legislation has made its way to 49 of the 50 United States with the only exception being Arizona.  TIFs are a popular form of public financing because they do not unnecessarily burden tax payers and they do not disrupt taxes currently received by existing entities.

How do TIFs work?

Once a TIF is approved by the municipality governing the site, the municipality will create a TIF district that encompasses a defined area; within this district is the project to be built or redeveloped.  The TIF district designation is typically in place for a defined period of time, usually between 20 to 30 years, but it can vary.

Before we get into the math behind TIFs, let’s have a quick lesson on how property taxes are determined.  Counties are responsible for assessing property values (called assessed values) for taxing purposes.  Within counties are multiple taxing entities, such as your school district, fire department, local hospitals, etc., all of which assess and collect taxes on your property to support their services.  Each taxing entity has its own tax rate that is multiplied by the county’s assessed value to determine the taxes owed.  When a TIF is created, it will not disrupt the tax revenues being collected by these local agencies (schools, fire department, hospital, etc.) because of the cap or base assessed value component of a TIF.

For properties within the TIF district, a cap or base assessed value is given (depicted below by the blue box), and going forward, any increases in assessed value above that established by the cap are called “incremental assessed value.”  The resulting tax revenues from the incremental assessed value go towards subsidizing the new development.  After the tax revenues have returned the amount of the subsidy or after the TIF expires, the TIF district will be extinguished and taxing entities will receive the now higher tax revenues, which are based on the base assessed value plus the incremental assessed value (depicted below by the yellow polygon).  Below are two graphics detailing the basic concept and the math behind TIFs.

Tax Increment Financing

Tax Increment Financing chart

 

The theory is that, as a result of the new development, property values will rise in the surrounding area (i.e. the defined TIF district).  You can see the assessed property value increase being depicted by the red triangle in the graph above.  As property values rise, so do the tax revenues realized.  This way, the properties in the TIF district that receive the benefit of the new development shoulder the burden of the cost of subsidizing the development, and property owners outside the TIF district do not pay for public improvements that will not affect their property value.

What developers need to know about TIFs:

  • First and foremost, TIFs reduce what the developer pays for the development by providing a capital infusion and reducing the amount of equity the developer must bring to the table.
  • Lenders view TIF funds as equity in a deal. This can act to de-lever a transaction, which can lead to better financing terms.  At the same time, borrowers must be cognizant of recent bank regulatory changes (i.e. Basel III) that limit how much TIF funding can be counted as equity.
  • TIFs are a taxpayer-friendly form of financing; thus, it is easier to get public support for a development when using a TIF as the form of public financing as opposed to issuing bonds or raising taxes.
  • It is not uncommon that a developer receiving TIF funds must include certain agreed upon public improvements. An example would be that the development must include new sidewalks, streets or other infrastructure that the city negotiates with the developer.

Any developer considering a new project should look into TIF incentives that may be available through the municipality that governs their site.  As highlighted above, any TIF funds received could go towards reducing the developer’s personal equity requirements, gaining public support, and making the project more easily financeable (again, subject to Basel III).

To learn more about this topic, please contact the author, Duke Dennis, Senior Analyst with Metropolitan Capital Advisorsddennis@metcapital.com (972) 267-0600.

Source(s):

  • Craig L. Johnson, Indiana University (TIF Assessed Value Over Project Life – Graphic)
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Single Family Rentals: Commercial Real Estate’s Newest Frontier

By Justin Laub

single family rentals

For those unaware, a new asset class has come into being in commercial real estate: single-family rentals.  Prior to the Great Recession, when home ownership was still the epitome of the American Dream, the concept of single-family homes for rent was an afterthought. They existed but only in unique circumstances that seemed to apply to only a minority of the population. Fast forward to the new, post-recession U.S. economy, and the U.S. has become a renter nation on a scale not seen in a long time. Whether by choice or by circumstance, the U.S. population is increasingly renting its housing stock. The home ownership rate in the U.S. has fallen from a peak of 69% in 2004 to 63.7% as of Q1 2015. The current homeownership rate is the lowest it has been in over 25 years. The roughly 6,000,000 rental households added in the U.S. over the past decade have created a huge boom in demand for apartments and, in the process, created the new single-family rental asset class. Private equity firms and lenders alike have been investing heavily in this new asset class and have created ever more sophisticated ways of financing it.

The first investors out of the gate on a mass scale were major real estate private equity names such as Blackstone and Colony Capital. Over time other investors have entered the field as well as lenders and more regional players. In a short span of six years since the depth of the Great Recession in 2009, we have seen the asset class come from almost nothing to over $20 billion invested in over 200,000 homes, with major IPOs, new REITs and single-family rental-backed mortgage securitizations taking place along the way. The timeline of major events reads as follows:

  • June 2012: Blackstone forms Invitation Homes to purchase large portfolios of distressed single-family homes
  • December 2012: IPO for first single family REIT (Silver Bay Realty Trust, $709 million market cap)
  • June 2013: within one year of formation, Invitation Homes has spent over $1 billion on acquisitions
  • November 2013: Blackstone issues the first ever mortgage-backed securitization of single-family rentals ($479,000,000 bond issuance, backed by 3,200 homes, all owned by Blackstone)
  • February 2014: Starwood Waypoint Residential Trust becomes the 4th single-family REIT (with the total capitalization for public, single family REITs currently around $5.5 billion)
  • March 2015: Blackstone issues the first ever securitization of multi-borrower single-family rentals ($230,000,000 bond issuance)
  • June 2015: Invitation Homes is the largest owner in the country with over 45,000 homes

A couple of my recent financing assignments, one in Dallas, TX, and the other in Pittsburgh, PA, give some color on the financing possibilities for this new asset class. For the Dallas assignment I was able to arrange for my client a non-recourse guidance line of credit from a bank for the acquisition of cash flowing single-family rentals in the Dallas area. I was able to show the bank that a liquid refinance market existed for this product in addition to the more obvious sale market. The guidance line from the bank was an alternative to the more typical bridge lending products on the market that offer non-recourse acquisition loans. The trade-off to get the much better bank pricing was lower leverage, around the 50% LTC level.

On my Pittsburgh assignment I was tasked with finding the most competitive sources of refinance loans for a $4.5 million portfolio of single-family rentals. Whereas most banks only offer fixed-rate loans for 5 years (maybe 7) and full or partial recourse loans, I was able to identify multiple lenders that could offer 10-year, fixed-rate, non-recourse loans for this portfolio of single-family rentals. The rate for these lenders is typically a bit higher than bank loans (5-6% vs. 4-5%), but the other terms that they can offer more than outweigh the higher cost. Banks, in general, are just not equipped to offer 10-year, fixed-rate, non-recourse loans, especially for this type of product and especially, as in the case of my deal, when there is a cash-out component to the refinance.

The financing market for single family rentals is fluid and evolving. With so much institutional money flowing through the asset class, borrowing costs continue to come down, and there’s more transparency on rent comps, sales comps, operating histories and the like. For help financing your next acquisition of a single-family rental portfolio or to refinance a portfolio that you already own, please contact MCA’s Senior Director, Justin Laub at jlaub@metcapital.com or visit our website – www.metcapital.com.

The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.

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What is the Deal with FNMA and Freddie Mac??

By Todd McNeill

There has been a lot of speculation going around on the current status of FNMA and Freddie Mac in the marketplace.  As most everyone is aware, both FNMA and Freddie Mac were placed into Conservatorship shortly after the Great Recession.  Soon thereafter, Congress was urged by Obama to wind down the affairs of FNMA and Freddie Mac.  In the midst of the back and forth between those who want to keep government subsidized mortgages and those who do not want government intervention in the mortgage market, an annual cap of $30 billion dollars was placed on the agencies.  Thus, once $30 billion dollars of mortgages were issued in any one year, these agencies were not allowed to loan any more for that fiscal year.

shutterstock_15108172With the surge in multifamily construction and sales, the agencies have reportedly reached $30 billion already in 2015.  As of April 2015, FNMA led new multifamily production at $14.9 billion while Freddie Mac registered new volume of $14.3 billion.  This translates to a 231% increase for FNMA and a 266% increase for Freddie Mac.  It is widely expected that the agencies will reach the $30 billion cap by 3rd Qtr. of 2015.

There are several factors that have contributed to increased lending from the agencies, such as the overall demand for apartment units and the all-time historical low interest rate environment.  Another factor is that the agencies approached their cap in late 2014 but delayed some of the closings until early 2015 to accommodate the cap issues, translating to an enormous 1st qtr. volume from the agencies.

In an attempt to slow the volume, both agencies increased spreads by 50bps, making current rates for 10-year fixed mortgages around 4.5%.  The jury is still out as to whether this has worked to slow the origination volume.

Both agencies have petitioned Congress to increase the $30 billion cap by $5 billion.  It is believed that this cap will be increased.

There are exclusions to the Cap that these agencies can make mortgages at will.  These include:

  • “Targeted affordable housing”, which are properties that have affordable units that equal to 50% or greater. If a property has affordable units but that are less than 50% of the total units, the agency is able to count 50% of the loan towards the Cap;
  • Small Multifamily properties – those properties with 5-50 units;
  • Manufactured Housing;
  • Affordable Senior Housing – The same % of residents that are 80% or below of the average medium income “AMI” can be deducted from the Cap total;
  • Unsubsidized Market Rate Affordable – The same % of residents who are 60% or below the average medium income “AMI” can be deducted from the Cap total;
  • Unsubsidized Market Rate affordable in high-cost or very high-cost markets – The same % of residents at or below 80% of the average medium income “AMI” can be deducted from the Cap total. These markets include certain submarkets of Boston; Los Angeles; Miami; New York City; San Francisco; Bridgeport; Chicago; Riverside/San Bernardino; Washington, D.C.; Seattle; San Jose; and San Diego.

As you can see, the exclusions for the Cap encourages more volume in affordable/workforce housing.

Previously, Freddie Mac and Fannie Mae loans in these redefined high- and very high-cost areas were generally in the capped category.  By excluding these loans from the cap, the agencies are able to provide more liquidity to these high-demand housing markets.

The immediate effect of all this has translated to increased multifamily lending volume from the CMBS sector.  The long-term effect is unknown, however, with less credit available in the multifamily sector surely leading to higher borrowing costs.  Should Congress pass a bill to eliminate FNMA and Freddie Mac, the costs to borrower will assuredly go up. Some would argue that property values would go down via a cap rate increase to absorb the higher borrowing costs.

This could not have come at a worse time with the robust multifamily market in high gear.  With so much uncertainty in the multifamily lending market, it is critical to be advised by an intermediary that understands and has a handle on all the current information that is changing rapidly.  Metropolitan Capital Advisors has access to numerous agency and CMBS lenders and can secure information rapidly on how a deal may be treated in the market for permanent fixed-rate mortgages.  We welcome the opportunity to review your multifamily finance requirement, and we are highly confident in our ability to execute the best financing options with (or without) the agency lenders in the market.

The author, Todd McNeill, is a 16-year veteran and principal of Metropolitan Capital Advisors.

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