Inside Syndicators' Favorite Housing Loophole & Mayweather's KO Deal

Inside Syndicators' Favorite Housing Loophole

“The fact that you [HFC] went from $250,000 to $6M in the span of 6Y says that you are doing something right – the problem is I’m not sure what it is that you’re doing right, and I don't know how much of that benefit is for the people of Cameron County.” – Judge Eddie Treviño, Cameron County Commissioners Court

The lemonade stand is the quintessential American symbol of early entrepreneurship. A child sits at the folding table, peddling her wares, and learns valuable lessons about salesmanship and profit. Those who make it big later in life often hearken back to this formative experience.

However, unlike most physical businesses, lemonade stands have a couple advantages: they do not pay rent, they do not pay property taxes, and there is a powerful external actor (parent, grandpa) thumbing the scales for them.

When multifamily syndicators descended upon Texas 🤠 in the feverish ZIRP days of ‘21 and ‘22, their hunger for fees (development fee, 10% CM fee, 25% “entrepreneurial profit”) pushed them into many questionable deals, deals that are now deep underwater or have been kicked back to their long-suffering lenders - see here and here. With soaring costs of capital, flattening rents and peskily high property taxes (generally the largest single expense in Texas deals), there was no way to make the numbers work.

So syndicators had to go find their own lemonade stand. 🍋 

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Syndicators (Cont.)

If syndicators could find a way to do away with property taxes, they had a fighting chance. If they could shoo away annoyances like sales tax on building materials, even better. And IF they could find a takeout that would give them a spectacularly low cost of capital, then even bad deals could metamorphose into great deals, the kind of deals that allow one to indulge in private jets and California mansions. 🛩️  

In ‘15, the Texas legislature introduced an incentive for affordable housing: if a developer built apartments through a special vehicle known as a Public Facility Corporation, and committed to reserve at least half the units for households making below 80% AMI, then property taxes would be waived entirely. The spirit of the incentive was that you cut developers a deal in exchange for bringing much-needed AH to the community - “after all,” as Don Barzini says, “we are not Communists.” 

“It worked for a long time, but then it started being abused,” said one local developer. PFCs began being used in places where the delta between the 80% AMI rent and the market rent didn’t exist, in effect making it a freebie. And then, some PFCs went full cowboy: since the state legislature had neglected to restrict PFC activity to the locality, they began peddling their wares in much hotter markets: Austin, Dallas, Houston. A rando school 🎒 or water district 🚰 in Travis County or Garland could, in exchange for a nice upfront per-unit fee, create several dozen PFCs all across the state, PFCs that became a magnet for syndicators’ “dogshit deals,” as one market participant put it 🐕. These deals were typically structured as ground leases – The Promote has reviewed a number of the agreements and will dive into them in upcoming eds. – and resulted in hundreds of millions of dollars being wiped off city tax rolls for 75Y – here’s an e.g. from a UT Austin study.  

The program caught a lot of heat for these traveling PFCs 💼 see here and here. “I’m appalled that Housing Authorities and taxing authorities have completely abused the statutory authority to create PFCs in a totally nontransparent manner,” State Sen. Paul Bettencourt said in Feb. ‘23, and last June, he led a successful effort to get rid of the loophole. Traveling PFCs were done.

Syndicators needed a new lemonade stand, and they would find it in Housing Finance Corporations. Unlike w/ PFCs, you can’t be a municipal water district – you have to be a county/city-sponsored HFC, and the HFC has to join the GP entity. But otherwise, it’s a fairly similar deal (a few $100K upfront fee, annual rent, in exchange for no property taxes& no sales tax) and it’s attracted the same posse of syndicators in search of a lifeline. 🛟 

The PFC and HFC programs were devised in the spirit of creating “meaningful affordability through local public/private partnerships, but unfortunately, some have focused only on the letter of the law,” says Barrett Linburg, a Dallas-based developer and principal at Savoy Partners. “While recent changes have fixed the PFC program, the HFC program is still being misused, straying from its original intent.”

Two HFCs, Garland and Cameron County, have been particularly rampant across Texas, sources said, and it’s unclear how much of their effort has yielded new AH in their home territories. I point you to this marvelous video testimony (h/t CBS) from last summer, in which Judge Eddie Treviño grills Cameron County HFC execs Sergio Gonzalez and Mark Yates.

Treviño: Is that your project? You are investing and you’re getting revenue and a return?Gonzalez: Yes.
Yates (cuts in): Actually, that one is what they call a waterfall investment- we have not received 1 penny of regular income on that 👏
Treviño: But your plan is to..
Yates: Yeah, when it does start to produce a cash flow

That “when” is more of a “Waiting for Godot” when. Meanwhile, the syndicators receive their smorgasbord of fees on a de-risked deal, and when the property locks in long-term financing through HFC-issued muni bonds, the syndicator also earns a promote 😍 embedded in the junior tranche of the bond. Not a bad day’s work.

BTW, state lawmakers have caught wind of a lot of this (prob not the muni bond magic tho) and Bettencourt is chomping at the bit to do away w/ the traveling HFC loophole. However, here’s the beauty: The Texas Legislature only meets in regular session on the second Tuesday in January of each odd-numbered year. Which means: the party’s on until at least next June. 🎉 

We’ll be doing a lot more on this topic in upcoming eds. Stay tuned.

Pretty Boy Takes Manhattan 🥊 

The undisputed master of the Philly shell just made one of the blockbuster New York deals of the year: Floyd “Pretty Boy” Mayweather Jr. is in contract to buy an affordable housing portfolio from Josh Gotlib’s Black Spruce for $402M, per TRD. The Upper Manhattan-focused spread includes 1K units across 60+ buildings, and Mayweather told the publication that the deal “holds deep emotional significance for me and my family,” noting that he lived “seven deep” in a 1-bed in Brunswick, NJ as a kid. Gotlib amassed the units as part of a pandemic-era acquisition spree that saw him become 1 of New York’s biggest MF landlords.

Mayweather has stepped into the Manhattan ring before: He has been investing alongside office behemoth SL Green, and even shouted out the REIT’s former prez Andrew Mathias in a ‘22 interview (right at the hour mark here).

Kush’s South Florida Push

It’s Kushner: The buyer of Aimco’s Hamilton tower in Miami’s Edgewater is the mighty family firm, per TRD, which is in contract to pay $190M ($690K/door) for the property. That’s a handsome pending profit for Aimco, which paid $90M for the 28-story tower as well as neighboring smaller properties in ‘20. The deal is part of a continued Kushner push into South Florida – the firm, now led by Laurent Morali and Nicole Kushner Meyer (Charlie is always looming) wrapped up construction of a 420-unit luxe rental at 2000 Biscayne (in a JV w/ PTM Partners) and is in contract to buy a Hollywood site (nearly 6 acres) near the Seminole Hard Rock Hotel & Casino. Meanwhile, it’s been divesting from its more exotic bets in Manhattan, including its East Village walk-up portfolio.

Quickies

• No good deed-in-lieu: TPG Angelo Gordon surrenders Chicago rental

• Rick Caruso’s retail giant wants to up its resi game 👔 

• Blue Owl (all over CRE) upsizes to 240K sf at RFR’s Seagram Building 🍟🥤 

• Alpaca puts pref into Hope Street’s luxe BK rental at $300M valuation 

• Gortikov pays $120M for Shekhter AH portfolio in Santa Monica - more on the unraveling of Shekhter’s empire here

• Fortress of Solitude: Charles Cohen (catch up on saga here) appeals $187M PG ruling 

• Irvine zones for 15K more homes over airport commission’s tantrums 🛫 

• For the first time since ‘12, private RE fundraising < $100B in Q1-Q3 

Unquotable Quotes

Programming note: Barring some skyline-bending news, The Promote is off this Friday. We’ll see you back here Monday 🍋