Traveling HFC Rodeos & Lennar's Land Over Fist

The Traveling HFC Rodeo

“Only the little people pay taxes.” - Leona Helmsley

Summer-camp romances are the most intense one can have. The knowledge that this will soon be over, that the cocoon of sweet nothings will soon break and you’ll be back to your humdrum life in the city, makes each day under the stars worth savoring.

So to it is in the Texas multifamily game. The clock is ticking on a spectacularly controversial property tax-absolving vehicle known as traveling Housing Finance Corporations, w/ the state legislature expected to take a hard stance on the practice in its June session. Until then, though, there are deals to be done, and money to be made, particularly for the cottage industry of lawyers & consultants who’ve sprung up to guide syndicators through the HFC process. The avenues to do so, however, are closing fast: In Nov., The Promote revealed that Freddie Mac stopped quoting new deals for traveling HFCs, a move that sent syndicators rushing to score CMBS financing. CMBS originators, though, have mostly shied away from funding such deals, per sources, because they’re unable to find B-piece buyers to shoulder their burden.

So where does that leave us? Loan mods.

HFCs (Cont.)

Here’s what used to happen: a sponsor would get what’s known as a “predetermination letter” from the taxing jurisdiction, guaranteeing them the property-tax exemption. This document made financing the deal a breeze, as a lender had confidence that the numbers would pencil out. More recently though, these letters are hard to come by – there’s too much regulatory uncertainty and headline risk – the Houston Chronicle just did a deep dive on the situation in Harris County that’s worth reading.

So over the past couple months, there’s been a scramble to reach out to existing lenders and convince them to agree to an equitable title structure, i.e. moving deals from a fee-simple deal to a ground-lease structure compatible w/ HFCs. The lender isn’t being asked to kick in additional financing and it potentially boosts their odds of getting paid back, so they’re often good w/ it; for the syndicator, it sets the deal up to potentially avail of a traveling HFC exemption (i.e. zero property taxes) if and when the regulatory dust settles. If, let’s say, the deal does get the exemption, it can be a major boon to NOI, and so-called “dogshit deals” suddenly become a lot sweeter – a property that’s not even covering its debt service could be turned into one that’s making money. 🐕️ 

“These are deals that should have died,” said one source active in the market. Instead, buoyed by consultants (Matt Avital’s IH Advisors is making it 🌧️ , per insiders), debt brokers (Newmark’s Purvesh Gosalia – a former Freddie guy) and a coterie of lawyers, they are being resurrected. 💼 We also just heard that Pecos County (pop: 15K) is ramping up its HFC engine, hiring attorneys in the major TX markets and courting mortgage brokers to send deals their way. With Texas AG Ken Paxton expected to take a stance on traveling HFCs in early ‘25, and the crucial legislative session wrapping up in June, everyone’s soaking up the romance while they can. 🌆 

Lennar’s Land Over Fist

“Why, land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for, because it’s the only thing that lasts.” - Gerald O’ Hara, Gone With the Wind 

Lennar is moving to spin the bulk of its land holdings into a separate vehicle for which it’s seeking REIT status. The new entity, Millrose Properties, will be seeded w/ $1B in cash, $5-6B worth of land, and a homesite option purchase platform, per a regulatory filing. “We continue to remain focused on our volume-based strategy of driving sales and cash flow while using margin as a shock absorber as we continue to migrate to an asset-light, land-light business model,” Lennar said. Millrose will acquire dirt and become a vendor of prepped development sites; its first client will be Lennar, but it may eventually branch out to other players. Goldman Sachs-backed Kennedy Lewis will manage Millrose post-spinoff, and Millrose will use $900M of its new funds to buy land from new Lennar homebuilder subsidiary Rausch Coleman.

It’s a tasty bit o’ financial engineering that reminded longtime Lennarheads (massive h/t @dtmorgan18) of 2 marquee GFC-era transactions: MSR & Newhall Ranch. In ‘07, Lennar sold 11K sites to a JV it struck w/ Morgan Stanley for less than half of book value; it also scored options to buy the properties back at a pre-determined price. And in a deal w/ Calpers (why is it always poor Calpers getting rocked), Lennar sold a controlling interest in a 15K-acre development to the pension fund for $970M – again w/ first dibs rights – only to buy it back in a new JV for a fat discount 2Y later. 🏑 

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Schreiber: Dealmaking > Reading

No equity, no problem. Waterbridge’s Joel Schreiber, who’s being pursued for $80M+ in PGs ( 😉 Kenny) by Starwood over one of his DTLA megadeals, broke his silence over another convoluted transaction in the neighborhood. In a recent deposition (h/t TRD), Schreiber discussed (in his own way) his dealmaking at Union Bank Plaza, which he bought for $104M last year, sold for $80M this year to Southwest Carpenters Pension Trust 🪓 , but somehow still made money on.

The secret? Schreiber had no equity in the deal, he said; instead, he made a property-management fee. And even though he agreed to a PG on the property’s mezz debt, he said the lender didn’t care that he had no funds to honor it. His plan, he said, was to go into contract to buy the property ($150/foot-ish) from KBS, and then flip the contract (pretty standard MO for Schreiber). However, he was forced to close after being unable to find someone to assume the deal, he said. He then financed it w/ $70M in bridge debt from Hankey 🚗 (big player in this high-risk, high-reward space in CA) as well as mezz from BH Properties, per TRD. When Starwood’s attorney mentioned that the loan docs Schreiber signed showed that the borrower would make a direct/indirect benefit from the loan, Schreiber declared: “I’ll be honest — I didn’t read that.” 🐐 

CoStar’s Mile-High Club

Quickies

• 📽️ Rialto to Signature borrowers: There’s a new sheriff in town 👮

• Great Neck strivers back at it: Rahmani, Khalili team up w/ self-storage investor to buy W. Chelsea office @ fat discount (more on the lads here) 🧣

• Lesser/Greater: JLL spars w/ ex-rainmaker over forgivable loan 

• U.S. Senators launch probe into shuttered sale-leaseback startup EasyKnock (timeline of 🗑️ 🔥 here)

• Also: Why did EasyKnock CEO Jarred Kessler put a bunch of nonsense atop his LinkedIn? His company affiliation is buried deep now 🔮 

Unquotable Quotes