James (Jim) Simmons III, CEO & Managing Partner at Asland Capital Partners, joined us for an interview. We discussed his background, the mechanics of credit enhancement, and suggestions for how to increase affordable housing in the country.
Daily Beat: Can you share some of your background on how you got into affordable housing?
Jim Simmons: My mother likes to say that I’ve had three careers and that’s if you subtract out my academic career. I have two masters and spent a lot of time in school. I started off in engineering first and worked on Wall Street second. I was then involved in public policy at the Upper Manhattan Empowerment Zone, which led me to join the world of real estate.
I recognized that it’s really difficult to effectuate positive change on a community unless you control or can influence the real estate. When I looked at Harlem, Washington Heights, and Inwood between the 1960s and 1970s, I realized that the depopulation and disinvestment were mostly decisions made by individuals.
Similarly, by investing in assets and goods and services, you can rapidly change a neighborhood into a place where people do want to live and stay. These development decisions are generally speaking made by individuals, not institutions. The United States’ capitalistic society results in real estate being in the hands of individuals.
By positive change, I am not talking about the removal of pre-existing individuals, but what I mean is giving them high quality living existences just like anybody else has within the city. If someone who lives on the Upper West Side can expect to have a gym or a door person in their building, someone who lives in the Bronx should be able to expect those things too.
You just have to fashion ways to do it economically such that returns can be made or garnered and be acceptable to the investor base. They don’t have to be 20 plus IRR transactions, but they also can’t lose money.
As we’ve done these public private partnerships, we find the compromise between investment returns and the benefit. I am a firm believer that there’s a middle ground where you can generate acceptable returns, while also providing a benefit to the communities and individuals who live there both historically and prospectively.
Daily Beat: Asland Capital and Pembroke Residential recently landed a $100 million financing package to build a 154-unit project affordable senior housing development in the Bronx. Goldman Sachs’ Urban Investment Group provided a $67 million letter of credit for the development to credit-enhance the construction loan. Can you please speak to the origins of the project?
Jim Simmons: The building was previously a Mitchell Lama building and the project is a product of a ULURP that was approved in 2018.
There’s a critical shortage of affordable housing. The New York City Department of Housing Preservation and Development (HPD) has identified various programs to reduce the high costs associated with building affordable housing. High cost markets like New York are particularly difficult because you are subject to wage rules like Davis-Bacon.
Most of the Mitchell Lama vintage buildings have extra space surrounding the property. As everyone tries to look at where the next generation of affordable housing production will come from, developers are looking at existing assets and finding ways to use the underutilized part of the property. In this case, you had underutilized parking on both sides of the preexisting building.
More importantly, the existing Mitchell Lama was going to be eligible to exit the program in 2023. The affordability was therefore at risk of being lost. I went into HPD, which I had negotiated several prior regulatory agreements and preservation transactions with, to show how this was an opportunity to partner together. The idea was to preserve the affordable housing in the existing building and invest capital to make it sustainable over the next 40 years.
When you go through ULURP, the entire community has a voice, including all of the elected officials, many of whom I worked with previously. Deeply affordable housing for seniors was at the top of the list for the needs of the community, so that’s what got approved.
Daily Beat: Can you please describe the process of determining the best course of financing when putting together an affordable housing project?
Jim Simmons: There are only four or five levers to make a deal pencil out. You have the cost of land, supplies, and labor to build the property, in addition to the cost of financing, equity, and whatever subsidy is brought to the table. Once you put that in the pie, the equity return expectations must be at a place where all the other sources and uses add up. In this inflationary environment, the places that are now becoming more difficult are the cost of goods and services to build.
When the cost of steel, labor, and sheetrock goes up, that means that there must be a higher subsidy or higher rents. Fortunately, most of the guaranteed rent payments are set based on AMI with any increases based upon an economic formula tied to CPI. This works well as the increase reflects the cost to operate a building; however, increases that are subject to a political process are more challenging and may not end up covering the operational costs.
As long as the following factors are met; namely, coverage ratios on the debt are conservative, equity can get a commensurate return, and that through a process of Guaranteed Maximum Price with contractors, the building can get constructed and tenanted in a reasonable period of time, we can feel comfortable with a transaction.
Daily Beat: Dan Ulger from Goldman Sachs’ Urban Investment Group spoke with our team about the credit enhancement element of the deal with the Housing Finance Agency (HFA) bonds works. Can you please describe to our readers the precise mechanism that’s operating here?
Jim Simmons: The agency issues the bonds, which are either doubly or triply tax exempt. Those bonds get sold to institutions and individuals who want to enjoy a return. Those returns are set by the issuing agency, which in this instance was HFA. That’s a market based mechanism where they’re priced and investors can buy them.
The bonds are backed by the full faith and credit of the state of New York. The credit enhancement component deals with the risk from the time you close until the asset is stabilized. The property needs to be built and tenanted to demonstrate an operational alignment with the projections.
Daily Beat: Meaning, the credit enhancement is giving investors a comfort level?
Jim Simmons: Yes. Credit enhancement gives investors a level of comfort that a development will reach the point of stabilization where the risk is much lower. Once these assets are tenanted and you have some operational history, there is a very low likelihood of a risk of default. Historically, it’s less than 1%.
The credit enhancement is giving bond buyers the idea that there is strong financial backing and there are players at the table who are going to make sure the building gets built because they are on the hook just like the developers.
Psychologically, a bondholder is confident because they see a financial institution at the table that will make sure that whatever is broken gets fixed. Investors want to know that there’s a financial institution at the table that has deep pockets with skin in the game.
Daily Beat: So Goldman does not provide any funds in this arrangement.
Jim Simmons: That’s correct. It’s built on the full faith of the State that issues the bonds, Goldman Sachs, and the developers. This entire arrangement makes them comfortable and when they go out to sell the bonds, they can price them accordingly.
Daily Beat: So credit enhancement is the mechanism to reduce risk.
Jim Simmons: Correct: Not every municipality has pristine credit rates.
Daily Beat: What are your thoughts on Good Cause Eviction?
Jim Simmons: I’m not in favor of it. You cannot tell an owner that a tenant who won’t pay rent can retain legal ownership of the unit without recourse. In a scenario, where a tenant creates life, safety, and other issues for the other residents in the building, it would be difficult to remove them.
I believe that there are other mechanisms to determine whether an owner is harassing tenants to leave. There are obviously bad owners out there, but I fully believe that those are in the minority. My view is that as you go after the individuals who are doing the bad acts, as opposed to making broad reaching blanket statements or legislation affecting the industry writ large.
Daily Beat: Thoughts on 421-a?
Jim Simmons: It’s extremely difficult and expensive to build affordable housing, certainly for the lowest income individuals, but even the middle at 60% to 140% of AMI. The cost of dirt in New York City is expensive because in many instances it is backed into based upon profit margins of a condo or rental development. There has to be a program in place to incentivize developers to include affordable units in their projects.
I don’t know if 421-a is the best answer, but it’s the best one that we currently have. Maybe it needs to be tweaked and amended. People believe that it’s not good enough, but if there isn’t a viable incentive, developers are simply going to say that it’s easier to build condos like Billionaire’s Row and be done with it.
Daily Beat: Should the type of financing mechanisms unique to affordable housing be expanded to higher income thresholds?
Jim Simmons: I view all big problems the same way. If there are a bunch of smart people at- tacking it, you can come up with multiple ways to solve them. If you look at COVID, we have three separate vaccines and now have a couple of pills. There was not one right answer – there were multiple right answers.
I believe that people should focus on coming up with the best ideas and then take the best ones and do a pilot and act accordingly based on the 30 results. If they all work, let’s do them all and If only one works, let’s do one.
It is solvable. The private sector is putting people in space. We can solve this problem. It just takes people thinking outside of the box and it takes the government to accept that. People can’t object to doing it a new way simply because it hasn’t been done that way historically.
If that’s the case, COVID would have been much more severe. It took a lot of smart people to say that this is my expertise and here’s how I think I can solve it. The government, private sector, and society funded it to see if it can be solved. Once you arrive at a solution, everyone will follow that path, but it started with trials.
*The interview has been edited and condensed for clarity.