The Day After Tomorrow: A Traveling HFC Post-Mortem

We were taxiing down the runway when my phone started lighting up. “It’s done.” “Signed.” “It got signed?” Developers, debt brokers, attorneys, and even just the professionally nosy, reaching out to confirm the multifamily industry’s worst fears had come true: Gov. Greg Abbott had signed HB21, the nuclear bill that sought to not merely kill Traveling HFCs but also retroactively smack them around, into law.

“Fucking hot wheels,” one insider who’s worked on dozens of such deals wrote, just as we lifted off. I had to wait 10,000 feet for the rest. ✈️ 

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HFCs (Cont.)

The Promote has been ALL over what we think of as the mother of all property-tax loopholes, one that became a lifeline for horrible Texas multifamily deals, a sweetener for good deals, a cash cow for a cottage industry of consultants & attorneys, and a politically radioactive vehicle that had lawmakers baying for blood – understandable, as Traveling HFCs provided v little new affordable housing while permanently pillaging the tax rolls. (If you’re new to these pages or need a refresher, start here, then here, then here, and finally here, and def. check out the deep dive in the pod here.) For today though, let’s get right into the immediate rxns. to and concerns about this new law – primarily, its retroactive (practically if not explicitly) component. ⏪️ 

• Rent reductions even on deals that were locally approved must now be ≥ 50% of property tax savings (the math on how you get there is NOT straightforward) and deals are subject to annual audits. This yearly cavity search is going to stymie lending. “Vagueness doesn’t work for lenders & equity,” said John Drachman, whose Waterford Property has done local HFC deals. Some of Drachman’s deals, as well as those of other sponsors who used local HFCs, may no longer pencil – part of why those who’ve used the local program are among the fiercest critics of the Traveling loophole is that they knew the backlash from the latter might eventually hurt them too.

• Traveling HFC deals are completely toast. Debt brokers who’ve been making it rain over the past year-and-a-half by scoring loan mods for sponsors through HFC structures are stoic about it – “Well brother, they’re all so fucked basis wise it probs doesn’t matter lol,” one said of his clients. Irate syndicators, though, have taken to LI to voice their feelings. TriArc’s Joseph Bramante called HB21 “so unTexan” 🤠 and warned that a legal firestorm was coming. (It is a fact that Article 1, Sec. 16 of the Texas Constitution explicitly forbids retroactive laws.) Bramante railed about affordable housing in his post; left unsaid was that the vast majority of Traveling HFC deals usually don’t actually create/preserve more AH, as the max. rent threshold is often HIGHER than the current market rent. For a sense of the properties that have tapped into the program, check out this list that was shared w/ The Promote in Jan. 👇️ 

• Agency & CMBS: Here’s where it gets REALLY interesting: Both Freddie & CMBS had thrown in clauses in loan docs re. the Traveling HFC exemption whereby if a deal lost its exemption, the debt would go from non-recourse ( 😍 ) to recourse ( 😭). Which means, a bevy of fee-YOLO sponsors who were on the hook for nothing more than their swampy-pool buildings may now be on the hook for a lot more than that. (More on how lenders pursue recourse guarantees here & in the pod here.) Loans also have certain LTV requirements, and with the V in such deals getting nuked, sponsors may be asked to kick in add’l equity to maintain the ratios – not too many will care to do it. (There are also concerns about what prepayments might do to loans’ REMIC status, but that’s for another time)

• Broader fallout: The American way is to milk a loophole for all it’s worth, see lawmakers eventually wise to it and close it, and move on to the next one. What HB21 does, though, is put that maxim at risk. It casts a pall over housing incentive programs not just in Texas, but nationwide 🇺🇸 How can a sponsor feel comfortable jumping into a deal if the legal rug could be pulled from underneath them down the road? How can a lender commit capital if the numbers on a deal they’re funding are changed willy-nilly? This seems to be the biggest takeaway among insiders here – Traveling HFCs were a scheme, everyone knew they were a scheme, and now they’re gone – fair dinkum. But clawing incentives back – no matter how ghoulish they were to begin with – might be even worse.

  PSA: This week’s edition of The Promote Podcast, feat. Texas’ own Barrett Linburg, is essential listening on the Traveling HFC program. Check it out 👇️ or on Spotify & Apple.

Nuveen’s American Nightmare

The Ghermezian family’s American Dream Mall, a 3.5M sf NJ development boondoggle of Chris Christiean proportions, is again testing the pain tolerance of bondholders. The mall’s most recent valuation is $2.5B, per its latest posted tax bill, a drop of $800M from its previous appraisal. Which means, the Ghermezians’ annual PILOT payments to muni bondholders will now be just $36.5M - well under the $54.1M in annual interest they’re owed, per Bloomberg. Bond trustees can tap into reserves to make up the difference, but if the mall value keeps dropping, those funds will soon run dry and they may not be paid back. “It seems increasingly likely that full principal will not be repaid on the bonds,” muni bond analyst Lisa Washburn told the publication. The $800M PILOT debt on the project is part of a $1.1B tax-exempt muni bond financing package; Nuveen, which manages money for retirees (parent is TIAA), holds nearly $700M of it.

Gross sales at the mall were $650M in ‘24, up 18% YoY but a ways away from initial projections of $2B. The Ghermezians, of Triple Five Group, have routinely appealed their property-tax bills, citing the pandemic. In an extraordinary confession in March, East Rutherford mayor Jeffrey Lahullier admitted he had no leverage in talks w/ the Persian retail princes. “If I sue them for taxes and I end up with it,” he said, “what am I gonna do with it?” 🛝 5️⃣5️⃣5️⃣

Pinnacle Blames the Rate Reaper 👿 

We dove into the carnage in New York’s rent-stabilized market last Friday, breaking down a couple of headline cases & the maverick bargain-hunting amid it all. One of the protagonists of those cases has now come out and put the blame for his troubles on the floating-rate reaper ™️: Joel Wiener’s Pinnacle Group, which put a 5K-unit portfolio into bankruptcy this month to stave off lender NYCB/Flagstar, says “sky-rocketed” rates (from 3-4% to 7.5-10.5%) and the ‘19 rent reforms put it in an untenable situation. The debt service, according to restructuring docs viewed by Bloomberg, jumped from $26M in ‘23 to $36M last year, and is headed for another increase.

Here’s the 🌶️ bit: On top of the $564M debt from NYCB, Pinnacle had raised money for the portfolio on the TASE bond market, which means the total debt on the portfolio was $1B. Flagstar is arguing that instead of using rent to pay down its loan, Pinnacle may have funneled it to satisfy its Israeli obligations. “No one knows where the rental income went,” Flagstar said in court papers, “but it did not go to pay the lenders and appears to have been consolidated to pay bondholders.” 🥛 🍯 

PS: Next week’s pod gets even deeper into the RS market woes, but don’t worry, we balance it out by talking about the exuberance in data centers. Subscribe now on Apple or Spotify to get it fresh. 🎙️ 

Quickies

• Swire sells office supertall site in Brickell to Melo for $200M+

• Council approves rezoning of BK’s Atlantic Ave, permits 4,600 homes 👏 

• HPP’s Victor Coleman’s total comp nearly triples to $24.8M - despite far from stellar year for REIT - it lost $364M 🤷‍♀️

• InterVest seeks $850M construction loan for 111 Wall office-resi 

• After $25M cut bait payment 4Y ago, Coinbase falls back in 💗 w/ SF: Takes 150K sf at Tishman Speyer’s Mission Rock complex

• SomeraRoad buys BK Heights’ Hotel Bossert – a former Chetrit joint – for $100M, plans resi conversion 

• After sudden Greystone exit, Shaya Ackerman once again flying own flag 

• 🗣️ DMs lighting up w/ word of drama @ Merchants Bank (Indiana) - what gives

• FYI for CushWake readers: Your IT overlords have blocked the newsletter (trying to get it sorted). So if you want access to the latest CRE juice, we suggest signing up w/ your personal email for now 💾 

• Are these Knicks courtside tix on a ground lease? 🏀 

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