Talking Heads: Alan Jaffe Managing Director – Head of Public Finance Housing, Real Estate and Project Finance, Jefferies LLC
By Darryl Hicks
7 min read
An increasing number of states are recognizing the value of multifamily private activity bonds as a critical source of financing for affordable housing, and some of them are utilizing very innovative strategies to help stretch these resources.
Alan Jaffe is at the forefront of these efforts. Jaffe is managing director and head of the Public Finance Housing, Real Estate, and Project Finance Group at Jefferies, the largest independent investment bank in the United States. Jefferies is also a 50 percent owner of Berkadia, a market leading multifamily and commercial lender, investment sales provider and tax credit syndicator.
Over his 20-year career, Jaffe has worked with government-sponsored enterprises (GSEs), developers and state and local Housing Finance Agencies (HFAs) across the country on numerous multifamily financing structures and strategies, as well as single family financing initiatives, military housing, student housing and tax increment real estate transactions. He has led over $40 billion in debt financings across these various sectors, pioneering a number of industry firsts, including several volume-cap leveraging strategies.
Tax Credit Advisor sat down with Jaffe to discuss how states are overcoming multifamily volume cap constraints and other important trends in the bond markets.
[Note that in the following Q&A Alan Jaffe is not acting as a “municipal advisor” as that term is defined by Section 15B of the Securities Exchange Act and is not providing any advice under that Act.]
Tax Credit Advisor: I understand that some state Housing Finance Agencies have developed new ways to stretch their multifamily private activity bond volume cap. Please discuss these strategies with our readers.
Alan Jaffe: I believe the biggest change is a more national focus on the issue. For a few years now, states like New York, Colorado, Washington and Massachusetts have been dealing with volume cap constraints, but in late 2019 and early 2020 we saw several other states join the list and others began to realize that they are on the precipice of the issue. As a result, there is a greater focus on multifamily volume cap recycling, as well as tax-exempt/taxable blending for single family transactions that has become more viable given the increased demand for taxable municipal debt in the marketplace. Bifurcating 80/20s, multifamily volume cap recycling paired with minimum (53 percent) basis funding, single family blending and recycling – these are all known strategies at this point. Over the last several years, these approaches have been used in spots around the country. The biggest change today is that they are being used much more broadly in many states.
Single family issuers in particular have been really aggressive in creating multiple execution channels for their lending programs, several of which don’t involve bonds, thereby making more available for multifamily. These tools are now proving that much more critical given the relative inefficiency of the municipal market compared to Agency MBS. The most recent innovations being discussed relate to multifamily recycling between multiple issuers. In states where four percent transactions are spread among many issuers, utilizing recycling programs as they stand today based on IRS requirements can be problematic and we have been speaking with a number of clients regarding how to create working programs across multiple issuers. It will take coordination but the recipe is there.
TCA: Which of these strategies do you find has been most impactful and why?
AJ: All of the above have been quite effective, with some, such as bifurcated 80/20s, being more impactful in certain states. Without a doubt, single family issuers have made a huge difference by being able to fund loans through the mortgage markets and with blending, thereby making more volume cap available for multifamily. For multifamily directly, those states that moved to a 53 percent of basis allocation approach early have reaped the greatest benefits in delaying the scarcity point.
TCA: Some of our readers work in states that haven’t yet adopted these strategies. How could more states be encouraged to adopt such strategies?
AJ: The biggest difference maker is being proactive and anticipating the challenge before you are in the thick of it. Typically by the time the issue hits, it can take a while to put strategies in place to manage the problem. That could involve taxable/tax-exempt blending of single family bond financings even before scarcity hits to essentially delay the onset. On the multifamily side, moving to a 53 percent or so allocation of basis ASAP is the first step for the same delayed onset reason. Along with that, setting up recycling programs and related logistical steps is the other critical point, for both single-family and multifamily. Multifamily in particular can be challenging given IRS constraints, so being able to launch it early is important to having an impact.
TCA: What other legislative or regulatory relief would you like to see adopted by regulators or Congress this year or next to increase liquidity for bond deals?
AJ: The need for this is greater than ever today. In the near term, a key will be the Fed’s program for purchasing longer-term municipal debt, which will be the first time that its toolkit will provide direct municipal market support during my career. It’s challenging given how fragmented the municipal market is but the potential for a huge difference making move is there. Having municipals categorized as Level 2A assets for Liquidity Coverage Ratio calculation purposes will be extremely helpful in bringing banks back to the market in size. Municipal market participants and issuers have been pursuing this agenda with regulators for a long time. Given the recent market dislocations, the HFA community is looking at bringing back the Federal Financing Bank funding program for FHA Risk-Share multifamily loans and there is talk of reopening the New Issue Bond Purchase Program. Since both have existed in the not too distant past, the hope is that they could be relatively manageable to restart once again. And finally, given the prospective needs for affordable housing as we come out of the pandemic-related economic slowdown, it would certainly be helpful to get the Affordable Housing Credit Improvement Act enacted into law given the benefits to Low Income Housing Tax Credit (LIHTC) values and the improved multifamily recycling provisions that have also been floated.
TCA: What would you tell someone who’s looking to market bonds during these unstable times?
AJ: Make sure you have a flexible team that can respond to changes and has a broad and unbiased set of capabilities to get a deal done in any environment and in any market. Having the right partners can make all the difference in being able to anticipate the right path and get things done. It is also prudent right now to make sure that a specific transaction works under a number of financing outcomes, so modeling those and being able to close gaps may be key. The good news is that the affordable housing finance industry is creative and a true community so good and executable ideas travel fast.
TCA: What long-term financial impacts do you foresee for the affordable housing market as a result of the COVID-19 pandemic?
AJ: I think it is too early to tell but seems fairly certain that there will be some lasting impacts. We are already seeing a very different trajectory for Section 8 properties versus non-Section 8 LIHTC. Compared to other municipal revenue credits, standalone real estate transactions tend to have smaller cash reserves, which is proving to be critical right now – bridging the hopefully short-to-medium term liquidity needs. That could result in a permanent increase to reserve requirements for transactions. The GSEs are already moving in that direction. The lasting impacts will really depend on how long the challenges related to the pandemic continue and how quickly communities and economies can begin to recover.
TCA: Is there anything important that I didn’t ask that you would like to share with our readers?
AJ: In challenging times, sometimes people’s instincts are to retreat to their respective points of view and priorities. This is true whether the challenge is volume cap scarcity or a global pandemic. At the end of the day, the opportunities to succeed will be much greater if all stakeholders, public and private, are prepared to give a little to generate large scale solutions that keep everyone’s mission of growing affordable housing moving forward.
