Talking Heads: Ken Lore, Katten Muchin Rosenman
By Darryl Hicks
9 min read
Over his career, Ken Lore has advised some of the nation’s largest real estate owners, developers and financial institutions, and distinguished himself as a top legal mind in affordable housing. As a young attorney, he was mentored by one of the most revered housing advocates of the past 60 years, Phil Brownstein, who served as the first assistant secretary for housing/federal housing administration commissioner under Presidents John F. Kennedy and Lyndon B. Johnson.
Among his achievements, Lore helped draft the Low Income Housing Tax Credit provisions of the Internal Revenue Code (Section 42) and continues to advise and represent investors and other clients on all aspects of LIHTC and New Markets Tax Credits.
In 2014, Lore joined the law firm of Katten Muchin Rosenman where he oversees the firm’s east coast real estate practice and serves on the board of directors. Lore lives in Washington, DC, and also has an office in New York City where he works on projects that are being developed under many structures, including through the city’s ambitious Housing New York Initiative.
Tax Credit Advisor sat down with Lore to talk about the current state of the business and how he sees the political landscape impacting future deals.
Tax Credit Advisor: Everybody is talking about tax reform and budget cuts. How has this impacted your projects and what do you think will ultimately happen?
Ken Lore: The uncertainties around tax reform and proposed cuts to the HUD budget are significantly impacting affordable housing deals. Investors are smart enough to figure out solutions to these impediments so they can continue to do business and price credits appropriately.The uncertainty is slowing things down and requiring people to think through issues differently. But as a general matter, it’s also giving the marketplace an opportunity to make various adjustments. LIHTC transactions are still being done in this interim period, but prices are lower and take into account the risk of tax reform that could reduce the value of the depreciation portion of the investment and the reduced tax rates that make the depreciation and other losses less valuable. Investors are taking different approaches.
TCA: What approaches are investors taking?
KL: The more common approach is that investors are assuming corporate tax rates will go down to 20 percent or 25 percent and they are adjusting the pricing accordingly. The general view is that for every one percent decline in the corporate rate, the pricing for tax credits drops by about a percent. The next question is whether an upward adjustment is available. Investors take different views. Some investors assume that 25 percent will be the new corporate tax rate and will take the risk that corporate tax rates go lower. Other investors are willing, particularly with strong guarantors, to provide the ability to have upward adjustors in some cases. This uncertainty makes it more difficult for projects to proceed, particularly 100 percent affordable transactions where the question becomes how are you going to fill the gap that used to be filled with higher tax credit pricing. Tax credit pricing, without adjusting for tax reform risk, has been at all-time highs. Affordable transactions are seeing prices as high as $1.18 in some parts of the country before adjustments for tax reform risk. Transactions used to get done with much lower pricing. Unfortunately, costs have also gone up and developers, credit issuers and bond issuers are struggling to bridge the gap.
TCA: How do we bridge the funding gaps?
KL: Some housing agencies have been willing and able to fill gaps with grants or soft loans from various sources. Other housing agencies do not have access to soft financing; that obviously makes it more difficult or impossible to do deals. Costs may have to come down, and developers and others are trying to figure out how to do that. The proposed federal budget cuts have also created great uncertainty. HUD funds that are often used by local housing agencies to bridge financing gaps are being zeroed out or dramatically cut. Many on Capitol Hill have taken the view that the Trump Administration’s HUD proposed budget has greater cuts than are warranted. We will have to watch closely and see how that washes out. All this uncertainty makes it that much more difficult to plan for 2018. The result is that transactions are moving at a slower pace in the underwriting stages. Some will just not get done.
TCA: You spend a lot of time in New York City. I’m sure our readers would be interested in getting your perspectives on Mayor Bill de Blasio’s Housing New York Initiative and what opportunities exist for developers?
KL: I am working on many projects. The city is making projects viable in a number of ways. On one I am working on, the city is making available a large tract of land in an attractive area of Queens for one dollar. The quid pro quo is that the developer will construct two large buildings that have 20 percent affordable at tax credit rents, while two-thirds of the project will be either affordable or workforce housing at 135 percent or 165 percent of area median income. One-third of the units will be market. The city is also providing low-interest rate loans to ensure these project financings are feasible. It’s a combination of tax-exempt bonds and tax credits on the low-income units, assistance on the land acquisition, and large soft low-interest loans. This is a dramatic example of ways in which the city is helping to create affordable and workforce housing.
In addition, New York City is providing significant real estate tax abatements. This is a particularly big deal in New York because real estate taxes on rental housing are very high. The tax abatement program, known as 421-a, expired two years ago. As a result of a complicated political process successfully engineered by the governor, there is a brand new, and enhanced, real estate tax abatement program that provides full tax abatement for up to 35 years on qualified projects and for lesser periods of time depending on the locations and nature of the project. It is a combination of all of these tools and resources New York is utilizing to meet its goal of creating 200,000 new units of affordable housing. It’s a lot of work. City officials are doing a good job in a difficult effort. They clearly understand that to create affordable housing and workforce housing the government needs to be a partner. So lots of things are happening in New York.
TCA: What advice would you give to a developer who is looking for new business opportunities and may be eyeing New York, but is not currently active there?
KL: The best way to get involved in New York is to co-venture with people who are there now and hire legal counsel who know the state’s affordable housing programs inside and out and have the relationships with city and state agencies.
TCA: You’ve worked in Washington, DC for many decades and know your way around political circles. How do you see the affordable housing business changing under the Trump Administration over the next four to eight years.
KL: It’s hard to say how it will change. It depends on what happens in Congress. If Congress reduces the value of the LIHTC, either directly or indirectly, it will result in less affordable housing being built unless states and localities can pick up the slack. In my opinion, neither the tax changes nor the changes to the HUD budget will be as bad as currently proposed by the Trump Administration, because I don’t think Congress will adopt those suggestions in whole.
TCA: Congress is just as dysfunctional as ever, but at the same time, I don’t think the congressional leadership and administration will give up on tax reform or reducing government spending. What do think?
KL: It’s fair to assume that some changes will be adopted and the resources to create affordable housing will be stretched. We are going to have to come up with better ways to be more efficient and to find new funding sources from state and local governments. As a political matter, the budget is critically important for some people. For others, it is tax reform and for most it is both.
There is another segment of the population who believe the very fabric of our society is affected by how we house our residents, especially those who are economically challenged. Where the pendulum swings is unclear. Under the Trump Administration, the balance is clearly swinging in the wrong direction for affordable housing.
Hopefully there will be enough support at the state and local governments, and within Congress, to maintain a rigorous and continued effort to not only build new affordable housing, but to maintain what we now have; that we not only keep it, but ensure that the buildings are maintained. There is always hope and 2018.
What happens with healthcare is going to have an impact upon those who need affordable housing; all of these economic issues are interrelated. If you support affordable housing and workforce housing, then it’s important that you express these views to your senators and representatives, at the federal, state and local levels. The squeaky wheel gets the grease. It’s important that your elected officials understand the importance of these issues in their communities, that they see what has been built in their districts, and that they attend the ribbon cuttings.
TCA: What advice can you give to our readers, who may desire to become more politically active?
KL: The critical step is to be continually active–don’t just call once. Develop relationships with your elected representatives in your localities, state and in Congress. Send them emails. Write to them. Go visit them. Have them visit your projects. Let them know the good things, let them know the problems and be productive in helping them find ways to solve problems. Don’t assume public officials know as much as you do, or that they are as motivated as you are. It’s your responsibility to show them the benefits to society and perhaps more importantly to their own self-interests to promote community development and housing activities. Don’t sit back and expect that somebody else is going to do the difficult work.
Story Contact:
Ken Lore, Partner – Head of RE for East Coast
Katten Muchin Rosenman LLP
[email protected]
