REITS Affordable Housing

Real Estate Investment Trusts

Corporation set up to own or finance real estate

Resembles a corporation & issues stock, commercial paper & borrows from banks

Purchases real estate such as: offices, shopping centers, apartments, healthcare, industrial real estate, hotels

REITs stocks became attractive to those who wanted to invest in real estate but did not want the illiquidity of real estate investments

mutual fund of real estate

REIT Structure

Be managed by a board of directors of trustees

have no more than 50% of shares held by 5 or fewer individuals during the last half of the taxable year

Invest at least 75% of its total assets in real estate assets

Drives at least 75% of its gross income from rents on real estate property or interest on mortgages on real property

Pay annually at least 90% of its taxable income in the form of shareholder dividends

REIT issues

Dividend income is derived from: commercial NOI, hotel EBITDA

REITs are not in the development business

REITs buy cashflow

Equity REIT

Provides equity ownership, makes money on income & capital gains

Debt REIT

Provides or buys debt, makes money on the interest

Hybrid REIT

Provides both debt & equity and earns money both ways

Affordable Housing

Person or household does not pay more than 30% of their gross income for rent or a mortgage

Few direct public initiatives to deliver affordable housing

In the 1970s the US shifted the strategy to the private sector

Publicly supported private initiatives

Section 8 rent subsidy

mortgage guarantees

low-cost (tax-exempt) mortgage4s

tax credits

down payment assistance

payment in lieu of taxes

Section 8 Housing Subsidy program

Largest federal program to provide direct housing assistance

Funding through the department of housing & urban development

annual appropriation

places the goal of providing housing for low & moderate income households directly on the private sector

Section 8 rent subsidy

goes with household

contract with landlord- 80% of median income rent- a cap

funded by federal government

Mortgage Guarantees (HUD)

Guarantees mortgage from private lender

Gets developer cheaper interest rate to lower costs

Section 221d(3): requires a % to be income qualified

Section 221d(4): market rate

Low cost tax-exempt mortgage

Normally bonds issued by states

re-loaned to developer

pass on lower interest cost to reduce project cost

higher loan/value ratio (90% vs 80%)

Tax credits

May be up to 10% of costs

helps developers get equity dollars to encourage participation

Combine with loan guarantee to maximize cost reduction

Down payment assistance

Program for homeowners

as much as $25k

Different options: forgive after 5 years, payback when home is sold

Payment in lieu of taxes (PILOT)

Replaces taxed to reduce monthly rent

% of taxes otherwise due

mandatory where federal or state mortgage assistance is provided. cities have no say

Asset backed securities

Marketable securities that are collaterally backed by real estate & other assets

These securities create a flow of fresh capital into the real estate markets

Mortgage & Asset Backed Security Types

Commercial mortgage-backed securities (CMBS)

Collateral mortgage obligation (CMO)

Asset backed security (ABS)

Commercial mortgage backed security

securities backed by commercial mortgages

pool of mortgages

two types of commercial mortgages by lenders: loans to be securitized (into CMBS) & portfolio loans-to be held by lender

Mortgages are the collateral

Normally issued in traunches

Purchasers are banks, hedge funds, pension funds, mutual funds

Tranches

Part of structured finance

Structured finance consists of a # of tranches

each tranch is a different class of notes

each tranch (or note) has or may have a different credit rating

Benefits of CMBS financing

Access to large capital pools

Fixed interest rates

Longer loan terms

Typical CMBS structure

Amortization: 25 years

Term: 5-10 years

No prepayment allowed

Nonrecourse

requires large reserve

Mortgage & asset backed securities process

Lender pools loans to be securitized into a package

lender creates a “trust”

trust issues bonds secured by the mortgage pool

Bonds are issued in tranches which carry: varying interest rates, variable maturity dates (call dates), variety of credit ratings, payment priorities

investors may buy one of the tranches

“waterfall”-sequence of payment: interest is paid based on seniority, principal out of balance

Considered “low risk” investment with low default rate & lots of mortgages

Collateralized mortgage obligation

residential mortgage-backed securities

sold in tranches: prime & sub-prime

each tranche has a credit rating

pumps money into residential home mortgage market

Process same as CMBS

Collateralized mortgage obligation risks

sensitive to interest rates- if rates go up security loses value

not true of reverse- if rates go down people may refinance & pay off early reducing interest earnings

Ginnie Mae

Chartered by federal government

1968 housing & community development act

guarantee MBS insured by fed agencies: FHA, veterans affairs, single family & multi-family, only guarantee, do not issue debt themselves

Fannie Mae

Purchase Fed insured residential mortgages & package into guaranteed MBS securities & sell to investors

Freddie Mac

Purchase non-fed insured mortgages

Filled vaccum in 1980s following the retreat of savings & loans (credit unions) & insurance companies

Asset Backed Security

Security backed by a pool of assets (not mortgages)

a vehicle for investing in a diversified portfolio

assets can be: auto loans, installment loans, student loans, accounts receivable

many tranches (different assets) in security

ABS process

ABC bank makes car loans

bank sells pool of car loans to XYZ capital

XYZ issues bonds secured by pool of car loans

XYZ makes money by: charging a fee, serve as trustee for fee