REIA 133 Fabiola Fleuranvil: Tax credit financing - using government subsidies to finance projects

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Hello, enlightened investors, and thank you for being with us today. I'm your host, Dr. Allen. I cannot wait to explore with our expert today Tax credit financing and how to use government subsidies to finance projects. Fabiola Florinville lives in 2 worlds as a CEO of Blueprint Creative Group, a marketing agency serving government clients, and as a real estate developer with her investment company at ICON Heritage Partners. Fabiola continues to expand the firm's portfolio of multifamily and commercial assets, The firm is currently developing a 138-unit affordable assisted living facility financed with low-income housing tax credits. So, Fabiola, share with us a memorable experience from your formative years that's helped you to be who you are today.

Hey, Allen, thanks for having me and allowing me to share on your platform. So I would say one of the fondest moments that I would say that that was a defining point of where I am today as a serial entrepreneur. I've always been an entrepreneur. You know, I have 2 degrees and I still never had a job, a real job, never went into corporate America. When I was in the 7th grade, my mother bought leftover Halloween candies. And I'm not a candy person, never really had a sweet tooth. So I took it to school. It was like a Snickers bag, one of the smaller packs. of Snickers, took it to school. I'm in the 7th grade, and I sold it in one day. I said, wow, that was easy. So when I told my mom, my mom said, well, you want to do it again? So she bought more bags. And eventually, I had like an enterprise in middle school. I was selling candy. I was selling chips. And I was probably making 3x what she paid for it. And obviously, she allowed me to keep the profit. She's not like, let me buy the supplies and you pay me back. So, but that was a defining moment for me because everyone came to know me as the chip and candy girl. And I was able to just make money. I don't even know what I need. I didn't need it, but I was just making money. I've always been a saver. So I was like building up and stacking up my savings at a very young age. And I clearly remember because my best friend at that age is still my best friend today. And she reminds me, she said, you said that you would never work for anyone. And that was in the 7th grade, and I have held up to that. And I would credit that being the defining moment that, even though I didn't really know that it was entrepreneurship in its nascent stage, but that really led me to understand how money works, right? How you build relationships with your customers and your clients, because I had regulars. Supply and demand, you know, like I, I knew what products Because I would see certain students on this day of the week. So I knew what products to buy because I would see them and I know that they liked them. So like, as I think about that now, and as I'm thinking through it, that really taught me like the basic economics of how business runs. And I would say that was a pivotal moment in me really understanding the value of entrepreneurship. Wow.

What an experience for a 7th grader. And it was fun and pleasurable. And at the same time—

Until the school stopped me. It started to create copycats. And they were like, okay, this is becoming a distraction. No one's selling anything anymore.

Oh, wow. Yeah. Well, government regulation, huh? So you learned about that at a young age as well.

I did.

Yeah. And how it can— well, government regulations can support, but they can also demolish a lot of work that we put together. But you have learned how to Let the government help you. And so I want to get into that, but first of all, tell us about this fascinating project you're involved in, in the 138-unit affordable assisted living facility that you are bringing together.

So as a correction, it's not the government helping. Tax credit is something that institutional investors use to their advantage. So what I'm building is 138 units of affordable assisted living. So the way tax credit works works, the federal government allocates each state a pro rata share of tax credits that will go towards supporting affordable housing development. And institutional investors from capital markets to, you know, your, your super wealthy, they buy these tax credits because it buys down their tax liability.

Mm-hmm.

And so the state, they sell these credits to these institutional investors in exchange for equity into— small piece of equity into the project. And now the state uses these tax credits to finance and fund affordable projects. So you can essentially use tax credits for 100% affordability or even a fraction. So if you see, for example, a high-rise in a downtown area— I'm in Miami, we see this a lot— super, you know, huge project, but when it says 20% affordable, That developer has tapped into tax credits, and that percentage of affordability is a share of the tax credits that they were able to be awarded that essentially is equity. So, for example, if it's a $25 million project— tax credits last for 10 years— if it's a $25 million project and you were awarded $1 million in tax credits, that's a $10 million award. Now you've essentially brought down your debt service from $25 million. to $15 million because that $10 million is pretty much equity that the government is putting into the deal. But part of the exchange is that you have to keep that project affordable between 15 to 30 years. So no market rate. So that's how you're able to see market rate developments and affordable mixes into that.

I see. Okay. Sounds complicated. So how do you get started with tax rate Low-income housing tax credits?

Well, I actually happened to purchase a really nice piece of property in Detroit. It was a former senior housing project. So at best, I figured it would be— I could redevelop it as senior housing again. And then just throughout a short period of time of just speaking with an operator who is in the space of affordable assisted living, you know, and then really seeing the market demand for senior housing, just because the demographic shift, the boomers of today are going to be the seniors that they're gonna need independent living, assisted living. And the reality is that assisted living is a buffer for the state between seniors who can no longer live independently. And instead of putting them in a nursing home, which costs the state 3 to 4 times more, you're able to put them in assisted living. Assisted living means that you can still live independently. You just may need some help with something, whether it's housekeeping, whether it's medication management, whether it's just help getting up.

Wow.

So you're living in a community of other seniors, in cities where you don't have a high inventory of assisted living, then a lot of times seniors end up in a nursing home when they really don't need to be in a nursing home. And that costs the government 3 to 5 times more versus had they been able to put them into an assisted living. So, I mean, over the past 5 to 7 years, the number of developments that have, you know, hit the pipeline around this entire country for senior housing, whether it be independent living, whether it be retirement communities, assisted living, that speaks to the demand. because, you know, we have this huge demographic shift over the next 15 to 20 years where we're going to have a much larger senior population and they're going to want to downsize. You know, that 2-story home, when you're 65 to 75, you don't want to keep walking up and down those stairs anymore. So you'd prefer to downsize. And so I tapped into a huge market demand. And in some communities, the demand is higher than others just because there's been so much overdevelopment in some communities, like in Florida and Miami. I mean, it's all over, right? Because we're 20% seniors. So I purchased a property that, you know, I figured it could be senior housing. And then as I started to really understand the assisted living landscape and that there was only one assisted living, affordable assisted living in Detroit, and the fact that I also understood, I learned how the affordability part works because assisted living is not an affordable product. It's really reserved for the senior who can self-pay $5,000 to $7,000 a month because they're getting 6 activities of daily living, 3 meals a day plus a snack, wellness activities, transport. They're getting a suite of services and it's not cheap. But the seniors of today, the boomers of today that are going to be seniors tomorrow, those pension funds are drying up, right? We don't, we don't have the industrialized seniors who have those big pension funds that could pay for that. So the affordability is a huge issue right now in assisted living. And what we are building is an assisted living facility that seniors can use their Medicaid waivers to subsidize the services. And whatever portion of the housing side they can't pay on their own, if they qualify for Section 8 vouchers, that can pay for it as well. So that alone covers, I don't even know what the data is, but I would say more than 30 to 40% of seniors who are in need of assisted living, because at that point, Especially the average age of seniors who are in assisted living, they're in their 70s. At that point, you know, they're probably down to like less than $2,000 in fixed income a month. So subsidizing it is the sweet spot of this development. So I tapped into low-income housing tax credits because it's already an affordable project just based off of the mechanics of the structure of it. So the tax credits have allowed me to really tap into the equity that I needed and reduce my debt We'll be right back after a brief announcement.

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Okay, so I'm going to nerd out a little bit.

Okay.

And explain this. So at the higher level, When the federal government allocates the tax credits to the state, investors purchase these tax credits because it buys down their tax liability. So like, and we're talking about institutional investors, right? So their tax liability is usually much larger than even the individual wealthy investor. So in exchange for buying these tax credits, there's a formula that reduces. So like, let's say if your annual tax liability is $5 million or whatever the case may be, there's a formula that would reduce that. So So you're— you've bought these tax credits for 10 years, essentially, because that's the equity timeframe as well. So you have the investor who has purchased the tax credits, and the state now is matching the tax credits with the developers. So it's a two-sided function. So the investor's purchase of these tax credits buys well, provides the equity that the developer needs in exchange for a 1% share. It's just a paper share, paper equity share into the deal. So it's not like they own the project, but just for mechanics, the investor owns 99% and the developer owns 1%, just on paper. So the developer now has to compete for these tax credits because there's only but so much that's awarded. And typically each state has 2 funding rounds per year. So there's a 4% bracket and a 9% bracket. Obviously you'll get more with 9%, and there's a formula that breaks down how much 9%, because it's based off of different things from the total hard cost of the project. If you're in a qualified census tract area, meaning lower income area, you get a points boost. So there's a formula that determines how much you get from the 9%. 4% is not competitive. So you can, you know, put in an application at the state for 4% at any time. 9% is competitive. So like in Michigan, where my project is, there's 2 rounds, spring and fall. So I'm actually pursuing the spring 2022 round, April 1st, and I'm competing with other projects as well. So like, let's say 100 projects submit for this spring round. There is a scoring process. We self-score and we get to—

Mm-hmm.

They, once they release the self- scores, we can compare and contrast. Do I move further and continue in this process based off of the other projects that have come down the line, or do I, you know, back out now and get a refund on the fees that is going to cost me to move forward? And that's essentially like in a nutshell how it works. The projects that do move forward, now there is an evaluation period and the credits are awarded to the most competitive projects, the projects that meet current market demand, projects that have viability. And, you know, and every state has its own QAP, Qualified Plan, so they all have different criteria. So it's a very interesting process. It's a lengthy process. You start working on your application like 7, 8 months prior. That's how lengthy it is. So my team and I, we've been working on the application, on the architectural stuff that's going to be needed for it. So it's interesting, but it just shows you how a lot of projects can tap into that. So you might have needed $25 million. My project is $25 million. I might have— I would have needed a $25 million loan, right, to finance the construction of it. If I'm awarded, I can probably buy down that $25 million to probably less than half of that in debt because I have the equity from the tax credits, and then the remaining I can get, you know, a soft loan or, you know, other types of loan from the state or even in the private market. So it makes your project cheaper.

Okay.

But the exchange is that I'm not able to charge market rent. So let's say market rent for your particular city would be $1,500 for a 1/1, and the affordability is based off of HUD guidelines. So HUD may say a 1-bedroom for someone at 60% of the average median income, because that's the bar. So you have to price out your units for 60% or less. So let's say HUD says the, the guideline at the 60% level is $800 a month. You can't charge more than $800. I'm foregoing that difference between the market rent of $1,500 and the $800 that HUD says is a max. And that's why it remains affordable to the residents, but to the developer, you're losing that $700 in market potential, but there are developer fees that you've made that kind of, you know, Yeah, very complicated process, but could be very worthwhile if your numbers and everything work out. Which is why volume is important, because if you have a 300-unit development, right, you have volume economies of scale, so it works out better versus imagine doing this for a 20-unit.

Yeah, yeah, it would be challenging indeed. So I'm, I'm thinking of rural communities that also need these facilities.

Oh, absolutely. And there are probably different communities depending on the state, have different point boosts. So if you're developing, for example, permanent supportive housing, if you're developing housing for homeless people, that gives you an advantage when you're doing tax credits. Housing in rural communities, that gives you an advantage.

Oh.

Even now, there's a category in Michigan for senior housing. So when you're doing like specialized housing, there's like even more advantages. But I can tell you a lot of the Biggest developers, like here in Miami, one of the largest developers is Related Group. They have really gotten to that point because of affordable housing development projects. So it's a huge— so even though it sounds like you're taking a discount off of being able to develop market-rate properties, it's a huge industry, very lucrative when you can really tap into it.

Yeah, I could see how it could be once you really learn the process. And I would think it is not, it's not a process you're going to go through once. It's just too time-consuming not to replicate it once you have that process down. So I'm sure that you're going to be doing this time and time again. It just doesn't make sense. But I know in our little rural community here, we have actually 3 nursing homes that serve about a population of about 30,000 people. That's way below what we need. And yet I don't see any developments going on in conjunction with satisfying that particular need. And I suspect that that's going to be true throughout rural America, is my— I suspect.

Yeah, yeah, absolutely.

So you focus on this high-growth sector of senior housing.

No, that's not the sector that I focus on.

That's your focus. Okay.

So I'm an investor, I'm a developer, right? So my primary sector is the multifamily space. So at the core, this is still housing. It's multifamily, it's 138 units, right? It's more so about what's the highest and best use and how do you position a project. So I structured the deal this way and took advantage of this just because it was just the highest and best use, this project. Based off of, you know, local demand, availability, all of these things. So, but I'm not a tax credit developer, but absolutely I'm in this category. So I will continue that run. But yeah, that's not— you have some developers where they only focus on affordable housing. I'm looking for the best deals possible where the path to progress is, or a deal based off of local demand.

Mm-hmm. So where do you see the high-growth sectors for 2022?

So every time I'm having conversations with private equity firms, you know, when I'm discussing deal opportunities, the things that always seem to catch their attention is senior living, right? So this category that I'm in, I had a lot of interest in it. I didn't need private equity, obviously, because I'm doing tax credits, but if I did need it, I— there was a lot of interest in it. So senior housing, Industrial, light industrial as well. And then obviously the multifamily space. There's so much demand for new housing inventory all over the place. I'm hearing like in cities like Orlando, I mean, it's the shortest. I'm in Miami. You can't even buy a house in Miami. I saw some data that says there's probably just 30 days worth of inventory right now, you know? Really? Wow. Yeah, in Miami. So there is so much demand for housing inventory. The build-to-rent market is huge right now because of that. So you have a lot of people who are foregoing buying a house. Like, it's, it's ridiculous to buy a property right now, depending, depending on the city. So a lot of developers are now in that build-to-rent market where, you know, the community looks like a single-family community, but they're really built to rent. So these are some of the trends that are kind of really taking shape. And then obviously a lot of the dynamics that have happened since COVID are helping some of these trends as well.

Yeah, nobody expected to see that, did they? And all of the forecasts going into COVID, they were all wrong.

What were some of the forecasts? Let's think back.

Well, they, they were— we were going to have Foreclosures on top of foreclosures. We were going to have evictions on top of evictions. Investments were going to be lost and so on and so forth.

And well, that could have been possible had the government not provided support in that area.

Absolutely.

Yeah. But even with the foreclosures, remember, we're just now getting out of the eviction moratorium. So there could be a backlog that we're not aware of. But, you know, it would have happened already. Everyone's forecast is wrong. So we're going into 2022 and it hasn't happened yet.

Yeah.

Yeah.

So we'll see when that moratorium comes to an end. It looks to me like though, most landlords have been working out workouts and are anticipating this. So my suspicion is that there is so much pent-up demand that it's Not going to be much more than just a blip on the radar. So, but we'll see, we'll see how it turns out here. What do you think is going to happen?

There's so much pent-up demand. There's so much money on the streets right now. The availability of capital is just out of this world. Investors are looking for deals. We're starving for deals. It's so competitive right now. Assets used to trade for, just 2 years ago, I'm seeing multifamily, like 200, 300-unit multifamily units. I don't want to use the word flip, but being flipped, like in just a year's timeframe. It was acquired in 2020 and they sold it again in 2021 for a nice profit.

Absolutely.

And I'm seeing that 1, 2 times over for the same property. So there's just— it's— the market is— it almost scares you a little bit. Like, okay, what's the end? Are we in the middle? Is there still more ahead? Are we at the top? You know, it's, it's so crazy right now. Finding good deals is incredibly harder.

Yeah, absolutely. It would be so nice to have a crystal ball at these times, would it not? Well, Fabelio, tell us how we can get in touch with you and what you have to offer.

Well, I mean, on my end, I'm always looking for the next Good deal. The next opportunity. Looking to explore new markets, you know, growth markets, markets that are on the path to progress, especially with where the shifts have happened since COVID with a lot of people moving out of the city center into smaller communities. So that, that provides a lot of potential. I don't know if that's sustainable, if people are going to decide 3 years later that I want to go back to city life. But, you know, that's something to look forward to. So I'm always looking for new markets, looking for new deals, always loving to connect with investors, whether you're a limited investor or whether you're a private equity firm or in a capital markets space. So people can always find me, um, online and contact me there at iconheritagepartners.com.

Well, wonderful. Well, it has been a delight having you. I've got one last question before we close here, and that is, what was your most difficult setback in life? What did you learn from that? And how did you come through that time?

I would say in the early years of starting my, um, independent route, my, my entrepreneurial journey, I went from getting my MBA and then bypassing the corporate route to go the entrepreneurial route. And there's a buffer period, right? So it doesn't happen immediately. So checking yourself and everyone else around you, because they're looking at it like you just got this degree. And you're going to do what? So, you know, there's that buffer period where you're wondering, okay, am I in the right space? Because as an entrepreneur, you're not going to always make money, right? You will fail multiple times, and it's whether you pick yourself back up or not that determines your longevity. And I did well fast, and I failed fast a couple of times. But from the 7th grade, I always knew that my path was where I was. So there was never a moment where I wanted to throw in the towel, but so many people throw in the towel, and there's nothing wrong with that because there are days where I'm like, it would be so much easier to just clock in and clock back out at 5 PM, right, versus having mornings and not knowing where you're— when your night ends, because I could be on my laptop at midnight, right? So, um, I would say early on, really having that staying power and having the guts and the grits for it, because everyone's not made out to be an entrepreneur. And just knowing that deep within me, you know, divinely, that was what was already decided for. So there was no other— I had never thought about, let me go apply for a job. So even through those failure moments, it was like, okay, how do I learn and pivot? So I would say that's always what keeps me grounded, knowing where I started from, And knowing where I'm going.

Good vision there. And continuity and tenacity.

Yeah. And I started really early at a young age, so I still have some good years ahead of me.

Yes, you do. And you've done an amazing job there. Well, Fabiánio, thanks so much for being with us today. It has been a pleasure.

Thank you for having me.

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