Jimmy Silverwood: Don’t take no for an answer. All things affordable housing.

Welcome, everyone, to episode 26 of Offshoot. My guest today is Jimmy Silverwood, president of Affirmed Housing Group a San Diego-based affordable housing company that develops in San Diego, LA, and the Bay Area. Since their 1992 start, they have completed $2.8 billion in projects and created more than 5,500 apartments across 70 communities. The company has about 32 employees on the development side and an additional 15 or so in their general contracting division.

Jimmy had the good fortune to grow up in the affordable business.  After going away to college at CU Boulder, he did a few years at Turner Construction. When he joined Affirmed he was an acquisitions and finance analyst, then a VP, and finally took became presidency under his father, James, who remains CEO.  Of note, James started the company after being blown up in the S & L crisis of the late 1980s.

The complexity of affordable housing is a world onto itself. My hope in speaking with Jimmy was that we might open up some of the mystery around the capital structures used to finance these developments. He delivers. We go deep into pretty esoteric stuff right out of the gate. It struck me as table stakes to understanding their business, and the space as a whole.

Listen in as we cover topics that include:

Why affordable housing isn’t a reflection of the cost structure, only the restrictions on rent.

The difference between workforce housing and affordable housing,

How tax credits are awarded, turned into cash, and layered above conventional debt.

How competitive the process of winning tax credits is.

The difference between 4% and 9% tax credits and how much of the capital stack each can fund.

The timelines that must be managed between expiration of tax credit awards and the pulling of development permits.

The availability of 90% land loans and how that informs land acquisition.

The scoring systems that are used to determine the attractiveness of prospective affordable housing projects.

How to address push back from the community around the notions of bringing lower income people into higher income areas and what the data says about these changes.

How Affirmed, and other affordable housing groups, get paid.

How Affirmed thinks of itself as a vendor for the city that delivers on their affordable housing mandates.

Why Affirmed uses an internally integrated general contractor.

And finally, why financial models are the keys to the kingdom within the real estate industry.

As I said before, we go deep here.  I hope that those of you that really want to understand this side of the business find it as insightful as I did.

Transcript

[00:50] Kevin Choquette: Welcome everyone to episode 26 of Offshoot. My guest today is Jimmy Silverwood, President of Affirmed Housing Group, a San Diego based affordable housing company that develops in San Diego, Louisiana and the Bay Area.

[01:06] Since their 1992 start, they’ve completed $2.8 billion in projects and created more than 5,500 apartments across 70 communities. The company has about 32 employees on the development side and an additional 15 or so in their general contracting division.

[01:22] Jimmy had the good fortune of growing up in the affordable housing business. After going away to college at CU Boulder, he did a few years at Turner Construction. When he joined Affirmed, he was an acquisitions and finance analysts, then a VP and finally took over the presidency under his father James,

[01:41] who remains the CEO of note. James started the company after being blown up in the SNL crisis of the late 1980s.

[01:50] The complexity of affordable housing is a world unto itself. My hope in speaking with Jimmy was that we might open up some of the mystery around the capital structures used to finance these developments he delivers.

[02:03] We go pretty deep pretty quickly into the esoteric stuff right out of the gate. It struck me as table stakes to understanding their business and the space as a whole.

[02:14] Listen in as we cover topics that include why affordable housing isn’t a reflection of the cost structure, only the restrictions on rent the difference between workforce housing and affordable housing how tax credits are awarded, turned into cash and layered above conventional debt how competitive the process of winning tax credits is,

[02:36] the difference between 4% and 9% tax credits and how much of the capital stack each can fund the timelines that must be managed between expiration of tax credit awards and the pulling of development permits, the availability of 90% land loans and how that informs land acquisition the scoring systems that are used to determine the attractiveness of prospective affordable housing projects how to address pushback from the community around the notions of bringing lower income people into higher income

[03:07] areas and what the data says about these changes how affirmed and for that matter, any other affordable housing group gets paid how a firm thinks of itself as a vendor for the city that delivers on their affordable housing mandates, why a firm uses an internally integrated general contractor, and finally,

[03:27] why financial models are the keys to the kingdom within the real estate industry.

[03:32] As I said before, we go pretty deep here. I hope that those of you that really want to understand this side of the business find it as insightful as I did.

[03:48] Good morning, Jimmy. Welcome to the podcast.

[03:50] Jimmy Silverwood: Hey, good morning, Kevin. Thanks for having me.

[03:53] Kevin Choquette: Yeah, thanks so much for taking the time. I know you guys got a lot going on over there and I appreciate you carving out some of your calendar for me.

[04:00] Jimmy Silverwood: Of course.

[04:02] Kevin Choquette: Get us started with Affirmed Housing Group. What do you guys do? What is your company all about?

[04:09] Jimmy Silverwood: Yeah, so Affirmed Housing,

[04:12] we’re based here in San Diego,

[04:15] been based in California for over over 30 years. We have our headquarters here in San Diego and satellite office as well in San Jose that we opened up about six years ago.

[04:30] So Affirmed Housing has been developing affordable tax credit housing throughout California for the last 30 years.

[04:40] And early on in the company as well, we had some developments in kind of the mid Atlantic states back east as well. So yeah, we specialize in tax credit affordable housing.

[04:56] You know, again throughout California we develop mostly ground up construction. So about, you know, I’d say maybe 80, 85% of our deals are new construction. And then we also do some ack rehab as well as some adaptive reuse of other types of uses that we could touch on as well.

[05:20] Kevin Choquette: Cool.

[05:22] Jimmy Silverwood: That’s kind of the general overview, you.

[05:25] Kevin Choquette: Guys in that affordable housing is kind of thrown around in a lot of different applications. When I think of a group like Affirmed Housing Group, I always call it Capital A affordable.

[05:37] You’re doing low income tax credit financing and then putting some other pieces of capital on top of that to get a full capital stack. Is that kind of where you guys live?

[05:48] Jimmy Silverwood: So yeah, I’d love to kind of explain that as well. So true affordable rent restricted housing, which again we’ll kind of touch about really the definition of what true affordable housing is.

[06:04] But rent restricted housing in the U.S. the Low Income Housing Tax Credit produces about 95% of that.

[06:15] Right. So the only other 5%, you know, could be what’s called naturally occurring affordable housing,

[06:24] as well as, you know, some older kind of HUD programs that might have, you know, Section 8 vouchers attached to maybe a market rate deal.

[06:34] So in terms of true affordable housing, which again, you know, a lot of people think about affordable housing and they say, oh well, that’s not affordable to build.

[06:44] Well, you know, we don’t have some secret way of you know, building housing. Right. The, the affordable aspect has to do with the rents that are charged for the end user, our, our tenants and our residents.

[06:58] So when we speak about affordable housing, it really doesn’t have something to do with the way we’re actually building the housing. Even though we could kind of touch on that.

[07:09] And there are some, you know, key differences between building, you know, affordable housing and market rate housing, such as, you know, unit sizes and things like that. Right. That ultimately most of the time our unit sizes are going to be lower.

[07:25] But in terms of construction techniques, again, it’s not to say because we’re building affordable housing, we have some secret sauce to produce it at half of the cost of what it takes to construct market rate housing.

[07:39] Kevin Choquette: Yeah. And it’s always struck me that kind of the heart of that whole business is the financing. And we could talk about this for a while, but just how, if you will, esoteric does it get, I mean, in my world it’s market rehousing and you know, very simply, there’s equity and debt in the capital stack.

[08:02] If we get a little bit more complicated, maybe there’s debt and a piece of prep and equity, or maybe there’s debt and then an operating partner, general partner, and a limited partner who’s a passive investor, you know, and then there’s a few other minor variations available to that in your world,

[08:22] as I. Well, let me ask you the question. How much more complicated is the capital stack in terms of debt and equity to get an affordable housing project financed?

[08:34] Jimmy Silverwood: So the, the answer is, it depends. I would say,

[08:39] you know, we, we,

[08:41] we build all types of affordable housing here in California. So we have kind of more of your traditional workforce type housing in, in the affordable world, which, you know, basically means we’re targeting working class families that are looking for, you know, affordable housing in different submarkets throughout California.

[09:05] So that’s, that’s kind of one bucket that we serve. And I would say the average AMI for a lot of those deals is, you know, right around 50 to 60% of the area median income.

[09:16] Kevin Choquette: Okay.

[09:17] Jimmy Silverwood: Which again, we could kind of touch on that as well in terms of, you know, how is that defined?

[09:23] Each county throughout California, as well as nationwide produces an area median income, which basically just means what is the median income of people making within a certain region?

[09:37] And then our populations that we serve within these developments,

[09:44] you know, range from, you know, 30% of the area median income all the way up to 80%. So that’s the range in which, you know, we, we can receive tax credits up to 80% of area median income.

[09:58] And, and most basically like describing that too, that would be, you know, for a single person, San Diego County’s area median income is about 120,000.

[10:08] So if you take 50% of that,

[10:12] you know, a single person might be making, you know, 50, 60,000 to be able to qualify within a 50% AMI unit here in San Diego.

[10:22] That all depends on family size as well as unit size. Right. So there’s no, there’s no, I mean the counties basically produce these area median incomes and it’s based on family size as well.

[10:36] So there’s a lot of different components that go into it, but generally speaking,

[10:40] that’s what, that’s what would qualify as somebody within the housing. And then they basically spend 30% of their income on the rent.

[10:49] Kevin Choquette: Okay. And then when you say unit size, it’s not necessarily square footage, it’s whether or not it’s a studio one, two or three.

[10:57] Jimmy Silverwood: Correct.

[10:57] Kevin Choquette: Kind of.

[10:58] Jimmy Silverwood: Yeah, yeah, exactly. So it doesn’t matter in terms of unit size. It’s all about bedroom count. So that’s, that dictates our rents, basically. So if you have a three bedroom affordable housing unit,

[11:13] you know, whether it’s a thousand square feet or 1,200 square ft, the max rent on that unit is the exact same within kind of our, our world.

[11:23] Kevin Choquette: Okay, so 30 to 80% AMI is kind of the target. Sounds like a lot of workforce is kind of 50, 60% AMI.

[11:32] And you just give a good definition for at least San Diego AMI. You’d take 50% of that and then you’d be able to deploy 30% of your, call it 50 to 60k income for a single person into rent.

[11:46] So that tells us what you’re building. But I’m still trying to get to like, okay, how do you,

[11:52] yeah, how do you finance that thing?

[11:54] Jimmy Silverwood: Yeah, so I, I was, I was trying to describe that ultimately there’s several different buckets of housing that we produce. One is on the more workforce. Let’s go down that route first and foremost.

[12:08] So on the workforce housing component, a lot of that tends to be a little bit more traditional in terms of the financing stack. Meaning a lot of times we’re not going to need 5, 6, 7, 8 sources to put together a deal for workforce housing.

[12:24] And a lot of that, you know. So for example, we have a deal in San Diego,

[12:29] North county,

[12:31] average AMI somewhere in the 55% range. And on that deal we have federal tax credits, we have state tax credits, and we have conventional debt. That’s the capital stack on that deal.

[12:46] Right. Which, you know, that’s more,

[12:49] I would say conventional and traditional, but also can, can also in some cases make our lives easier not having to go after, you know, five, six, seven, eight sources.

[13:01] It’s not to say every workforce housing deal in California can be financed that way because it just depends. Like that specific deal we were able to leverage state tax credit equity, which, you know, led to the equity on the deal Instead of being 40%, we were basically able to bring in tax credits on basically 60% of the capital stack.

[13:24] And then we only had to come up with, you know, other sources for 40%, which mostly was again conventional mortgage, as well as some deferred fees.

[13:35] So that’s kind of one side of the spectrum. The other side of the spectrum is more affordable housing serving, you know, basically the lowest income, extremely low income, call it down to 30% AMI.

[13:51] Some of our developments serve folks who were formerly homeless,

[13:55] which, you know, comes with a completely different way to finance those. Right. Because a lot of those folks can’t pay rent. So we have to, you know, subsidize those units with project based vouchers which, you know, are distributed from the housing authorities throughout California.

[14:13] Those are the HUD, you know, Section 8 vouchers, but they’re project based. So what that allows us to do is to underwrite to those units. Right. They’re not floating with tenants going from one building to the next.

[14:26] Us as the landlord and as the owner, we’re able to leverage that and actually count that income when we’re leveraging and sizing our mortgage on those.

[14:37] Kevin Choquette: Oh, interesting. Because it’s reliable, it’s per unit revenue per unit is fixed and probably indexed to some inflation or CPI or AMI or something.

[14:48] Jimmy Silverwood: Yeah, kind of. You know,

[14:50] and, and, and what’s interesting is the way that the rents are set on the project based voucher units is that takes the fair market rent and that will actually dig in past just, you know, county statistics.

[15:03] Let’s just say we’re in a, you know, great part of San Diego, a higher income, higher rent market. Those vouchers are typically going to be more to us as the landlord in those markets.

[15:15] So it basically takes fair market rent. So let’s just say you have a market rate development sitting right next to an affordable development.

[15:24] Whatever those rents that they’re charging over there, usually we’re able to basically utilize that within our sizing of our debt, if that makes sense.

[15:33] Kevin Choquette: It does. And on those deals then on the capital side, is it the same,

[15:39] you know, you’d started with the workforce housing on one example, federal tax credit, state tax credit and conventional debt on these lower income where you got project based vouchers. What’s that capital stack look like?

[15:52] Jimmy Silverwood: Yeah, so like the constant is the federal tax credit equity on all these deals, which I probably should have started there, that, that on any given deal ranges from, let’s call it 35% of your total stack to all the way up to like 60% of your total stack.

[16:12] And with, I mean, yeah, we could talk about this for a while for sure.

[16:17] Kevin Choquette: It’s complex, but that’s the point. I love this.

[16:21] Jimmy Silverwood: Yeah. So there’s two tax credits. I should have started with that. Okay. There’s a 4% credit which you know, has, I would call it 35 to 40% of your total development cost is financed from tax credit equity.

[16:38] And then you have your 9% bucket which on those deals,

[16:44] and again the state, each state has 9% credits, they have 4% credits. Both of those look different in terms of the competition to applicants, developers like us,

[16:57] the 9% finance is anywhere from, I mean closer to like 60 to 65% of your total development cost within the 9% program. A lot of times those are serving folks that are, you know, the extremely low income and things like that.

[17:12] I would call it less traditional workforce housing versus the 4% program. Mostly finances rehabs as well as kind of more workforce driven product. Because again on the workforce side you’re able to bring in more mortgage proceeds to kind of help help fill the rest of the capital stack.

[17:31] Then within each of those, right. If you have a gap,

[17:36] unlike kind of market rate housing, a lot of times those gaps can be filled if the county has soft debt that they’re willing to put into a deal or the city has soft monies that they can put into the deal.

[17:49] So unlike on the market rate side where it’s very driven, just I mean based on yields, especially this soft debt, it doesn’t really exist in the market rate world. But because these agencies are trying to deploy and deploy their funds, specifically in some cases for affordable housing,

[18:12] they have much more patient money. Right. A lot of Those loans are 55 year soft loans. So the interest on those loans accrue and then eventually if the deal is refinanced or sold, you know, call it 15, 20, 30, 40 years down the road, that agency would be paid back their kind of soft debt.

[18:31] But it almost, it feels like additional equity. Right. I mean that’s really,

[18:36] they’re paid as it’s available.

[18:38] Kevin Choquette: There’s no immaturity date or hard. Hard pay, current cash flow mandate.

[18:44] Jimmy Silverwood: Correct. I mean, they’re usually sized for 55 years. So I guess in a way there could be a hard payment at year 55 to pay off those loans.

[18:53] But that, that’s what allows affordable housing to be produced. And quite simply put is if your rents, you know, again, we talked about the cost to build it. It’s not like we have some secret sauce to build it much lower than market rate developers.

[19:10] And so you need that additional gap financing because our rents are, you know, in some cases a third of what a market rate developer can charge.

[19:20] Kevin Choquette: Well, let’s go back for. And I understand some of this reasonably well, but just try to bring everybody along on the tax credit mechanism once, whether it’s a federal tax credit or a state tax credit.

[19:34] How does that work? As in, how do you convert a tax credit into equity that you can actually deploy to go buy drywall and copper and lumber?

[19:45] Jimmy Silverwood: Yes. So that the t. The low income Housing Tax Credit program, real quick, federally,

[19:51] that was enacted in 1988. So just giving some kind of background as to how long the program’s been in place. And it’s a bipartisan program. One of the intrigues about the program and why it has bipartisan support, quite frankly, is likely because of a lot of the private public partnerships that come along with it.

[20:11] So most, simply put,

[20:14] tax credit investors are usually the big banks. So I could kind of go through a list.

[20:21] Bank of America, US Bank, Wells Fargo, all of those folks are big investors in tax credit equity for community development throughout the US and then past that, there’s also syndicators, so Raymond James, Boston financial groups like that, that actually syndicate and, and they’ll, they’ll put together a fund like,

[20:47] let’s just call it a California fund.

[20:49] And they might have 20, 30, 40 banks that are within that fund. Right.

[20:57] Quite simply put, the investor is receiving a tax credit on their tax returns for every dollar invested in a tax credit. Low income housing tax credit, affordable housing development.

[21:13] Now, the pricing that they pay for, that depends. Right. So it really depends on a lot of federal policy. But right now I would say on average, the federal tax credit pricing, you know, again, there’s a lot of parameters that go into it, including location.

[21:33] Is there a CRA need by the bank that all kind of comes into it, but in general ranges anywhere from 85 cents to 90 cents. Right now, I’d say on average for pricing for federal tax credits, so they.

[21:49] Kevin Choquette: Can have a $1 future tax liability, buy a tax credit for 85 cents and then satisfy that tax liability at a slight discount and in so doing basically put equity in your capital stack.

[22:03] Jimmy Silverwood: Exactly, yeah. And they basically are able to earn that benefit for a 10 year period. So when an investor, a tax credit investor, invests in our projects,

[22:15] there’s a 10 year period that they want us as the general partner in the deal and then there’s a five year recapture period, basically. Meaning if they’re, if there was an issue with the property, let’s just say, for example, some drastic issue like, you know, some developer starts charging market rents.

[22:34] Right. Or something like that, the IRS could come back after the tax credit Investor at year 12 and basically recapture, you know, that tax credit investment. Right. Or basically the tax, the taxes that they deferred through this investment mechanism.

[22:53] So.

[22:53] Kevin Choquette: Oh, that’s interesting. I didn’t understand it. So there’s a performance mandate for you guys as the project sponsor and for them as the equity investor in the project to actually deliver and maintain the affordable housing for.

[23:09] What are you saying, 10 years?

[23:11] Jimmy Silverwood: Yeah. So really,

[23:14] you know, when we think, when we think about, you know, a potential refinance or sale or whatever,

[23:22] you know, we’re at least in the deals for 15 years. And quite frankly, it’s because of that 10 year period, the initial tax period, that they’re receiving that tax benefit plus the five year recapture period.

[23:36] And a lot of times these investors are looking at the sponsor critically because they want to make sure that what they’re getting into obviously is going to be one, worthwhile and two, it’s going to mitigate any exposure they might have from any type of recapture from the irs.

[23:58] So it’s very sponsor driven. Like especially during rocky times. There’s some investors that groups like ours are able to get great tax credit pricing. But then there’s a lot of folks who might be just entering and saying, yeah, I’m going to do my first tax credit, affordable housing development.

[24:16] Well, there’s a lot of investors who are just going to pass on that altogether because again, there’s a lot of strings attached. But what’s interesting about it is,

[24:26] you know, from a private investor standpoint, there’s a ton of compliance in affordable housing. There’s very little default because there are a lot of,

[24:36] there’s a lot of eyes on it. I guess right outside of, you know, the public agencies, you also have these private markets that are extremely critical of each transaction that they’re investing in.

[24:49] Kevin Choquette: What do you mean by private markets? The individual, like the investor that might be coming through Raymond James and buying the tax credit.

[24:55] Jimmy Silverwood: Correct? Yeah. I just mean more conventional. Yeah. Not necessarily private banks. Right. Well.

[25:02] Kevin Choquette: And the leverage on the debt side is still underwritten to fairly conventional debt coverage ratios anyway. Right. So if you’re doing it.

[25:11] Jimmy Silverwood: Yeah.

[25:12] We can usually go a little bit lower. I mean, you’d have to tell me like on the market rate side, is it. I don’t know, is it a 130 right.

[25:19] Now that, you know, I mean normal.

[25:21] Kevin Choquette: Agencies, 125 and the banks will go one, two, maybe 115. And then of course, life codes are. Call it 135 to 150 and above.

[25:31] Jimmy Silverwood: Okay. So I would say on average ours are 115.

[25:35] Kevin Choquette: Yeah, yeah. But then you’re 50% AMI, meaning you’re the. Well, depending on what type of affordable housing you’re developing. So you have a tenant demand that’s super high.

[25:48] Jimmy Silverwood: Right? Yeah. A lot of our developments we have dependent on the location and you know, kind of the AMI that we’re serving. A lot of. A lot of these developments have a thousand people on the waiting list.

[26:01] Kevin Choquette: Yeah, that’s exactly what I’d expect. So I want to go back to this 4% and 9% tax credit. I think you said a 4% credit might do 35 to 40% of the capital stack and a 9% might do 60 or 65%.

[26:17] What I’ve probably been told before, but I can’t recall is 4% of what or 9% of what? Or is that just what they’re called? I’ve never understood why there’s like 4% credits and 9% credits.

[26:30] And like, is there a numerator denominator that is reflecting this like 4%, 9% thing?

[26:37] Jimmy Silverwood: Yeah. So I mean, basically the 9% obviously is a larger figure. Right. So I mean, the way that the tax credits are calculated,

[26:48] there’s a 9% factor on the 9% side and a 4% factor on the 4% side, which that then calculates to roughly, you know, 30 to 30 or, excuse me, 35 to 40% tax credit equity on the 4% side.

[27:04] And then on the 9% side, it calculates to 60 to 65% of your total development cost. Right. So it is a factor that actually gets applied.

[27:15] And that’s, that’s, I guess most. Simply put, I could go into, you know, a lot of. A lot of the cost in the project. You have a certain amount of cost that is eligible for tax credits.

[27:26] And that eligible basis then is multiplied by those factors. I got it.

[27:31] Kevin Choquette: So if I have a 100% or, sorry, excuse me, we’ll just make a $100 million project,

[27:37] maybe only 80 million of it is eligible for the tax credit underwriting. You take that 80 million, multiply by 40% or, excuse me, 4% and that’s how you derive.

[27:52] Well, except that wouldn’t be 32 or 35% of the capital stack. Well, it’s not super.

[27:58] Jimmy Silverwood: Yeah, so that gets to your annual factor.

[28:02] Kevin Choquette: Right.

[28:03] Jimmy Silverwood: But because you’re earning it over 10 years on the federal, you’d multiply it by 10. Right. So yeah, exactly.

[28:11] Kevin Choquette: That’s it. That’s the thing I’ve always been questioning, like why is a 4%? It’s the 10 year tail. So you’re basically doing a 10 year tail, 4% of the eligible costs or a 10 year tail with 9% of the eligible costs and people are paying a discount to capture all of that tax benefit over a 10 year duration.

[28:32] Jimmy Silverwood: Yes, exactly. So like most, simply put, you have 100 million, let’s just say an eligible basis,

[28:39] let’s just say it’s a 4% deal. You apply 4% to that, that would be 4 million basically per year in annual credit. So if you multiply that by 10 years, you’re at 40 million.

[28:51] And then you got to take into account whatever tax credit pricing is on that. Right. So if might $0.92 or whatever, you’re going to get a little less than the 40 million in your terms of your equity.

[29:03] Kevin Choquette: Yep, perfect. Understood. And then just as far as you, you mentioned it’s competitive. Right? So I mean it sounds like really good equity to be able to source, but I’m sure you’re not.

[29:17] Affirmed Housing Group isn’t the only show in town who would be going through what I don’t understand. So I’ll just call like this application process trying to be granted these awards.

[29:30] But how, how competitive is it? And how do you guys go about securing alcohol? I don’t know, is a grant the right word? I don’t know how, I just don’t know the nomenclature around the space, but sounds like it’s competitive.

[29:42] And how do you go about, you know, doing that?

[29:45] Jimmy Silverwood: Well, I mean really on the, on the tax credit, equity, it’s, it’s really equity. You know, they’re not grants per se.

[29:53] Kevin Choquette: But I, I get it.

[29:54] Jimmy Silverwood: Right. Like I think when I think of grants, I think of there are some grant programs, but those, those help fill kind of the gap in your project.

[30:03] Kevin Choquette: Right word. It’s an award or it’s some. There’s some sort of award might not be the, you have to win it. Right?

[30:10] Jimmy Silverwood: Right. So here’s what’s crazy about our industry, right? And we always joke like, you know, if, I mean, there’s, there’s some certainty in the affordable housing world, especially during down times.

[30:24] And you know, here’s an example, right? When interest rates jump from, you know, 4 to 7% or you know, yeah, really on, on the perm at one point, that’s kind of where they went.

[30:39] We’re able to, one of, one of the unique aspects is even during a downturn, right, Like I know construction debt continuously is extremely difficult, if not impossible for some market rate developers to secure.

[30:53] That is not something we have to worry about within the affordable housing tax credit world.

[30:59] However, you know, during interest rate times that interest rates are going up, we have to secure more soft money. Right? Like for example,

[31:10] let’s just say a deal has a $5 million gap because of interest rate increases over the last couple years. You know, you’ve put this deal together for years and you have a $5 million gap in affordable housing.

[31:22] You do have an opportunity to potentially go to the city or the county or the state if they have funding programs available to apply for $5 million. Let’s just say in kind of that more soft loan environment to fill your gap and then ultimately, you know, be underway.

[31:42] But as you’re kind of raising your capital stack, the last stop for us is going in for tax credits. But here’s what’s crazy about it, right? You might, you might have to secure, you know, in some cases, 1, 2, 3 other sources in order to go in for tax credits.

[31:59] And then when you go in for tax credits, it’s also competitive.

[32:03] So on the 4% side, it’s been over subscribed the last couple of years. Call it three to one. Meaning if there’s, you know,

[32:12] 300 applications that go in, 100 applications are awarded, and again, it’s typically less than 300 applications that go into any given round.

[32:23] Usually anywhere from 100 to 200 applications.

[32:26] Kevin Choquette: But that is there’s three sellers for every one buyer.

[32:30] Jimmy Silverwood: Yeah, for the most part. Right. And that’s, that’s on the, that’s on the 4% side. And then on the 9% competition, I’d say the hit rate, you know, going in for those credits is usually like 40%.

[32:42] And again, this is just, you know, recent statistics. So this, this stuff definitely changes. But I guess it’s to say, you know, you might be working on a deal for two, three, four Five years, you put together your financing stack, you go in for credits.

[32:58] You know, it could take you three, four rounds of going in for credits even to get the credits right. So that’s what’s kind of wild because what’s also dictated when you get the credits is you have a certain amount of time to start construction.

[33:15] So as a developer in the affordable housing world, basically you’re having to get your design and your construction drawings to a far enough point point so that you can deliver.

[33:28] Because if you get a tax credit award, that’s great. But if you don’t start, usually historically it’s been, you’ve had six months from a tax credit award to start.

[33:38] So you could imagine, you know, some, some jurisdictions it takes a year to get construction permits.

[33:45] So you gotta, you gotta put you. There’s definitely some, some risks that we take in which it might take you.

[33:54] Even though you’re at the tax credit stage of the financing, it could take you several rounds. Yet you’re having to get to 50% construction drawings just to be able to deliver if you get the credit award.

[34:09] Right.

[34:09] Kevin Choquette: That’s tricky. And this is great. I knew there was risk in your business that I didn’t understand. So let’s just look at building codes, right? Here’s 2024. We’re about to roll to 2025.

[34:21] City of San Diego has a new update to building codes. So let’s say you’re two and a half years into this process and this particular round you didn’t get your tax credit award,

[34:36] but you’ve got maybe 50% CDs, and now you’re trying to figure out, okay, are we going to go ahead and pull permits to get the go complete your CDs, pull permits to get the grandfathered sort of building code,

[34:52] or are we going to be forced to do a redesign? Because in 2025 it’s a new building code and then you’ve got to spend money to do that. Right? So it sounds like you have a real challenge on trying to figure out where to draw the line in the sand in terms of your upfront equity allocation before you know you’ve kind of got a full tank of gas and can start really going vertical.

[35:16] Jimmy Silverwood: Right, Exactly.

[35:18] Yeah. I think it’s interesting because on a lot of these deals similar to just market rate developers, we’re taking risk. It just looks different in our world, but a lot of the risk is similar.

[35:32] We’re in a lot of cases going out, purchasing land.

[35:37] Are we receiving,

[35:40] you know, some pretty good loan programs because of what we’re producing in terms of affordable housing? Yes, the answer is yes. Like on acquisition, for example, you know, we have community development financial institutions who specialize in acquisition financing for,

[35:56] you know, affordable housing, rent, restricted development.

[36:00] And on any given case, you know, some of those were receiving, you know, 90% loan. And we’re, you know, coming up with the other 10% when we purchase a property.

[36:10] But I guess where I’m going with it is a lot of times we’re going out, we’re purchasing property in areas and locations that we think score well within the system.

[36:20] But then also, you know, working with our local agencies, especially our repeat partners, repeat business on kind of where they’re looking for their next affordable housing development. But then in addition,

[36:34] it’s on us to make sure that if we need local money, does the local agency have money? Right. Which. The soft debt. Right, Exactly.

[36:44] Kevin Choquette: Who are you saying might provide you a high leverage land acquisition loan? Because I want some of that money.

[36:50] Jimmy Silverwood: Yes, exactly. I mean, again, they look for covenants, right? So when you actually purchase the land, they’re going to put a covenant on there. So, you know, again,

[37:01] it’s specific to affordable housing, but there a couple of the groups. So a group called Century Housing out of Los Angeles, they do a lot of different type of stuff.

[37:12] They also do some development, but they’re One of the CDFIs that we work with.

[37:17] There’s a group called Low Income Investment Fund lif They also provide acquisition financing. There’s a group up in the Bay called Housing Trust of Silicon Valley.

[37:29] They also provide acquisition financing. And what’s interesting about that is they have some participants such as Google, Apple, Big Tech that have provided them funds. And on certain cases we can get 2% money on acquisitions in the Bay, which is extremely helpful because obviously, as you know, land in the Bay Area is twice,

[37:55] maybe three times the cost as Southern California.

[38:01] Kevin Choquette: Well, that was awesome because we couldn’t even start talking about this until you at least lay some groundwork. But with all of that opportunities and challenges, what are you guys facing now?

[38:13] What’s up in the marketplace? What are you trying to navigate?

[38:18] Jimmy Silverwood: Yeah, so right now,

[38:20] just like anybody, we’re impacted on the interest rate side of things and obviously the construction cost side of things.

[38:30] So, you know, the biggest challenge right now is trying to, you know, find additional monies to get these deals fully funded. Another aspect is just, you know, when we go in for tax credits, the competition and the backlog of affordable housing developments in California is pretty large.

[38:51] So, like, just to give you an example, this last 4% tax credit round, we submitted seven applications. It looks like we’ll get two of those,

[39:00] which, you know, five years ago, maybe it was that we got 100% of them. Right. Depending on, you know, the backlog and the amount of competition.

[39:11] On top of that, what’s, what’s challenging and what affordable developers have to deal with is, you know, the policy direction changes at the state level, as you know. And so, you know, the regulations for these tax credits, as well as the scoring system that ultimately awards the tax credits to different deals,

[39:33] it changes annually. There’s different, you know, regulation changes that we have to follow that all of a sudden, you know, a deal that you put together three, four years ago, you know, they make a tweak at the state level.

[39:46] Maybe you were competitive before, know, and then the next year you’re not going to be competitive because of some change to the regulation. So that’s also a kind of risk that, that we take is that you might be 3, 4, 5 million dollars in on a development.

[40:03] And, you know, the, the state could change direction as to how they’re scoring these applications.

[40:09] And one day you might look good, and then the next day you might not. Right. So we’re having to be very flexible and nimble,

[40:18] and people who have been doing this, you know, for a long time in California,

[40:22] they, they understand it and they get it, and, and, you know, they find a way to survive, you know, and that’s, that’s kind of something that our group’s been successful with over, you know, 30 years of experience here in California.

[40:36] Kevin Choquette: And you had said a while back that as interest rates go up, you need more of that soft debt? Is that just a function of the cost of capital and underwriting to that debt coverage that we mentioned as like, 115, that senior loan’s going to go down, the tax credits may not increase,

[40:54] and so you have a bigger gap to fill.

[40:56] Jimmy Silverwood: Exactly. Yeah.

[40:58] Kevin Choquette: Yeah, yeah.

[40:59] Jimmy Silverwood: That’s exactly right. Right. I mean, it’s not like,

[41:03] well, you don’t want your costs to go up. Right. So your costs are helping calculate that tax credit equity. So unless the pricing on the equity all of a sudden, you know, shot up, that could potentially offset a gap.

[41:18] But, you know, over the last, I don’t know, 10 years, I would say over the last, I don’t know, seven years since tax reform,

[41:29] you know, for the most part, pricing’s been going down. And I could kind of briefly speak to that. The way that a lot of the tax credit pricing tracks has to do with the corporate tax rate.

[41:41] So, you know, when it was, I don’t know, 28, maybe even 30% at some point during Obama’s administration,

[41:50] you know, the demand for tax credit equity was much higher amongst the banks than when it got reduced to call it, I think. Is it at 21%?

[42:00] Kevin Choquette: Yeah, 20, 21. Yeah.

[42:02] Jimmy Silverwood: You know, tax credit pricing, for example, on a deal might have been A$20 at the peak when corporate tax rates were closer to 30%. Once it moves down to 20% now, we’re kind of in this 90 cent range.

[42:18] So on any given deal, I mean you could do the math, but it might be 3, 4, 5 million. If it’s a sizable deal, it could be a 10 to 15 million dollars swing.

[42:30] So yeah, in terms of tax reform at the federal level, that’s also something that directly feeds into our business. Now there are CRA investors as well. And so as you could imagine, you know, they might pay more for a certain, you know, project in a certain location if they’re also receiving some of that CRA benefit.

[42:53] Kevin Choquette: And cra, the Community Reinvestment act, it mandates that banks are redeploying a certain allocation of, I don’t know if it’s profit or their capital base into a specific geography. Is that kind of how that works?

[43:09] Jimmy Silverwood: Yes, yeah, that’s, that’s, I mean I’m not a, I’m not a expert in that, but I would say that’s, that’s how I would, you know, describe it in a general sense.

[43:18] Kevin Choquette: The scoring system. I’ve heard of resource maps and I’ve only heard it in passing. Again, this is not my space and I appreciate you opening up on all this stuff. High resource areas, low resource areas.

[43:30] Is that the entirety of the scoring system or are there other parts? How do, how does the agency. I heard you say, like what the criteria might change year, year by year.

[43:41] But what are the core parts of scoring a potential affordable housing development so that somebody can objectively say, hey, this has more merit than, yeah, projects.

[43:55] Jimmy Silverwood: Yeah, so I guess,

[43:58] and that’s, that’s a good question in terms of resource areas. So this came about about five years ago. And the reason it came about is because historically the state realized that a lot of affordable housing tax credit housing in California was produced in lower income markets throughout California.

[44:22] And based on, let’s just take a workforce housing, you know, family development.

[44:28] The outcome, the outcomes for the residents, for children were, you know, basically not going to be as good as producing affordable housing within higher income areas with better schools.

[44:44] So that’s kind of like, you know, partly as to why the state came up with kind of this high resource, moderate resource, lower resource areas is because they wanted to push investment of affordable housing into higher income areas with potential better outcomes for affordable housing residents.

[45:06] So that’s been a, that’s been a change over the last. Again, I don’t know if it’s been five years or seven years. And Cal Berkeley comes out with these maps every year.

[45:17] I think it’s Cal Berkeley that studies not only schools, not only incomes in areas, but also environmental aspects as well,

[45:29] and scores different locations. And you know, there’s highest resource, high resource. And I would say in terms of the system in which the state is awarding tax credits, you do receive a benefit by being within a high or highest resource area.

[45:48] Kevin Choquette: In this. In the scoring system.

[45:51] Jimmy Silverwood: In the scoring system, yeah. And, and you know, again, without going into too many details about the scoring system, because that’s just like one piece of it, right? There’s, there’s a ton of other aspects that come into the scoring system.

[46:05] And there’s two different scoring systems for the 4% credits and the 9% credits.

[46:11] But let’s just take the 4% side. There’s, there’s a lot of different things that go into it. Are you nearby, you know, transit, you get certain points for being by transit.

[46:21] Are there amenities in the area such as schools,

[46:26] medical clinics that tenants could access, pharmacy, grocery stores, you know, things like that? Are those within walking distance? So you’re going to score much better. You know, a lot of these somewhat equate to what a market rate developer might be looking for.

[46:42] Right. Is, is everybody going to have to get in their car to go and receive any service? Right.

[46:49] So those are all different components that go into the scoring system. And then they also try to,

[46:57] you know, weight things as well, differently to kind of level the playing field. Because there’s some projects that might require prevailing wages on the construction costs, which, you know, let’s just say city of San Diego puts in 5 million into a deal, usually they’re going to require prevailing wages as part of that construction build,

[47:17] which is, you know.

[47:19] Yeah. Whole other aspect that comes into our world of trying to produce affordable housing throughout California.

[47:28] Kevin Choquette: Yeah.

[47:30] So that just zooming out to what you just said on the scoring system has echoes of being a market rate for profit developer in that proximity to transit and amenities and higher incomes actually makes the site and the projects score better.

[47:55] But also you guys still have to come up with a widget that, that works. And I Have to imagine that in a lower, in a, in a very colloquial sense, a lower resource area, not within the metrics we’re talking about here, he’s going to have cheaper land.

[48:11] And if you go into a more desirable area, you’re going to have to pay more for that land. Doesn’t that make it hard for you guys to get land in a place that’s still going to pro produce something economically viable?

[48:27] Like it seems like they’re pushing against each other. Hey, go get a high resource area where all these amenities are nearby, which means you’re going to pay more for the land, which I would assume makes it harder to make the deal pencil because you’re sizing based off of Noi that’s driven by ami and then you’ve got tax credits that are either going to be that 4% or 9%.

[48:50] But if your land cost is that much more, your gap is probably that much bigger.

[48:55] Jimmy Silverwood: Yeah, no, you’re, you’re absolutely right. That’s part of the Alphabet soup is just on the land side is that you’re right. In these higher income areas we’re definitely going to be paying more for the land.

[49:09] And what’s also interesting about that aspect is. Let’s just give you an example. Right? So in San Diego, let’s say an affordable housing tax credit deals in Mission Valley versus maybe San Ysidro or you know, kind of a lower potential resource area.

[49:29] The rents that we charge because, because it’s by county area median income, the rents we charge are the same in both the, the cap. Right. The max rents we can charge are the same.

[49:41] So if you think about it from a financing perspective, you’re paying more for the land, yet you’re not able to make that up and rent. And so you’re right in that it can be more expensive, especially just looking at the land side of it.

[49:58] But another component is on the density side of it, right.

[50:03] Are you going to be able to produce as many more units in some of these higher resource areas or are you going to receive a lot of pushback from the local communities and things like that?

[50:14] I would say that the state has provided a lot of tools for us to navigate that which has been really helpful in kind of these higher resource areas is that yeah, maybe historically they haven’t had three story buildings or four story buildings, but the state provides us some tools I guess to get to the density that we need to get those deals to pencil.

[50:38] But yeah, all of that kind of comes into the puzzle. Know that we work in, yeah.

[50:43] Kevin Choquette: And honestly, in the last five or seven years, it seems like the state has gotten, I don’t, I mean, relative to my professional career prior to that, I think it’s safe to say the state has gotten quite aggressive about trying to promote not just affordable housing capital, a, you know,

[51:01] tax credit, rent restricted affordable housing, but housing in general. I mean, it does seem better for, for everybody.

[51:10] Jimmy Silverwood: Yeah, I would completely agree. I mean, you look at San Diego and I know, you know, like anything, right? People, people hate change. People do not like change. And we’re seeing it, you know, throughout communities in San Diego.

[51:25] And part of that is some of the policies at the city level.

[51:29] But from a housing perspective,

[51:32] clearly, you know, the supply, I mean, even during some of these down times, the supply has been a lot better than it would be because of some of these,

[51:43] you know, policies around producing a little bit more density in these areas. Because as you know, land is scarce. Unless we’re going into East County. If we’re just taking San Diego county as an example, unless you’re getting into east county, which, you know, is just increasing, you know, people’s commutes for the most part are workforce,

[52:08] it is a benefit. But yeah, like anything, right. I mean you’re still going to have folks that aren’t happy about seeing that change in their communities such as, you know, three, four, five story buildings.

[52:19] But it is better from a housing perspective. And I think, you know, the most basic reason why we’re in this housing crisis is it’s a supply issue. So know, the only way to potentially bring down rents in these markets or housing prices is supply.

[52:39] So I think it’s tough. Right. You know, and I, I, I get it. We’re developing a, a deal within a half mile of my house. I drive by it every single day and a lot of my friends and, and neighbors are saying, oh Jimmy, it’s getting kind of tall.

[52:56] You know, it’s three story building, but yeah, so I get it. Right? Change is tough, but it’s hard to find a way out of it without additional supply.

[53:06] Kevin Choquette: That’s it. And it’s like, what is the population of San Diego county now? Three million, like roughly. I don’t, I don’t know. I think that’s right.

[53:18] Jimmy Silverwood: Probably.

[53:19] Kevin Choquette: Yeah, we could google it. But let’s say it’s 3 million. Yeah.

[53:24] Like what is it that makes people who live in an area with 3 million other people think they have a right to keep all of the built environment below? Let’s just arbitrarily say 30ft like, it’s really weird, honestly.

[53:39] Like there’s 3 million people here, guys like soon to be four. It might take a little bit, but it’s a major metropolitan area and it’s always a little bit perplexing to me that there’s such indignation over development.

[53:52] Like rewind 50 years ago, rewind 100 years ago. Did your neighborhood have anything like, was it just a bunch of coastal sage with, with like, you know what I mean?

[54:05] But then it’s like, well, but now I’m here and so you can’t do anything. It’s, it’s, it’s a funny thing.

[54:11] Jimmy Silverwood: Yeah, I agree. And it’s is tough. I mean, you know, obviously our organization, you know, we do community outreach on most of our developments. And it is interesting, right, because you’re in the office, we’re in a little bit more of a corporate environment, you know, grinding,

[54:32] grinding on Performas and, and all that kind of stuff. And then you go out and you go to a community meeting and it is so personal for everyone involved. Right.

[54:41] So it is, you know, we gotta look at it through a different lens. And the way I look at it is, hey, you know, during that community outreach process,

[54:51] like there is no way we’re going to win everybody over. And that’s okay. You know, we’re, we’re there a lot of times to provide information,

[54:59] provide information about,

[55:02] you know, how these developments will operate, who our property management company is, how people qualify for the housing. But what I’m recognizing more and more is that you have a certain amount of people at each of those meetings interested in how I can apply.

[55:20] And that’s interesting. I think the conversation, you know, since I’ve been in the business has, has definitely changed. In which you have a lot of folks that previously might have been extremely against, you know, additional housing and multifamily and affordable housing within their communities.

[55:38] But now they have kids that can’t move back to San Diego because they can’t afford it. And so I think people’s perspective has, has certainly changed.

[55:48] But it’s not to say that everybody’s.

[55:50] Kevin Choquette: Perspective has changed that whole community outreach thing. I took some time to browse through your guys website and some of the industry news on you and it seems like probably, well, at least as much and possibly more than a lot of other developers.

[56:11] You guys are engaged in that process and like you said, you’re not going to appease everyone. But how do you approach the idea of being receptive to community feedback? Hey, could you step back this corner A little bit more so that xyz or do you think we can just do three stories instead of four?

[56:32] And at the same time you’ve done a really good job of explaining the real nuts and bolts of okay, I’ve got to deal with. I’m not going to even try to recast it because we just talked about it for 45 minutes.

[56:44] But you. There’s a lot of dimension and nuance into putting together these capital stacks and the different restrictions and different capital and the cost and the debt. And it’s got to be a full on challenge in and of itself without somebody saying, hey, could you just step that back on the corner like maybe 15ft?

[57:03] How do you, like maybe I’m asking it from an emotional perspective, like you’re a principal of the firm, you’re trying to keep the thing going and be successful in your business and you’ve got a bajillion constraints that you’re successfully navigating.

[57:21] And then somebody just comes along and says, well, yeah, but could you just, could you just pull that corner back? Like how do you navigate that challenge? It seems significant.

[57:30] Jimmy Silverwood: Yeah.

[57:32] I think each case is a little bit different. I think from my perspective, I usually come back to are we going to be able to finance this deal and ultimately produce housing on a site with this change?

[57:48] Right. So I think a lot of times we’re just going back to whether or not we can finance a particular change. When we’re talking about knocking off a floor of a building, obviously that becomes a little bit more drastic from initial underwriting because as we know, it’s all about economies of scale.

[58:06] Right. So as soon as you lop off a floor, let’s just say of 100 unit building, you’re losing, let’s just say 20, 30 units in that. And so every different financial mechanism is incrementally going up on a per unit basis.

[58:24] So it really depends. I would say in areas that we have, you know, maybe some city funds or county funds that we can go after, we’re far more receptive to larger changes in the design and the original,

[58:42] you know, kind of building plans versus if, if we’re in an area that, you know, we have no way of filling a gap, then we have to kind of decide, okay, is it worth still proceeding?

[58:56] You know, have we already paid for the land? Right? Have we already purchase the land? Are we exposed, you know, 5, 6, 7, $8 million on the land on a deal?

[59:06] And we need this amount of units to get the deal to pencil that. That always comes into the question. So I guess to answer your question, it’s, it’s definitely on a deal by deal basis,

[59:17] but we have done it before. You know, we might have the right to build a five story building, but you know, working through community outreach and working with, you know, some of the electeds who might support a deal,

[59:30] you know, we opted to reduce a floor on the building. Right. What’s, what’s interesting about it is I would say nine times out of 10, the same people who were complaining about the height, they’re still complaining about the height, right.

[59:46] Kevin Choquette: Even after you gave them a floor.

[59:48] Jimmy Silverwood: Right. So like I personally have to have to balance. Okay. You know, these are, let’s just say you knock off a floor, those are 20 folks that, you know, in some cases, right.

[01:00:00] We hear it all the time in California, some cases these people might be homeless the next day. Right. So that is, it is a conundrum in which, you know, we have to kind of think through and, and when you develop a project in a building, we’re not looking, we’re not looking out the next five to 10 years,

[01:00:17] we’re saying, you know, what’s this community going to look like in 40, 50 years, right. Is a five story building going to be just the average in this certain community?

[01:00:27] And those are also, I don’t know, interesting discussions, I guess, right. To be having.

[01:00:35] Kevin Choquette: Yeah. You demonstrate a very considerate response. Like, I don’t know that I would be as patient given how much you have to do to get it to the point, just from what you explained,

[01:00:50] to get it to the point, to have a feasible project,

[01:00:53] like the fact that you are that measured and going, okay, well could we still finance it? Is there alternative sources of financing that would make it so we could finance it?

[01:01:01] If we really did do that, I mean, hats off to you.

[01:01:05] That sounds challenging. It’s not unlike any other developer, but it sounds difficult.

[01:01:10] Jimmy Silverwood: Yeah. And I think the low hanging fruit, right. For people that are very engaged in the process,

[01:01:17] you could imagine there are a lot of people who are just focused on what type of population we’re serving, which is a whole, another podcast, right. And kind of discussing, you know, how that process plays out, which kind of comes back to, in some cases,

[01:01:35] you know, we’re focused on what are your comments on the design, the building, the height, the window orientation,

[01:01:42] you know, do you have comments about, you know, the program space that we have within the development, how to qualify, you know, providing kind of that, that type of feedback and that opportunity for a community, but less about like who Are we serving?

[01:01:56] Right. Who exactly is going to, who is going to live here? Because that gets into an interesting kind of fair housing, I guess, discussion. And in a lot of cases, Kevin, you know, the way we see ourselves is we’re a vendor for a lot of the jurisdictions we’re providing.

[01:02:12] We’re building and providing affordable housing for those, for these jurisdictions because ultimately they don’t, they don’t have the staff and, or a lot of times, you know, the, the. Yeah, a full blown development staff.

[01:02:25] Right. I mean that’s, yeah, I guess in terms of private market continuing to build affordable housing, I definitely think that that’s, you know, the way to go.

[01:02:36] So you get.

[01:02:37] Kevin Choquette: Do you. I understood exactly what you just said there. Do you.

[01:02:41] I’ll be in a sensitive, in the way I’m going to say this at least as to the best of my ability. Do you have community citizens? Let’s say you’re in.

[01:02:50] Well, the one that’s say a half mile from your house, I imagine it’s a high resource area. It’s desirable neighborhood and people have paid up to be able to call that place home.

[01:03:01] If it has nice retail amenities, nice grocery stores, nice roads.

[01:03:07] Do you have people voicing concerns? I don’t know what sort of AMI it is, but let’s stipulate it’s 50% AMI. Like who are these people that you’re going to bring into this community?

[01:03:19] Does that come up?

[01:03:21] Jimmy Silverwood: It does,

[01:03:23] it does come up. I would say,

[01:03:27] as you could probably imagine, a lot of times it comes up in a, in a different narrative. It will come up as well. I’m all for affordable housing, but I don’t think this is the location for.

[01:03:43] Kevin Choquette: Right. And what’s the evidence against or for that? I mean,

[01:03:48] I don’t actually have any visibility into this. I’ve never lived in what I would say is a really nice neighborhood where all of the sudden a quote unquote affordable housing project came through.

[01:03:59] And seen the implications of it, I have suspicions, but I don’t want to put them on the table. Like, how does that usually unfold in terms of the impact and repercussions for the, the immediate neighborhood?

[01:04:11] Jimmy Silverwood: Well, so what’s interesting is a lot of the newer master plan developments throughout, you know, San Diego and that’s, that’s in one of the areas that I live.

[01:04:23] It already has hundreds, not thousands, but hundreds of affordable housing apartments already in operations. That’s what’s funny about it is people just don’t know.

[01:04:34] Kevin Choquette: That’s right. And all of our projects have Affordable units in them because of the state density bonus.

[01:04:39] Jimmy Silverwood: Right, exactly. So in terms of the data and statistics, it’s, it’s not there to support that your neighborhood crime is going to go up. Right? I mean, those are such dated, you know, views, but unfortunately those are still some people’s views.

[01:04:58] And you know, sometimes during outreach we are providing some of that, that data and statistics, a lot of it. You know, so many times it comes up that, you know, our property values are going to go down.

[01:05:10] Well actually when we invest, you know, $100 million in this development.

[01:05:16] And we’re also, let’s just say for example, this one kind of nearby my house, we have a commercial component as well to that, a retail component.

[01:05:27] You know, the reality is that home values are going up in those areas. In higher income areas. It is, it’s interesting, right, because in more of a moderate resource or an area that might be gentrifying, as you can imagine, any type of development helps spur other development for a community that’s already built out.

[01:05:48] Maybe that’s not so much the case. But there’s no evidence to suggest that affordable housing developed anywhere within your community is going to bring down home values. In fact, a lot of the data supports that.

[01:06:00] It increases both home values and property values.

[01:06:04] Kevin Choquette: Yeah, that’s, that’s interesting. That’s kind of what I would expect if it, it’s something people are concerned about and it ends up being a nothing burger.

[01:06:13] Jimmy Silverwood: Right.

[01:06:14] Kevin Choquette: What’s it take to be amongst the best? I mean, I, I see you guys as,

[01:06:18] I don’t know, the affordable housing space. Well, I don’t know who your competitors are. You know, we’re, we’re on the market side over here. And it is funny how there’s kind of just like, yeah, you guys are over there, we’re over here.

[01:06:30] Even though we’re all kind of doing the same thing.

[01:06:33] What’s it take to be amongst the best in this space? Like what are the, the critical excellences that you have to maintain in order to be effective?

[01:06:44] Jimmy Silverwood: Well, I would say one of the things is just being around for so long has been extremely helpful. You know, I run the day to day operations as well as our senior team who a lot of folks on our, a couple of the folks on our senior team have been here for 15,

[01:07:05] 20 years and just that kind of institutional knowledge that our company has that, you know, maybe development companies that have started within the last 5, 10, 15 years in affordable housing space, you know, they don’t have that long of experience with which, you know, really just comes down to what has the organization,

[01:07:27] organization seen, what have we been through and things like that. So we definitely have a lot of lessons learned, I would say in terms of like construction types as well as different site characteristics and things like that.

[01:07:43] Part of it’s just, you know, real estate development, right, is all the risk you take, you know, are you going to miss something during due diligence that next thing you know, you can’t build your project on, you know, on the land side,

[01:07:56] you know, those are areas that we kind of thrive in because we have infrastructure within our company and a knowledge base and experience base within our company that we’ve seen a lot.

[01:08:09] And that kind of comes back to, you know, our CEO, my father Jim, who started the company.

[01:08:14] I lean on him for a lot of weird stuff, right? You always, you always find weird new stuff in real estate development. And just being able to call him, I know where he lives,

[01:08:28] I know that guy.

[01:08:30] Just being able to access, you know, and talk to him about his experiences is really helpful in our decision making. But I think that’s part of it is, you know, the stakes are high.

[01:08:41] You can’t, you, you really can’t be making big mistakes. And I think that’s what has kept us, you know, best at class is that, you know, we,

[01:08:51] don’t get me wrong, we make mistakes, but it’s just making sure those mistakes aren’t going to, you know,

[01:08:58] ruin a deal, you know, that you’ve spent millions of dollars on. So I think that’s, that’s part of it. And then ultimately, you know, like any, like any business, it’s very relationship based.

[01:09:10] So we have, you know, cities, counties that we’ve worked with for so long and you know, that’s been part of it too, is from a reputation standpoint for people within this field.

[01:09:24] You know, we’ve, we’ve benefited from having a really good reputation on producing affordable housing, but then also ultimately being in it for the long haul. You know, I mean, again, given that we have been here for 30 years, all the folks who are involved in this space know we’re going to be here for another 30 years.

[01:09:44] And you know, we’re not just doing one off deals, you know, we’re kind of in it for the long haul.

[01:09:50] Kevin Choquette: And, and then the team that you guys actually are bringing to the, to the table here, I, again, I’m, I don’t know that much about Affirmed. I know you’re in the president role.

[01:10:00] You’re you. I would. Well, you could tell us what your, your Day to day is what. And then what’s the team underneath you? How many people are on, on the team?

[01:10:10] Jimmy Silverwood: Yeah, so our organization, we have I think about 31, 32 people throughout the whole organization on the, on the real estate development side. And then we have a general contracting company as well as subsidiary and they probably have maybe 15 to 20 full time employees and you know, some, some folks on kind of a consulting basis as well.

[01:10:41] So that’s, that’s kind of the, the makeup of the two organizations. We just do, I mean we don’t do, you know, our own property management or anything like that.

[01:10:53] So in terms of vertical integration, we have the general contracting side of it and the development side of it. And then we, you know, source out services for deals and then also property management on deals.

[01:11:09] So that’s kind of, you know, the makeup of the organizations. And then at Affirmed we have, you know, Bay Area team, mostly development folks up there. And then we here in San Diego have all of our financing and accounting operations headquartered here in San Diego.

[01:11:29] So in terms of what I oversee, I oversee,

[01:11:33] you know, several folks on our senior team, which includes asset management,

[01:11:37] construction and finance.

[01:11:41] So on a day to day, every day looks very different.

[01:11:46] I would say I get the fortunate job of having to get involved in a lot of different issues that come up. Right. So a lot of my day to day might look like helping put out fires on numerous areas.

[01:12:05] It could involve some of the business development aspects associated with public speaking, events, conferences,

[01:12:15] meeting, just, you know, with market rate developers. You know, maybe they have,

[01:12:20] you know, affordable component that they’re looking to source out to an affordable housing development group. So in, in terms of,

[01:12:30] I would say the majority of my day to day is spent on the business development side. The tip of the spear we like to call it in real estate development, which is really the acquisitions and where the company is going and then also the real estate development side.

[01:12:48] So we have a director of development both in SoCal and NorCal who report to me. And so my job, the way I see it on the development side is really how do I get things unstuck to keep moving?

[01:13:05] Kevin Choquette: That must be a really sleepy job.

[01:13:11] Why do you guys have an internal general contractor? I get into that dialogue a lot,

[01:13:17] especially when I’m. Again, we’re different markets. But LP Equity is oftentimes reluctant to deploy dollars into a vertically integrated development and building shop because they’re concerned that any failure on either the GC side or the developer side leaves them holding the bag because now both have failed and so they’ll want that,

[01:13:41] if you will, sort of like separation of church and state, the project sponsor developer being its own entity and then contracting out to a third party that theoretically can put up guarantees of maximum price and hopefully uphold this schedule and perform as expected.

[01:14:02] But what, I wonder, what brings an affordable housing group to have that resource in, in house as opposed to just hiring it as you, as you go?

[01:14:13] Jimmy Silverwood: Yeah. So we initially,

[01:14:18] the idea around us bringing that aspect in house mostly had to do with our rehab projects in which we found ourselves, you know, kind of itching our heads as to why, you know, for more of a light type rehab for a portfolio deal that we, we own and, or,

[01:14:40] you know, an AC rehab. Why, if we’re spending, you know, 30, 40,000 a unit, which for, you know, for a lot of people that’s fairly substantial, but in our world, you know, not, not too substantial, depending on the age of the building,

[01:14:56] you know, bringing the GC in house made a lot of sense because ultimately we found ourselves with drawings that were just as thick as our new construction aspect. Right. So we’re spending more money on the design aspect because ultimately we want the drawings to cover everything so that we’re mitigating change orders with a third party gc.

[01:15:20] Right. So that’s one aspect of it. And then the other is just with rehabs, it’s like, oh, yeah, that was unforeseen. Well, was it, you know, on a light rehab, right.

[01:15:31] Where you’re not necessarily going down to the studs. And so it was kind of, you know, a mix between trying to reduce our design fees for some of these more light rehabs and also being able to kind of mitigate, you know, change orders that we are beginning to see on these lighter rehabs.

[01:15:52] And then finally just really having a little bit more control because some of these rehabs would include in place rehabs, meaning we’re moving people out of the units, back into their units.

[01:16:04] And so to have to rely on a third party gc, unless that’s, you know, their expertise, we also felt like having a little bit more control over that, given that these are our residents, especially if it’s a portfolio deal that we currently own,

[01:16:18] we wanted to have more control over that. So that was about seven years ago. And as that, as the GC company started to grow, we did our first ground up probably about maybe, gosh, time flies, maybe five, six years ago, maybe even longer.

[01:16:36] Gezo. And then now they’ve gotten to a point that each project they have bonding capacity up to 100 million per project. So they’re ultimately able to pretty much do any of our developments throughout the state.

[01:16:50] I would say as of right now they do about, I don’t know, maybe 60% of our work. And then we have two deals starting up in the Bay Area next year.

[01:17:01] One that’s about 105 million and then another that’s about 40 million that they’re going to go up north and help build those for us.

[01:17:08] Kevin Choquette: And so are they a true independent sort of entity? And are they putting up,

[01:17:14] you mentioned bonds, but are they putting up a guaranteed maximum price contract or is it a cost plus contract? How do you guys think about that aspect? And maybe those entities that are taking the tax credits and all the eyeballs on it mandate some of how that has to get done.

[01:17:31] But how does the GC work with the developer?

[01:17:34] Jimmy Silverwood: Yeah, so I mean, I think we’re, we’re definitely affiliated. I mean, you know, the, it doesn’t have the same ownership as Affirmed, but basically, you know, several of our senior team members are owners of the construction arm.

[01:17:53] So yeah, however you want to call that related affiliated.

[01:17:57] But in terms of the deals,

[01:18:02] you know,

[01:18:04] basically it’s, it’s mostly GMP type, type contracts. Yeah, I don’t think I’ve seen Cost plus for quite a while, at least in our space. But what it, what it kind of comes back to is,

[01:18:18] you know, we’re, we’re trying to do whatever we can to get these deals to pencil. And so, you know, there are times that we’re potentially going in with a little bit of a lower price and then we’re trying to solve to it.

[01:18:32] Right. So whether that be through ve of the building, I mean ideally you don’t have to necessarily go through that.

[01:18:41] You know. Two,

[01:18:43] I would say you don’t want to strip away things that are going to hurt, you know, long term operational aspect of the vision of a project in terms of program space and unit size and things like that Parking.

[01:18:56] Kevin Choquette: Right.

[01:18:57] Jimmy Silverwood: That comes into it. But we usually do go through a ve exercise and ultimately we’re pushing them hard and they’re always getting to a lower cost than we’d be paying for a third party gc.

[01:19:09] And their function is ultimately to help us get more deals to pencil and ultimately be a backstop for the development company. So I’m sure you kind of hear from other folks within affordable space or even the market rate space, and that’s usually what the general contracting side is set up for,

[01:19:32] is to really be that backstop. Right. In terms of, you know, the Primary goal is for the development company to be able to, you know, thrive and continue to get deals done.

[01:19:44] Kevin Choquette: Right. Be able to do things at a lower cost with more control.

[01:19:48] Jimmy Silverwood: Exactly. You know, another, another aspect of it on the control side is just that,

[01:19:54] you know, on the third party GC side, we used to always bid out our deals and you know, at times that would get us into trouble because you might have a low bid and then you know, all of a sudden they realize that they were too low of a bid.

[01:20:11] Right. And then they’re, then they’re potentially trying to make it up during construction.

[01:20:16] But in rare cases they might have an issue. Right. Like a big issue in which all of a sudden you’re in a position, you know, are they going to walk off the job?

[01:20:26] Are they going to be there the next day? Is this a one off deal for that company? Right. Are they in it for the long term with us? And so I would say a lot of our third party GCs, which we still have third party GC relationships because again I mentioned our general contracting arm doesn’t build everything.

[01:20:44] I would say those relationships are the foundation of them, are we’re not just looking at this deal, we’re looking at the next 5 deals, 10 deals, 20 deals over the next 20 years.

[01:20:58] Because ultimately then when it comes down to it, they’re not just looking to maximize their profit on a deal and make sure they make their profit. It might be that one deal they make their anticipated profit and the next deal they make very little.

[01:21:13] And that’s okay because we’re in kind of a long term relationship,

[01:21:19] you know, in which, yeah, you know, some deals they might make what they anticipate and other deals they won’t. And that’s okay because they’re not just looking at, you know, one individual deal at a time.

[01:21:30] Does that make sense?

[01:21:32] Kevin Choquette: It makes perfect sense. Yeah. I, I think any suite of service providers that you can get to behave in that manner, like call it a tribe,

[01:21:43] knowing that you want everybody to be successful. But not every deal goes exactly to pro forma, so let’s just go do another one. I mean, we certainly take that stance in our relationships, right.

[01:21:56] Not all of them are home runs and sometimes you have to bend in order to just get it done so you can go get the next one.

[01:22:04] Jimmy Silverwood: Yeah. And part of it too is so like also just to describe, you know, when we go in for tax credits,

[01:22:14] basically our construction cost and price that we have at that point,

[01:22:19] you know, we better **** well know what it’s going to be and because basically at that point it’s pretty much locked in. Right. And part of that comes into the competition.

[01:22:29] Right. The competition is going to drive people to, to potentially get a little bit more aggressive on their construction pricing because it is a competitive environment.

[01:22:39] But I guess I, the point I wanted to make is that, you know, when we talk about risk, if we have overages during construction, we’re paying for it. Right. It’s not like the agency all of a sudden is going to say, oh yeah, we’re going to put 2 more million,

[01:22:53] 2 million more in this deal.

[01:22:56] That’s, I mean, it’s not to say that’s never happened. It hasn’t happened for us. Right. Because at the end of the day when we go in for the tax credits, it’s kind of like we’re going to get the deal done even if that means we’re going to write a million dollar check.

[01:23:12] So,

[01:23:13] you know, and that’s part of it kind of comes back to reputation and everything. All the agencies we work with, they understand that. They understand that, you know, two years prior to a construction start, if they basically award the project $5 million, that’s going to be the amount of money they put into the deal.

[01:23:32] We’re not going to come back to them after construction and say, hey, actually we need, you know, more money. It’s not to say it never happens, but again, it kind of comes back to, you know, the risk that we take.

[01:23:43] It’s, it’s, you know, it is calculated risk, but at the same time, similar to a market rate developer. We’re on the hook.

[01:23:52] We’re on the hook in many ways. You know, we talked about the tax credit investor. We have these limited partnership agreements and those partnership agreements look very similar to the market rate world.

[01:24:02] Right.

[01:24:05] Anything that goes wrong, it’s on us as the general partner.

[01:24:09] Kevin Choquette: Yep. Well, here’s the thing that I should have started with, but we got super granular.

[01:24:17] My clients are on the hook for the same sort of cost overruns and they’ll have their LP investors holding them to performance metrics and a whole array of, let’s just call them, covenants, but not the least of which is cost overruns.

[01:24:33] And, and the ways that cost overruns can be dealt with are as varied as the number of ice cream flavors at Baskin Robbins. But at the end of the day, their incentive to maintain costs and bring the, the project’s own budget is to participate in the project profitability subject to a whole bunch of constraints and agreements between the,

[01:25:00] the large check Writer and them as the operator, you know, getting a levered return that beats the common equity.

[01:25:07] That is not the case on affordable housing. And we haven’t talked about that. Like what is the, the, the business and or profit incentive of a group like Confirmed Housing?

[01:25:17] I think I have an understanding of how that works. I’m kind of embarrassed that we didn’t actually talk about that a little bit sooner because I know you’re not going to sell it.

[01:25:25] You’re not going to go out and say hey we just built this three years ago so let’s go sell it at a 4 cap. Like that’s not the deal. How do you guys, how do you make the engine go around?

[01:25:33] Right. Every business needs revenue to cover OPEX and drive some profit.

[01:25:39] Jimmy Silverwood: Yeah. So just a little bit about how whether it’s a for profit affordable housing development company or nonprofit, which we have, we have actually. Excellent. You know there’s, there’s several large nonprofit affordable developers in the state who produce a ton of housing throughout the state.

[01:25:59] And then you have your, you know, for profit affordable developers who are kind of right there, you know, in terms of some of the, you know, largest producers of it in the state.

[01:26:10] There’s two mechanisms. So one is development fees. So you know, perhaps on the market rate side a developer, because they’re involved in kind of a backend component, you know, especially on you know, a quicker execution of a sale.

[01:26:29] Let’s just say it’s not a build to hold more of kind of a merchant build type structure on the market rate side. You know they’re, they’re charging less development fees.

[01:26:39] Right. Because ultimately they’re kind of putting those in for a potential, you know, payout I guess within a, I don’t know, you would have to tell me like a five year horizon.

[01:26:49] Kevin Choquette: Yeah, five or less.

[01:26:51] Jimmy Silverwood: Yeah. So for us it’s a little bit different. As I mentioned, we’re in the deals for at least 15 years. So there’s never going to be a sale or refi within the first 10 years for, for sure because of the tax credit investor.

[01:27:05] We’ve seen some sales and refis in year like 12 and again they, the investors just have some indemnities on the recapture risk that we talked about earlier.

[01:27:16] But development fees are what make a lot of affordable housing development companies in California churn.

[01:27:26] So that’s first and foremost. And those fees, they actually just got updated this year. Previously there were fixed,

[01:27:34] there was a cap on, on the amount of fee. Right. So I think it was two and a half million Dollars was the cap on the fee that since has been updated.

[01:27:45] Now the cap’s closer to like 6 million. But here’s an example, right? You do $100 million deal,

[01:27:51] you could do $150 million deal, you know, just a year ago or two years ago. And the cap on your development fee is two and a half million,

[01:28:00] plus or minus. Right? And so those fees for those that.

[01:28:04] Kevin Choquette: Don’T know, that’s really low. Right. But for our guys, it’s 5% of hard, hard and soft costs. And we would exclude land and finance from that. That to me is a market rate developer fee.

[01:28:15] Jimmy Silverwood: Right, exactly. So in some cases that that fee, the development fee would be as low as like 2 and a half, 3% on a deal, which again is kind of below market rate.

[01:28:27] So the development fees is one of it. And we earn those at different milestones with all of our different partners. But especially the investors kind of dictate or they negotiate when those fees are paid.

[01:28:41] And not surprisingly, the majority of the fee is paid when you convert the project stabilized and you convert from your construction to your permanent mortgage.

[01:28:52] So that’s one way a development, an affordable housing development company helps keep the lights on and pay overhead and all those types of things. The other aspect is cash flow.

[01:29:06] So each deal is drastically different. Like, let’s just say the example of having a city and a county providing some of that gap financing on those types of deals. The general partner, you know, might only be receiving 30% of the cash flow on an annual basis.

[01:29:25] Right.

[01:29:26] And what’s interesting about it is as, as you could also imagine, you know, we talked about the example that a lot of these rents in, in, you know, a potential market could be a third or a half of market rate.

[01:29:39] Our expenses are not, you know, some magical figure that we can, you know, all of a sudden operate these properties for way less. So the cash flow on these properties is significantly less in comparison to market rate.

[01:29:52] Right. But there is still some cash flow benefit that our organization and other affordable housing development companies in California that we benefit from is the cash flow component. Now, that cash flow could range from 30%.

[01:30:07] It could also go all the way up to like 90% on a deal that, you know, you don’t have any city money or county money, and it’s more conventional. Right.

[01:30:16] So that range is,

[01:30:18] can be pretty wide.

[01:30:21] You know, for example, if it’s a deal, you know, it’s funny because people think that when we, when we develop supportive housing, right, we have formerly homeless individuals that are living at a At a new property,

[01:30:34] you know, a lot of the neighbors and stuff are talking about, oh man, you know, they must be earning so much cash flow and all this stuff. It’s like. No, we, you know, some of those properties we earn like very, like, I mean, I’m talking like maybe 15 to 20,000 in asset management fees for those developments.

[01:30:53] Right. Over a 15 year period. So we’re certainly not doing those for the cash flow. We’re doing them because one, you know, we’re, we’re vendors for the cities and jurisdictions that we work in.

[01:31:06] And if that’s the greatest need, that’s the type of housing we’re going to produce. And two, we just think that,

[01:31:12] you know, it’s the right thing to do because, you know.

[01:31:16] Yeah, I mean, we have to make business decisions. But at the same time, if, if we’re helping our local communities, you know, and get people helping get people off the streets, and that’s worthwhile.

[01:31:27] Even though from a cash flow perspective, it makes zero sense.

[01:31:32] We do earn developer fees though on those deals. Right. So that is a component that we’re able to make some money even on deals that were providing supportive housing for formerly homeless.

[01:31:46] Kevin Choquette: Yeah, but look, backing into,

[01:31:48] thank you for that, that’s super helpful by the way. But backing into the cash flow part, you already said most of the debt is a 115 debt cover. Right. So the 10 debt cover is gone.

[01:31:58] Cause that’s your loan payment. And then you got a 15% premium over the loan payment that you might be taking a third of. Let’s not forget that you’re maybe getting 30 to 50% LTC financing.

[01:32:09] So these are not, these are not gigantic numbers. I suppose if it’s $200 million project, nominally it could start to be a real, you know, annuity, but it’s not the same as a market rate deal because you have low leverage, because you have low rents.

[01:32:26] And that means that nominally your, your 15% that’s over the loan payment isn’t a huge number.

[01:32:33] Jimmy Silverwood: Exactly. And I would say, you know, it’s, it’s really challenging to get deals done. It’s not impossible, but it’s really challenging to get affordable housing tax credit deals done without any city money, without any county money, without any state kind of soft loan money.

[01:32:51] But in those rare cases that you do have developments that, that are able to be structured that way,

[01:32:57] you’re basically not necessarily sharing the cash flow. Right.

[01:33:02] And you’re able to leverage that equity. So if we were doing that all day long. Right. Which again Those are rare. They come about, I would say, I don’t know, for us, maybe 5, 10% of the time.

[01:33:14] Right. That we’re able to basically put together a deal without gap financing.

[01:33:20] Those deals can obviously provide for higher cash flow levels to a developer.

[01:33:28] Kevin Choquette: Yeah. And then in those, it’s. If there’s a gap, it might just be your own equity or maybe there’s no equity.

[01:33:33] Jimmy Silverwood: It’s just. Yeah, we’ve actually done some private raises for what we call more of like a residual receipt loan. Right. In which folks are maybe investing. I mean, not big raises.

[01:33:46] We’ve done, you know, one and a half, $2 million raises on given deals. And in some of those cases, you know, folks are able to get kind of a tax deferral as well on, on their returns, which, you know, as you know, in California could be helpful.

[01:34:04] So that helps, you know, sell that mechanism. But ultimately those are additional gap fillers that we’ve looked at,

[01:34:11] you know, outside of kind of the traditional models.

[01:34:15] Kevin Choquette: Interesting.

[01:34:18] Let’s switch to the personal. We talked briefly yesterday and you’re like, yeah, let’s kind of focus more on the business, but just swing a little bit that way.

[01:34:26] It sounds like one of your mentors may have been the current CEO and AKA your father, but who have been kind of the influential guys that have gotten you into this space.

[01:34:38] I mean, clearly you guys are like, the ecosystem that you’re playing in is fundamentally different than market rate developers. I think everybody’s got constraints and they learn how to navigate them.

[01:34:51] But the set of constraints that you just articulated are, are completely different than market rate guys. And I, you know, both in terms of, like the domain expertise, certainly relevant, but also just becoming, you know, a leader, becoming professional and, and kind of running the firm.

[01:35:08] What, who, who has helped you along the way?

[01:35:14] Jimmy Silverwood: Yeah, so as, as you mentioned,

[01:35:16] you know, my father obviously has been a big mentor. I wouldn’t, I wouldn’t, I mean, I don’t know if I’d be in this business if it wasn’t for him. And what’s interesting is, you know, we’ll, we’ll host high school students, college students,

[01:35:31] different, different, you know, groups of people that are looking to figure out their careers. And, you know, I would say 95% of affordable housing development professionals, they just stumbled upon this field.

[01:35:43] Right. It’s not something that’s talked about at, you know, the high school or college level, maybe college level a little bit, but a lot of people don’t recognize that, you know, you can have a career in affordable housing Real estate development.

[01:35:59] I happen to be kind of born into it, right. So grew up going to a lot of the construction sites with my father. Worked on a lot of job sites.

[01:36:09] You know, I used to just be sweeping and. And, you know, cleaning up trash. And then my father would. Would arrive and, you know, the general contractors who I’d work with, you know, all of a sudden the site would be completely clean and, you know, all this stuff.

[01:36:25] He would come in his suit and I’d be sweating,

[01:36:28] sweating my tail off. And,

[01:36:31] you know, that’s. That’s originally, like, how. Yeah, I kind of. I mean, he. He’s. He’s always been adamant. I’ve worked since I was really young and kind of got to see the profession through that purview, which at the time I was like, this sucks, man.

[01:36:48] I’m sweeping all day,

[01:36:51] all this stuff. But out of college, I worked for Turner Construction for several years. Largest public general contractor in the US and really got an appreciation for really just construction and then also real estate.

[01:37:11] So Turner at the time had been doing a couple deals for Affirmed,

[01:37:16] and then eventually my father had kind of asked me if I wanted to come work at Affirmed.

[01:37:24] In terms of mentorship at Affirmed,

[01:37:28] he’s always been a big fan of mine and just been extremely helpful. What’s also helpful in navigating a family business, which, when I started, my older sister worked here. My younger sister at one point has worked here as well.

[01:37:43] What’s made it work is that my father and I really see eye to eye on 90 to 95% of everything,

[01:37:54] which is extremely helpful. It’s not to say that that’s the only reason it’s been successful, you know, this transition, but it’s a big. It’s a big piece of it because obviously he, you know, the trust has.

[01:38:06] Has always been there.

[01:38:09] And, you know, the way we look at exposure, the way we look at opportunity,

[01:38:14] a lot of that’s very aligned. So he’s definitely been a mentor of mine. I mean, you know, built this organization from scratch. He. He actually first had a single family home subdivision company started.

[01:38:32] Started as a framer when he first moved from Philadelphia with 50 bucks. I mean, he’s got the whole. He’s got the whole story right.

[01:38:40] True. Just entrepreneur,

[01:38:43] you know, found real estate as. As, you know, a path that he was interested in, specifically real estate development.

[01:38:51] So his first company, though, was a single family subdivision company.

[01:38:57] And during the savings and loans crisis, basically he had 500 homes. And the banks came back and took back each loan on each of the deals, completely unforeseen, wiped out his business.

[01:39:09] And then he pivoted to tax credit affordable housing development. His first deal was 200 units in Escondido.

[01:39:16] Kevin Choquette: What year was that?

[01:39:18] Jimmy Silverwood: That was in 1994.

[01:39:21] Kevin Choquette: Okay.

[01:39:22] Jimmy Silverwood: Right around there.

[01:39:24] So,

[01:39:26] yeah, so it’s been really cool for me to watch him.

[01:39:31] And certainly what’s also nice is during a lot of transition type periods, you don’t have access to usually the person, whether it’s a company, you know, hiring, hiring somebody from outside to come in and run the organization.

[01:39:51] You know, the benefit is that he’s still, he’s still around and I get to kind of access all that different information. As I mentioned, I know where he lives as our CEO.

[01:40:02] He’s involved a little bit more on the policy side and strategic growth for the company and other things that, you know, are. He’s kind of looking, you know,

[01:40:14] long term, you know, a little bit more of a long term lens for the company. And I’m, you know, managing kind of more of the day to day. So. Yeah, that’s a lot to say that he’s been, he’s been my biggest mentor in the space.

[01:40:27] Kevin Choquette: Perfect.

[01:40:29] You know,

[01:40:31] you just gave a good treatment of like, how you end up here. Uh, and it’s undoubtedly the case with this skillset that you now have that you could do a bunch of other things other than trade commercial real estate.

[01:40:45] Right at the end of the day, like most of us in the industry are at some level sort of creating value and then trading it on. And, and you, you have a unique iteration of that.

[01:40:55] But, but why, why commercial real estate? Of all the things you could do, why do you stay here? What’s your kind of like, what gets you out of bed in the morning to be like, all right, like, let’s do it again.

[01:41:06] Jimmy Silverwood: Yeah, well, I’m glad, I’m glad you asked because I don’t know if, I don’t know if general commercial real estate would get me out of bed every day. I think being in this industry.

[01:41:20] Kevin Choquette: You.

[01:41:20] Jimmy Silverwood: Know, is, is really what gets me out of bed every day. I think it’s, it’s really unique, you know, to have to be working at a company, working with colleagues and, and also it’s kind of like a bubble industry.

[01:41:33] Right. A lot of the banks and investors that we work with.

[01:41:37] Yeah, the numbers have to, have to usually make sense, but a lot of times, you know, folks are,

[01:41:45] you know, a little bit more mission driven as well. And so it’s, it’s helpful because every once in a While we do need flexibility, whereas, you know, most likely in most commercial real estate, you’re not going to get that flexibility because of the folks that we’re serving.

[01:42:01] I’d say, yeah, you know, at a firm, we have a triple bottom line. We can make a profit, but we’re also serving people and the planet aspect. We’ve been utilizing solar on our project since, like, year 2000.

[01:42:15] So, you know, Jim, our CEO, has been very influential in driving, you know, that aspect from a sustainability standpoint. But I think the number one thing that gets me out of bed is when I get to meet our residents who move into these developments.

[01:42:32] I mean,

[01:42:33] talk about an amazing experience. Unfortunately, there’s a lot of tears usually involved,

[01:42:39] but these are folks who have worked all their life and might have one or two things that kind of redirected their life,

[01:42:50] and they’re just looking for an opportunity to live,

[01:42:56] you know, with an affordable rent and not have to worry about eviction, homelessness, et cetera,

[01:43:04] as well. So I’d say, you know, the biggest thing that gets me out of bed is ultimately the folks we’re serving, and I get to meet a lot of them, you know, at our grand openings,

[01:43:15] as well as when we’re moving people into the development. So I’d say that’s the biggest, biggest driver, honestly. And real estate is so much fun. It’s so complex.

[01:43:27] You know, there’s wins and then there’s a whole lot of losses. Right. I know we didn’t talk about that, but it’s really interesting when, you know, annually.

[01:43:37] Yeah, you have a lot of failures. Right. I mean, that’s the reality of probably all types of real estate development. Right. But I talked about the competition when we go in for the credits.

[01:43:49] You know, I mean, each and every year we’re going to have, you know, failures as well, and we just keep pushing on with kind of the mission side of it helping.

[01:43:58] Helping me at least get out of bed every day.

[01:44:02] Kevin Choquette: Yeah, I dig it. And that probably, I’m guessing,

[01:44:06] is really informative when you have somebody standing next to you and saying, well, no, I’m really, I’m a really pro affordable housing, but I just don’t think it belongs in this location.

[01:44:17] You’ve met the people, you know, the people you’re like, hey, man, like. Like that. I know what you’re thinking, but I’ve met these people. Like, that’s kind of gotta be awesome.

[01:44:30] Jimmy Silverwood: Yeah, yeah, no, it is. And as you can imagine, it can be very frustrating. Like, you know, some of our staff, again, I Would say the. Yeah, everybody here is. Is really excited about the work that we’re doing.

[01:44:46] And that resonates really from everybody from our accounting team. Right.

[01:44:52] To the development team who’s actually going out and into the communities and talking about prospective developments. But you’re right, it can be very, though frustrating as well. Right. Hearing those remarks when we kind of know, we’ve met and talked with people who really need this housing because,

[01:45:12] yeah, it’s really easy. It’s really easy to talk about something if you’ve never.

[01:45:20] Well, yeah, you could talk about experienced it. Right? That’s right.

[01:45:25] Kevin Choquette: It’s their fear of something they’ve never experienced.

[01:45:27] Jimmy Silverwood: Right.

[01:45:28] Kevin Choquette: Yeah.

[01:45:30] Look, Jimmy, I want to be respectful of your time. I’ve gone a good bit here.

[01:45:34] Anything you want to offer to, you know, the kind of. You have come into this in a very fruitful way in terms of, you know, having. I actually didn’t know the story about your father with the tool belts and the framing and, you know, 50 bucks out of Philly.

[01:45:51] I’m obviously having met him, I’m not surprised.

[01:45:56] But, you know, so you’ve been on more like the entrepreneur kind of journey and you’ve got the. You’ve got the steering wheel now. You’re growing the business and you’ve dealt with the hardships and, you know, probably had the wins and the losses.

[01:46:09] Any advice or insight you want to share for, you know, the others in the industry, the entrepreneur that. The entrepreneur who’s, you know, fighting the good fight, whether it’s affordable housing or market rate housing,

[01:46:20] Just anything you might want to share?

[01:46:24] Jimmy Silverwood: Yeah, I. I think. I think, you know, two aspects that have served me really well in real estate.

[01:46:31] One is,

[01:46:33] you know,

[01:46:35] never really taking no for an answer. You know, I think that,

[01:46:39] I mean, that really just comes down to persistence, you know, and getting something done. And again, it’s not to say there’s never a case you don’t take, you know, that you take no for an answer.

[01:46:52] But I would say that served me the best is ultimately always knowing that there’s a different way to approach something ultimately to get to a yes answer,

[01:47:04] especially if that’s going to mean whether or not a deal moves forward.

[01:47:11] The other aspect is really that we didn’t necessarily touch on is the financial aspect. So when I started at the company, I jumped into Performas. I started at the company in 2013 and really was attracted to kind of the Performa underwriting side of things.

[01:47:32] And I think usually when I speak to folks entering real estate,

[01:47:38] really in all Facets, it’s like, understand the performant underwriting in whatever type of real estate that you’re doing, because the amount of people that can put that together and get a deal, you know, to pencil it can be fairly limited.

[01:47:57] I mean, every organization has to have, you know, at least one of those people.

[01:48:02] Hopefully in a lot of cases, a couple of those people.

[01:48:06] But that’s, you know, the number one kind of advice I could give to people who might be entering the field or are interested in bettering their skills in the field is learn exactly how the deals are getting done, how they’re being financed, so that you can go out and underwrite your own transaction.

[01:48:23] Because at the end of the day, you could have an awesome vision for a project, but if you don’t have a way of financing it and you can’t execute, doesn’t really matter.

[01:48:32] Kevin Choquette: Yeah, I completely agree. The keys to the kingdom are in the Excel spreadsheet.

[01:48:37] Jimmy Silverwood: Yes, exactly. Just love Excel, you know.

[01:48:41] Kevin Choquette: Yeah.

[01:48:43] Jimmy, thank you so much. Affirmed Housing Group, you guys listening this for you. Google it. Find Jimmy, his father. James,

[01:48:52] if you’ve got this far, thank you. And please take the time to get out there and click on five stars and review us, or hopefully you don’t give us one star.

[01:49:01] Jimmy, the mic is yours. To wrap it up, I would just want to tell you again, thank you so much for taking the time.

[01:49:09] Jimmy Silverwood: Yeah, thanks a lot for having me, Kevin. And, yeah, I hope people are still on listening. I know that we went into. We went into some pretty technical, you know, aspects of affordable housing, so hopefully, hopefully we don’t have any sleepers out there.

[01:49:24] But, yeah, thanks again for having me on the. The podcast. And, you know, it’s just I. I always enjoy a way of. Yeah, just bringing more information to truly what affordable housing is and how it functions.

[01:49:40] Because, you know, I think there’s definitely a lot of misleading, you know, interpretations out there. So, yeah, whenever I can kind of provide some additional info and transparency into it, I always like to take that opportunity.

[01:49:55] So thanks for having me, Kevin.

[01:49:57] Kevin Choquette: Yeah, and I said I’d stop, but honestly, if you go right back to what you just said about the spreadsheet and how technical we got, the reason I did it is because I don’t understand what you do in terms of all of the pieces and parts.

[01:50:09] And you just, you know, you spelled him out. And honestly, I think you’re perfectly on point with the audience, so I think it’ll be. It’s great. Thank you for, you know, being so transparent on all that yeah.

[01:50:19] Jimmy Silverwood: Thanks, Kevin.

[01:50:20] Kevin Choquette: All right, take care. Bye.