Deal Making in Affordable Housing With Kyle Shoemaker, Real Finds Podcast #20 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere with the Real Finds Podcast, the podcast series where we interview key entrepreneurs, scientists, and activists shaping the real estate industry and, as a result, our world. In today’s podcast, we’ll be speaking with Kyle Shoemaker. Kyle is Managing Director at Affordable Housing Investment Brokerage, Inc., whose sole purpose is the direct, confidential sale of affordable housing investments. They’re driven by a passion for maximizing client wealth and serving an industry that provides a vital social need. On the podcast, we discuss industry best practices and success stories, and we tackle myths, misconceptions, and challenges facing the affordable housing industry. It’s well worth a listen. Hey Kyle, thanks for hopping on the podcast today.
Kyle Shoemaker: Pleasure. Glad to be here.
Gordon Lamphere: Could you start by introducing yourself to the audience?
Kyle Shoemaker: Sure. I’m the founder and managing director of a boutique real estate brokerage that specializes in selling investment property in the affordable housing space.
What Affordable Housing Investment Means
Gordon Lamphere: When people hear affordable housing, they don’t often hear investment as well. How does that work, and what’s it like investing in affordable housing?
Kyle Shoemaker: There are a lot of ways to define affordable housing. The way my firm defines it, and sometimes people say capital-A Affordable Housing, is deed-restricted multifamily or senior housing properties, where there’s some type of restriction around the rent that can be charged and/or the income level of the tenants. There are various programs to accomplish this, and we focus on the two biggest: the Low-Income Housing Tax Credit, or LIHTC, and what people refer to as a project-based Section 8 contract, a housing assistance payments contract that ties Section 8 subsidy to a specific building.
The investment side is that those programs do not lead to government-owned housing. A lot of people hear affordable housing and think of the classic public housing projects, which historically were pretty rough places to live and to take care of. These programs are public-private partnerships, where the government provides some type of help to a real estate investor or developer to build or renovate a property, and in exchange, the developer or investor agrees to abide by limitations that make the property more affordable. It’s a specialization on the investment and development side, a business model where people do deals with various forms of assistance, and it can be a very good investment model if you know how to do it.
Gordon Lamphere: For our audience who doesn’t know, what’s the difference between doing something under a LIHTC or Section 8 model versus a different model?
Kyle Shoemaker: It’s mostly the process of being approved to receive the assistance. With the tax credit, actually using that tool to build or renovate something involves a pretty intense application process that takes a lot of know-how. It’s a highly specialized process. It becomes less specialized for an investor to purchase a property that’s already restricted by the tax credit, but even then, you still need to be approved by the state housing finance agency that oversees the program in each state to purchase and run the property. With Section 8 contracts, most are regulated by HUD, some are administered by local agencies, but for the most part it’s a federal HUD program. To purchase a property that receives that assistance, you need to apply to have the contract assigned to you or your investing entity. That’s just getting in the door. Then you have to know how to manage the property within the limitations of the programs, which in both cases means qualifying tenants’ income to make sure they’re at a level that qualifies for the assistance, and dealing with physical and book-and-record inspections from the agencies to make sure you’re complying. So it’s specialized in getting in and in running the properties, but ultimately it’s still investment real estate. You’re trying to make a return on the money you put in through cash flow, fees from running the management, and hopefully growing NOI and property value over time.
Success Stories
Gordon Lamphere: You’ve had a solid track record of successful deal making. Can you walk through one or two projects that were particularly successful and how the process works?
Kyle Shoemaker: Sure, and to be completely clear, my only role is as a broker. I don’t own or operate properties myself. I’ve always kept that as a separate business I don’t work in. I’m a seller’s rep. When someone needs to sell one of these pretty complicated assets, I’ve developed the know-how and track record to market and sell it efficiently. Successful deals are ones where somebody needs to exit something in the sweet spot of what we do. My company has been in business over ten years, so we’ve spent a long time knowing who the qualified, aggressive players in the industry are, so we can get to them quickly.
Recently, I sold a 170-unit senior project-based Section 8 property in Rockford, Illinois, for a long-term client, a family business. I’d sold two other properties for him over the last 12 years, and he’s moving toward retirement. This was the last asset in the portfolio. He didn’t have children in the business, and it was time to move on. The property was roughly 40 years old and needed some work. He’d done a good job maintaining it but hadn’t done a complete recapitalization and renovation. He hired me to market and sell it, and through our process, knowing how to size up these deals and get to the people who know how to do them, within about a month and a half of marketing we had 15 different offers. This was early last year. We were able to compare not just price but the track records of the buyers, to assess how likely each deal was to go through. In this space, maybe more than in other real estate, sellers want to know the plan for the property going forward and that it’s in good hands, because these are sensitive situations. With a senior Section 8 property in a town where the seller still has business interests or lives, they want to know it’s taken care of. Through the classic brokerage model of creating competition, we carefully selected a buyer who paid a large, fair price and had a very successful plan of using the tax credit to do real renovation and make the property viable for the foreseeable future. That closed early this year, even after a bunch of interest rate movement while we were under contract.
Around the same time, we had a senior tax credit property, not Section 8, in Burlington, Vermont, that we executed with the same process. Burlington is not a market I knew well before that opportunity, but the assets are so specialized that people who know how to buy them will go to any market. It’s more important to have a buyer who understands the programs than the local real estate market. That’s a big part of why our model has been replicated throughout the country. We’ve closed in 36 states, because we know the people targeting senior tax credit properties of a certain size. We actually sold the Burlington property to a group based in Chicago that’s expanding nationally.
What Makes a Viable Opportunity
Gordon Lamphere: You mentioned viable opportunities have consistent characteristics. What makes a viable investment opportunity in affordable housing?
Kyle Shoemaker: Either scale, or infrastructure to deal with a lack of scale. The deal needs to be big enough, or be near places where the people who understand the market are nearby. The Burlington property I sold to a Chicago group was north of a $20 million deal. That’s why the Chicago group was willing to go there. If it had been smaller, it wouldn’t have worked the same way. That said, we work on just about anything that’s restricted, even when it’s small. We do a handful of deals north of $20 million, but most of what we sell is probably $5 to $11 million, private client and family investment company properties, and we sell properties of a million dollars or less when they have the restrictions we focus on. Those can be more difficult if they’re remote. If we sell 30 units in Chicago or Atlanta, there are plenty of willing participants to make a market. On smaller deals in smaller towns, it can be harder to get the attention of people who know how to do these deals, because the experience required is so specialized that buyers can be choosy about where they spend their time.
Gordon Lamphere: Finding someone within the asset class with both the capital and the know-how can be difficult. How do you find buyers for these large deals? Is it people you work with regularly, or what’s your methodology?
Kyle Shoemaker: That’s probably the primary function of my work. We spend all our time understanding who can take these on, so we know how to size up the deal and give an optimistic presentation of the opportunity. But the real work is that I’ve spent a whole career, and my team with me, interacting with the players who are in or entering this market and know how to do it. So when I get the right assignment, I sometimes say I already know the buyer, I just haven’t identified who it is. The basic model when I started years ago was that it’s public record who owns and operates these restricted properties. I went into a market, looked up every owner and operator, and started developing relationships to see where I could help them. That’s continued to snowball.
NIMBYism, Rent Control, and Why Investors Should Care
Gordon Lamphere: On things snowballing, there’s been real pushback in a lot of communities against affordable housing: political pressure, municipal pressure, economic blowback around home prices. How has that affected your business and the affordable housing investment market in general?
Kyle Shoemaker: Those factors most significantly impact new development, where somebody is trying to bring a project to fruition that didn’t exist before. In affordable housing as we’re discussing it, that’s primarily ground-up construction. There are not new project-based Section 8 contracts. The contracts that exist, exist. There’s been some potential in recent budgets to add more, but for all intents and purposes, there are no new Section 8 contracts. So you’re mostly looking at building with the tax credit, where you deal with the neighborhood political pressure and NIMBYism, the not-in-my-backyard attitude, that affordable housing developers constantly face. My business isn’t totally impacted by that, because I deal with existing projects where you’re not changing the use and having to go before a town council with a lot of people fighting it.
But how I like to present this issue, particularly to broader audiences of multifamily investors and investment real estate people of any kind, is that supporting affordable housing is essential not just from a societal perspective, but to protect a real estate business. It’s become more and more apparent in the media and wider real estate circles that the imbalance of supply and demand for affordable housing is truly at crisis levels, and governments are going to have to react. The best programs we have are ones like the Low-Income Housing Tax Credit to build new housing. What’s critical to understand is that tax credit housing frequently doesn’t look any different from other apartments. It can add to a community. It’s not the classic housing project many people envision. I think it’s important to grow these programs to help prevent reactive rulemaking from governing bodies, specifically rent control laws. I like to say to a room of market-rate multifamily investors: you should be contributing to lobbying efforts to support and grow the tax credit as a tool to build affordable housing in a profitable, entrepreneurial partnership way, and help prevent the risk of your local governing body enacting a rule that hurts your investment in a desperate effort to address this crisis.
Gordon Lamphere: Can I follow up on that? What’s the connection between rent control and affordable housing? Some people in our space see them as working in tandem, others in conflict.
Kyle Shoemaker: Rent control is a form of attempting to create affordable housing. In many markets, rents have gone well beyond what many people in working-class jobs can pay, so a government says, we’re going to limit what a landlord is allowed to charge, in an effort to keep housing available to people at the lower or middle end of the spectrum. It’s a tool to try to help that problem, but it’s ultimately proving not to be particularly effective, because it’s damaging to the people it’s retroactively applied to. Somebody entered into a multifamily investment with a certain amount of money, a plan for maintaining and operating it, and a budget based on market rents. If suddenly they aren’t allowed to charge those rents, it impacts every other aspect of the business and ultimately drives investment capital away, creating fewer opportunities to build the housing that’s needed. A program like the tax credit is used by an entrepreneur who understands the program, uses private money, and gets an incentive to work effectively with the government to profitably create restricted housing, knowing all the rules up front. It’s very different from rent control. There’s a cap on the rents the owner can charge, but they knew exactly what that would look like going in, and they received an incentive to do it.
Gordon Lamphere: Before the Final Four, can you take us through how you find investors for these projects? It’s something you’ve been particularly successful at.
Kyle Shoemaker: The way I find people to do these deals is that I find everybody who has done these deals. That’s how specialized it is. Part of why I like my business, and why I can execute it with a small team, is that I’m not going out to find a guy with money and convince him to invest in affordable housing or teach him. I very specifically don’t do that. The specialization required is enough that it’s unusual for new people to enter the space, so my business is finding the people who know how to do it and getting to them.
The Final Four
Gordon Lamphere: We’re getting to the end, but the Final Four is always a pleasure, and we’ll have to have you on again. First, a favorite of mine: where do you see commercial real estate and affordable housing investing going over the next 10 years?
Kyle Shoemaker: I’m optimistic. Attention to the sector has only increased in the time I’ve been in the business. The pandemic escalated investment interest. When there was massive job loss right after the lockdowns, we very quickly got multiple calls from professional multifamily investors saying, I’ve been interested in affordable housing for years, but now we’re committing to learning this space, and a number of them successfully have. Bringing more attention, money, and ideas to the sector will only help. Awareness of the underlying problem the business is trying to solve has only grown, and there’s really large bipartisan support in government for programs like the tax credit as a proven job-creating investment vehicle that creates housing. The problem runs very deep and we’re nowhere close to addressing it, but I’m optimistic that awareness brings more solutions as more money and attention comes to the sector.
Gordon Lamphere: We’ve gone forward. Now let’s take it back. If you could give yourself a minute of advice when you were leaving high school, what would you tell young Kyle?
Kyle Shoemaker: Tough one, but what jumps to mind is to make sure you celebrate small achievements along the way. Real estate is such a long-term endeavor, no matter your function, whether you’re investing and buying property or starting a brokerage or other service career. It’s impossible to say, I’m going to go into the office today, work my butt off, and get this big check. So you have to know how to celebrate small victories along the way, and ultimately have a vision of what your life can be in that career and a belief that it’s possible. I think I knew that, but it’s the type of thing that can never be reinforced enough when you’re embarking on this.
Gordon Lamphere: I couldn’t agree more. So many times in this business the next commission or deal seems an eon away, and you just have to keep churning. One tidbit we like to get from successful real estate folks is knowledge from a book. I’m a voracious reader, and many of our listeners are too. Is there a real estate, business, or life book that’s influenced you?
Kyle Shoemaker: It’s hard to drill down, because I read all the time. The advice I like to give is not to limit your reading to business or self-help, though those are important, and I’ve read a lot about developments in psychology, which I find fascinating and important to life. Having a variety of topics and styles rounds you as a person, which ultimately helps in business deals. I recommend novels, to understand how people make decisions and to put yourself in someone else’s shoes. But a more specific business book that’s a quick read, which has framed a lot of what I’ve done over the last ten years and has become more important all the time, is Essentialism by Greg McKeown. The premise is that we have so many distractions, so how do you decide what’s essential, and why is deciding what’s essential important? One small tidbit I tell people is that the word priority, in its original form, had no plural. We like to say, what are my priorities today? A big point of the book is that you really can’t have priorities. Pick a priority, singular, work on that, then move on. It’s a great, simple way to frame how you approach your work.
Gordon Lamphere: That’s a wonderful point. So many of us in real estate are going all different directions and not focused on what really matters. That sounds like a great read. The last question is the most important, and the reason we started this podcast: to identify individuals influencing real estate and bring them on. Kyle, who should we have on next?
Kyle Shoemaker: I don’t have a specific name for you today, but I’d say the profile. You’ve gotten a flavor for how affordable housing works from the perspective of a broker and marketer. It would be great to have a developer, or someone working with a developer, who’s younger in their career and has learned how things have been done and is seeing how they evolve as the programs evolve and as our environment changes with inflation and interest rate increases, all the normal real estate drivers that impact us too. There’s a lot of innovative work being done to create housing in a profitable way that contributes to a community. One group I have in mind is Evergreen Real Estate Group in Chicago. They have a couple of different developers, and they’ve been innovative in a number of ways, but they were the developer who partnered with, I believe, the Chicago Housing Authority on a couple of projects where housing was built into library buildings in the last year or two. I think it’s an absolutely fascinating concept, and I believe it’s been very successful so far. I’m not sure who the exact right person would be to speak to those projects, but that’s a group worth reaching out to.
Gordon Lamphere: That’s wonderful advice, and we’ll reach out to Evergreen. The last question, the second most important: how does someone reach you? Email, phone, what’s the best point of contact?
Kyle Shoemaker: My contact information is pretty open and public on my company website. People can find me quickly, and I always take the time to respond to a thoughtful inquiry, no matter how it comes in.
Gordon Lamphere: Kyle, thank you so much for hopping on the podcast today, and we’ll have to have you on in the future.
Kyle Shoemaker: Pleasure.
Gordon Lamphere: Thanks again to Kyle. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, or a review. Your comments, interactions, and subscriptions truly matter and help us continue to provide quality guests. You can follow us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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