[Senate Hearing 118-607]
[From the U.S. Government Publishing Office]
S. Hrg. 118-607
UNLOCKING DEPARTMENT OF TRANSPORTATION FINANCING FOR MORE TRANSIT
ORIENTED HOUSING DEVELOPMENT
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
__________
SPECIAL HEARING
June 18, 2024--WASHINGTON, DC
__________
Printed for the use of the Committee on Appropriations
GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT
Available via the World Wide Web: https://www.govinfo.gov
_______________________________
U.S. GOVERNMENT PUBLISHING OFFICE
59-868 WASHINGTON : 2025
COMMITTEE ON APPROPRIATIONS
PATTY MURRAY, Washington, Chairman
RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine, Vice
JACK REED, Rhode Island Chairman
JON TESTER, Montana MITCH McCONNELL, Kentucky
JEANNE SHAHEEN, New Hampshire LISA MURKOWSKI, Alaska
JEFF MERKLEY, Oregon LINDSEY GRAHAM, South Carolina
CHRISTOPHER A. COONS, Delaware JERRY MORAN, Kansas
BRIAN SCHATZ, Hawaii JOHN HOEVEN, North Dakota
TAMMY BALDWIN, Wisconsin JOHN BOOZMAN, Arkansas
CHRISTOPHER MURPHY, Connecticut SHELLEY MOORE CAPITO, West
JOE MANCHIN, West Virginia Virginia
CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana
MARTIN HEINRICH, New Mexico CINDY HYDE-SMITH, Mississippi
GARY PETERS, Michigan BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona KATIE BRITT, Alabama
MARCO RUBIO, Florida
DEB FISCHER, Nebraska
Evan Schatz, Staff Director
Elizabeth McDonnell, Minority Staff Director
------
Subcommittee on Transportation, Housing and Urban Development, and
Related Agencies
BRIAN SCHATZ, Hawaii, Chairman
PATTY MURRAY, Washington (ex CINDY HYDE-SMITH, Mississippi,
officio) Ranking
RICHARD J. DURBIN, Illinois SUSAN M. COLLINS, Maine (ex
JACK REED, Rhode Island officio)
CHRISTOPHER A. COONS, Delaware JOHN BOOZMAN, Arkansas
CHRISTOPHER MURPHY, Connecticut SHELLEY MOORE CAPITO, West
JOE MANCHIN, West Virginia Virginia
CHRIS VAN HOLLEN, Maryland LINDSEY GRAHAM, South Carolina
KYRSTEN SINEMA, Arizona JOHN HOEVEN, North Dakota
JOHN KENNEDY, Louisiana
JERRY MORAN, Kansas
Professional Staff
Dabney Hegg
Kelsey Daniels
Rajat Mathur
Jessica Sun
Michael Clarke (Minority)
Cameron O'Brien (Minority)
Jason Woolwine (Minority)
Administrative Support
Amanda Kronenberger
C O N T E N T S
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Page
DEPARTMENT OF TRANSPORTATION
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Statement of Dr. Morteza Farajian, Executive Director, Build
America Bureau.................................................
1..............................................................
Opening Statement of Senator Brian Schatz........................
1..............................................................
Statement of Senator Cindy Hyde-Smith............................
2..............................................................
Summary Statement of Dr. Morteza Farajian........................
3..............................................................
Prepared Statement of Dr. Morteza Farajian, Ph.D.............
5..........................................................
Statement of Dr. Tracy Hadden LOH, Fellow, Brookings Institute...
7..............................................................
Prepared Statement of Dr. Tracy Hadden Loh...................
9..........................................................
Statement of Mr. Adhi Nagraj, Chief Development Officer,
Mccormack Baron Salazar........................................
12.............................................................
Prepared Statement of Mr. Adhi Nagraj........................
14.........................................................
Ratings of Partnership...................................
15.....................................................
Timing...................................................
15.....................................................
Intercreditor Agreements.................................
15.....................................................
Year 15--Resyndications..................................
16.....................................................
UNLOCKING DEPARTMENT OF TRANSPORTATION FINANCING FOR MORE TRANSIT-
ORIENTED HOUSING DEVELOPMENT
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TUESDAY, JUNE 18, 2024
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:02 a.m. in
Room SD-138, Dirksen Senate Office Building, Hon. Brian Schatz
(chairman) presiding.
Present: Senators Schatz, Reed, Van Hollen, and Hyde-Smith.
DEPARTMENT OF TRANSPORTATION
STATEMENT OF DR. MORTEZA FARAJIAN, EXECUTIVE DIRECTOR,
BUILD AMERICA BUREAU
opening statement of senator brian schatz
Senator Schatz. Good morning. This hearing will come to
order. And I want to thank our witnesses for being here today.
On our panel, we have Dr. Morteza Farajian, Executive
Director of the Build America Bureau of the Department of
Transportation; Dr. Tracy Hadden Loh, a Fellow at the Brookings
Institution; and Mr. Adhi Nagraj, Chief Development Officer at
McCormack Baron Salazar.
Each of our witnesses bring incredible expertise in their
respective fields, and we are eager to hear your thoughts on
how Congress can improve access to financing for transit-
oriented development. Funding TOD is a no-brainer. When we
invest in neighborhoods around public transit, we create jobs,
cut traffic, and protect the environment.
And it is even more relevant today as the country grapples
with a national housing shortage, and a post-pandemic reality
of empty office buildings. Estimates put the national housing
shortage somewhere between five- and seven million units. That
leaves nearly 42 million American households cost-burdened,
meaning they are spending more than 30 percent of their income
on housing. And in the state of Hawaii, 30 percent sounds
pretty good to most.
Skyrocketing housing costs are driving more and more people
into poverty and homelessness. A lot of the problem comes down
to the simple and stubborn reality that we don't build enough
housing in this country.
Now, a lot of work to fix that has to start with policy
reforms at the state and local level, but what the Federal
Government can and should do is incentivize national action and
expand access to financing opportunities for development.
We need to make it easier to build in any way that we can.
Providing low-interest capital through Transportation
Infrastructure Finance and Innovation Act (TIFIA) and Railroad
Rehabilitation & Improvement Financing (RRIF) is one means, but
for it to work and spur the kind of development that we had
planned for, it needs to be easier to use.
In 2015, the FAST Act expanded the TIFIA Program to include
housing projects near transit hubs. This direction from
Congress was stalled by the previous administration, who
neglected to address our housing crisis. But more recently,
following guidance under the Biden administration, we are
seeing real enthusiasm for it in states across the country.
Project proposals are popping up in red states and blue states
alike: Illinois, Florida, Utah, Texas, North Carolina. And the
list goes on.
But we have also heard from local governments and
developers that the credit rating requirements, fees, and
lengthy review processes hinder them from accessing these funds
for housing. And we have heard from DOT that limited funding
for administration and oversight is preventing the program from
reaching its full potential.
These challenges need to be addressed by Congress. We need
to simplify and streamline the credit review process, and we
need to get DOT the resources it needs to make the programs as
successful as they can be. The information we gather here today
will help us to do that, and we look forward to hearing your
perspectives and ideas, on how we can strengthen the program,
and help to unlock its benefits for communities nationwide.
And with that, I will turn it over to the Vice Chair,
Senator Hyde-Smith, for her opening statement.
statement of senator cindy hyde-smith
Senator Hyde-Smith. Thank you, Mr. Chairman. And welcome.
Thank you all for being here at this important hearing that we
are having today.
While many of the issues that we address in the T-HUD bill
falls squarely within either the transportation or the housing
spaces, the topic today clearly cuts across both. It is pretty
interesting, and TOD is a concept that seeks to blend
transportation and housing efforts through mixed-use
development around access to frequent and reliable public
transit. These types of projects may not be feasible for remote
rural communities in Mississippi, like where I live, and across
the country, but they certainly have promise and beneficial
factors for populated urban areas.
For example, Jackson, Mississippi, recently received a $1
million grant from the Federal Transit Administration for TOD
planning. This grant will support the One Line Project, which
aims to create new multimodal infrastructure and a bus rapid
transit system along a 5-Mile Corridor in our capital city.
This corridor has the highest concentration of employers and
educational institutions in the entire state, including Jackson
State University, and the University of Mississippi Medical
Center, and numerous city, county, and state government
offices. And despite this density, however, only 1 percent of
the residents living in that area use public transportation to
commute to work, and only 2 percent walk to work, 90 percent
commute to work using their personal vehicles. And we know what
that does.
The City of Jackson will use the Federal TOD funds to
reverse this trend, by improving accessibility and facilitating
mixed-use development. In addition to the FTA programs,
Congress has also supported TOD by authorizing the use of TIFIA
funds for commercial and residential development and related
infrastructure within a half mile of a transit facility.
Since Congress provided this new authority, however, only
one TIFIA loan has been awarded to a transit-oriented
development (TOD) project, which notably did not include any
residential components. So I hope today's discussion will shed
light on what is preventing more of these projects from moving
forward. I am concerned that what we are seeing is another case
of the Government being unable to get out of its own way.
Layers upon layers of Federal regulations and requirements
discourage local leaders and private investors from pursuing
the TOD projects that have the potential to transform so many
communities. But I do look forward to hearing what Congress can
do to improve the process while ensuring that housing is a
focus of federally funded TOD projects.
Thank you, Mr. Chairman.
Senator Schatz. Thank you, Vice Chair. Are there any
members wishing to make an opening statement? If not, we will
start with our witnesses. And you each have five minutes for
your testimony, and then we will get into our back and forth.
Dr. Farajian, please proceed with your testimony.
summary statement of dr. morteza farajian
Dr. Farajian. Thank you, Chair Schatz, Ranking Member Hyde-
Smith, and Members of the Subcommittee, for the opportunity to
discuss the Build America Bureau's Transit-Oriented Development
Financing. In my testimony today, I will highlight the Bureau's
TOD authority, activities, and remaining challenges.
First, I will summarize what we do. The Build America
Bureau advances and invests in America's infrastructure by
lending Federal funds at below-market rates on favorable terms
to qualified borrowers while protecting taxpayers, clearing
roadblocks for creditworthy projects, and encouraging the use
of best practices in project planning, financing, and delivery.
The Bureau has 115 TIFIA and RRIF loans and loan tranches
to 71 distinct borrowers from 23 states, and the District of
Columbia, that are in construction or operations, totaling just
over $31 billion in credit extended. The Bureau also
administers four grant programs to expand the public sector's
capacity to finance and deliver infrastructure. The Regional
Infrastructure Accelerator Program helps public entities
develop priorities and financing strategies to accelerate
projects eligible for TIFIA credit assistance.
The Thriving Communities Program provides technical
assistance, planning, and capacity-building support to smaller
and under-resourced communities through capacity builders--
technical assistance providers that support groups of
communities based on their common needs. The Bipartisan
Infrastructure Law established the Rural and Tribal Assistance
Pilot Program, which provides grants for preconstruction and
predevelopment studies for rural and tribal communities, and
the Innovative Finance and Asset Concession Program, which
provides grants to public entities to facilitate and evaluate
public-private partnerships.
We also offer customized direct technical assistance for
projects of all sizes and project sponsors with different
experience levels.
Finally, the Bureau administers allocation of private
activity bonds for qualified highway or surface freight
transfer facilities.
The FAST Act authorized the Bureau to finance TOD projects.
TOD projects include public infrastructure and economic
development projects, including affordable housing, workforce
housing, and commercial development physically or functionally
related to transit, passenger rail, or multimodal stations. TOD
projects can transform underperforming and underutilized
assets, increase transit and passenger rail ridership and
revenue, facilitate office-to-residential conversion, and
support affordable, equitable multimodal access to
opportunities and services. I am proud to say that in April
2024, the Bureau closed USDOT's first TOD loan of up to $26.8
million for the Mount Vernon Library Commons project, now under
construction in Washington State. Our financing will save that
community at least $3 million compared to other financing
options.
Implementing the TOD authorities Congress gave us has been
incremental and steady. We published TOD guidance and a policy
statement on our website. We held five webinars in the past
year for more than 500 participants. We also participated in
webinars with the White House and with the U.S. Department of
Housing and Urban Development, and presentations at the U.S.
Housing and Community Development Conference, the National
Housing and Rehabilitation Association, and the Urban Land
Institute.
We hosted in-person technical workshops in Austin, Kansas
City, Los Angeles, Chicago, and Jacksonville. To make our
financing more accessible and attractive, USDOT announced it
would provide transit and TOD projects TIFIA financing for up
to 49 percent of total project costs, the TIFIA statutory limit
since 2012. USDOT typically limits TIFIA loans to 33 percent of
project costs by policy.
Even with this progress, prospective borrowers have told us
they are encountering challenges in utilizing TIFIA or RRIF for
TOD projects, the most significant of which are the following.
TIFIA's legislation requires an investment-grade rating. While
this level of rating protects taxpayers from defaults, it can
be unattainable for certain TOD projects. Typically, rating
agencies do not rate real estate deals that have both
construction and long-term financing elements, as this is not
common practice in the market. The Bureau has consulted with
rating agencies, several of whom are now developing rating
approaches for TOD projects.
Second, a range of Federal requirements apply to TIFIA and
RRIF borrowers, including compliance with NEPA, Buy America,
Davis-Bacon wage rates, and others. Some prospective borrowers
have told the Bureau they are not familiar with Federal
requirements and have a learning curve in both understanding
how to comply and structuring compliant projects that are
financially viable.
To address this obstacle, the Bureau has had one-on-one
meetings to educate potential borrowers on Federal requirements
and to assist project sponsors in developing complete and
quality applications.
Third, project sponsors are used to the time line
commercial banks use for short-term construction loans. TIFIA
and RRIF loans typically have 40-year or longer maturities,
meaning they have both short-term construction risk and long-
term revenue risk. This combination complicates and lengthens
the underwriting process.
The Bureau has explored innovative approaches such as
teaming with short-term lenders and collaborating with HUD and
other Federal agencies to develop viable financing products and
to streamline the process. As our program matures and we close
more loans, we should be able to standardize our process and
procedures, and develop template documents that could further
streamline the process and reduce time lines.
In early 2021, we had no TOD projects in the Bureau's
active pipeline, even though the authority had been in place
since late 2015. Today, interest in the TOD pipeline is robust,
with over 40 TOD projects actively engaging with the Bureau on
utilizing its financing programs. We anticipate our TOD
pipeline and portfolio will continue growing quickly, and
welcome any opportunity to improve our programs and deliver
quality experiences that achieve the intended program outcomes.
Thank you, Chairman Schatz, Ranking Member Hyde-Smith, for
this opportunity. I would be happy to answer any questions you
might have for us.
[The statement follows:]
Prepared Statement of Dr. Morteza Farajian, Ph.D.
Thank you, Chair Schatz, Ranking Member Hyde-Smith, and Members of
the subcommittee for the opportunity to discuss Build America Bureau
(Bureau) financing and transit-oriented development (TOD). In my
testimony today, I will highlight the Bureau's TOD authority,
activities, and remaining challenges.
First, I will summarize what we do. The Build America Bureau (also
called the National Surface Transportation and Innovative Finance
Bureau) advances investment in America's infrastructure by lending
Federal funds at below market rates under favorable terms to qualified
borrowers while protecting taxpayers; clearing roadblocks for
creditworthy projects; and encouraging use of best practices in project
planning, financing, and delivery.
--The Bureau currently has 115 Transportation Infrastructure Finance
and Innovation Act (TIFIA) and Railroad Rehabilitation and
Improvement Financing (RRIF) program loans and loan tranches to
71 distinct borrowers from 23 States and the District of
Columbia that are in construction or operations, totaling just
over $31 billion in credit extended.
--With the FY 2025 budget proposal to repurpose balances in support
of the National Infrastructure Investment Grant Program, the
Bureau continues to have substantial capacity for new lending:
TIFIA will have over a billion in available credit subsidy
budget authority, with up to 15 percent of TIFIA's annual
funding available for TOD projects; RRIF has traditionally
relied upon borrower-paid credit risk premiums to pay the
subsidy cost of its loans, and has $35 billion in overall
lending capacity.
The Bureau also administers four grant programs to expand the
public sector's capacity to finance and deliver infrastructure. The
Regional Infrastructure Accelerator Program helps public entities
develop priorities and financing strategies to accelerate projects
eligible for TIFIA credit assistance. The Thriving Communities Program
provides technical assistance, planning, and capacity building support
to smaller and under-resourced communities through Capacity Builders-
technical assistance providers that support groups of communities based
on their common needs. The Bipartisan Infrastructure Law (BIL)
established the Rural and Tribal Assistance Pilot Program, which funds
pre-construction and pre-development studies for rural and Tribal
communities, and the Innovative Finance and Asset Concession Program,
which provides grants to public entities to facilitate and evaluate
public-private partnerships. We also offer customized direct technical
assistance, for projects of all sizes and project sponsors with
different experience levels. Finally, the Bureau administers private
activity bonds allocated by USDOT for qualified highway or surface
freight transfer facilities.
The Fixing America's Surface Transportation (FAST) Act authorized
the Bureau to offer TOD projects. TOD projects include public
infrastructure or economic development projects (including affordable
and workforce housing and commercial development) located near or
physically or functionally related to transit, passenger rail, or
multimodal stations. TOD projects can transform underperforming and
underutilized assets, increase transit and passenger rail ridership and
revenue, facilitate office-to-residential conversions, and support
affordable, equitable, multimodal access to opportunities and services.
I am proud to say that in April 2024, the Bureau closed USDOT's first
TOD loan-up to $26.8 million for the Mount Vernon (Washington) Library
Commons Project, now under construction. Our financing will save the
community at least $3 million compared to other financing options.
Building and implementing the TOD authorities Congress gave us has
been incremental and steady. We published TOD guidance and a policy
statement on our website. We held 5 webinars in the past year for more
than 500 participants. We also participated in webinars with the White
House and with the U.S. Department of Housing and Urban Development
(HUD) and presentations at the U.S. Housing and Community Development
Conference, National Housing and Rehabilitation Association, and Urban
Land Institute. We hosted in-person technical workshops in Austin,
Kansas City, Los Angeles, Chicago, and Jacksonville. To make our
financing more accessible and attractive, USDOT announced it would
provide transit and TOD projects TIFIA financing for up to 49 percent
of project costs, the TIFIA statutory limit since 2012. USDOT typically
limits TIFIA loans to 33 percent of project costs by policy.
Even with this progress, prospective borrowers have communicated
encountering challenges in utilizing TIFIA or RRIF for TOD projects,
the most significant of which are the following:
--TIFIA's legislation requires investment grade ratings. While this
level of rating protects taxpayers from defaults, it can be
unattainable for certain TOD projects (e.g., those pledging
project revenues as the repayment source). Typically, rating
agencies do not rate real estate deals that have both
construction and long-term financing elements, as these are not
common practice in the market. The Bureau has consulted with
rating agencies, several of whom are now developing rating
approaches for TOD projects. Some rating agencies have told me
they might have a hard time making the economics work to rate
smaller projects. Consequently, for some small projects the
cost to obtain a rating offsets the benefits TIFIA offers,
making TIFIA less attractive for those projects.
--A range of Federal requirements apply to TIFIA and RRIF borrowers,
including compliance with the National Environmental Policy Act
(NEPA), Buy America, Davis- Bacon wage rates, and others. Some
prospective borrowers have told the Bureau they are not
familiar with Federal requirements and have a learning curve in
both understanding how to comply and structuring compliant
projects that are financially viable. To address this obstacle,
the Bureau has had one-on-one meetings to educate potential
borrowers on Federal requirements and to assist project
sponsors in developing complete and quality applications.
--Project sponsors are used to the timeline commercial banks use for
short-term construction loans. TIFIA and RRIF loans typically
have 40-year or longer maturities, meaning they have both
short-term construction risk and long-term revenue risk. This
combination complicates-and lengthens-the underwriting process.
The Bureau has explored innovative approaches, such as teaming
with short-term lenders and other Federal agencies, and
collaboration with HUD and other Federal agencies to develop
effective products and to streamline the process. As our
program matures and we close a few more TOD loans, we should be
able to standardize our process and procedures and develop
template documents that could further streamline the process.
In early 2021, we had no TOD projects in the Bureau's active
pipeline, even though the authority had been in place since late 2015.
Today, interest in the TOD pipeline is robust, with over 20 TOD
projects engaging with the Bureau on utilizing its financing programs.
We anticipate our TOD pipeline and portfolio will continue growing
quickly and welcome any opportunity to improve our programs and deliver
quality customer experiences that achieve the intended program
outcomes.
Thank you, Chairman Schatz and Ranking Member Hyde-Smith. I would
be happy to answer any questions you might have.
Senator Schatz. Thank you. Dr. Loh, please proceed with
your testimony.
STATEMENT OF DR. TRACY HADDEN LOH, FELLOW, BROOKINGS
INSTITUTE
Dr. Loh. Good morning, Members of the Subcommittee. And
thank you for the opportunity to offer testimony as you explore
the potential of applying innovative public financing tools to
produce desperately needed affordable housing in ideal
locations near transit.
My name is Tracy Hadden Loh, and I am a Fellow at the
Brookings Institution where I study commercial real estate. I
also represent the District of Columbia on the Washington
Metropolitan Area Transit Authority Board.
However, what I am about to say is my own opinion and does
not necessarily represent the opinions of the staff, officers,
or trustees of Brookings, or those of the WMATA Board or staff.
With that out of the way, there are three reasons why the
public would benefit from the real existence of a working tool
for transit-oriented multifamily finance.
First, I assume that everyone here is already aware that
the U.S. is in a housing crisis where we do not have enough
homes in needed locations, and costs are at record highs.
The question is what to do about it. As my colleagues at
Brookings have recently noted, making apartments more
affordable starts with understanding the costs of building
them. The 20- to 30 percent of a typical project's soft costs
related to permitting and financing are directly shaped by
public policy and regulation. And affordable housing projects
often have higher soft costs due to the complexity of
financing. So any intervention that reduces the cost of
financing for affordable housing projects can directly improve
their feasibility and affordability.
Second, recently new multifamily starts have collapsed due
to higher interest rates and lower property values that are a
factor of rising operating costs reducing net income. A major
lesson that we learned from the Great Recession was that there
are better economic outcomes during and after a downturn, when
the government helps move capital counter-cyclically. While the
Federal Housing Administration already does this through
mortgage insurance, it is also hypothetically possible for the
Federal Government to do this through direct finance.
Third, the case of transit-oriented development is a unique
use case for the Federal role in multifamily finance that
directly addresses the need to balance risk and reward in the
public interest. There is a lot of Federal money invested in
transit systems, and they create value in the locations they
serve that is a reward to be captured, and at reduced public
risk. One study found that transit-accessible multifamily
properties are 58 percent less likely to default.
The U.S. Department of Transportation has over $100 billion
ready for deployment at very low interest rates through the
TIFIA and RRIF programs. These programs have traditionally
helped finance major transportation projects.
However, as we just heard, the first real estate project to
close on a TIFIA loan happened in April. This a big milestone
but additional statutory, and regulatory changes, and
clarifications are needed to make this financing more
accessible. DOT's NEPA process is lengthy and incompatible with
projects that also need to attract private equity capital in
order to complete their capital stack.
That kind of project succeeds or fails based on the time it
takes for a project to go from conception to occupancy and
stabilization. Other agencies like HUD, Agriculture, and the
EDA have NEPA processes that are more efficient. There is a
need for either an interagency collaboration or a new process
within the DOT.
Similarly, Buy America requirements that are impactful and
make sense for billion- or trillion-dollar infrastructure
projects are unnecessary deal killers on smaller-scale real
estate projects. An administrative waiver or legislative action
to speed up the more pressing policy priority of building
housing near transit, makes sense.
Congress should also consider increasing the maximum loan-
to-cost threshold for TIFIA from 49 percent to match RRIF,
which already allows loans up to 75 percent loan to cost. This
would reduce the burden on project sponsors to find gap
financing.
Finally, TIFIA borrowers are required to have an
investment-grade rating in order to receive a loan. The problem
is that rating agencies don't typically even rate the debt of
individual real estate projects. There are ways to work around
this but streamlining would be both appropriate and better.
In terms of advice to the administration, the development
of model documents, including a pro forma financial model for
transit-oriented development projects, could provide more
clarity than any number of webinars, workshops, or pages of
guidance, and this should be an immediate priority for the
Build America Bureau.
Transit-oriented development is a logical and elegant
solution to multiple problems; however, significant barriers to
using TIFIA and RRIF financing for real estate are real.
Here are three reasons why it makes sense to debug this
now: Any countercyclical housing lending is helpful, and
affordable housing near transit achieves many broadly shared
policy goals. Two, some projects will never be strong
candidates for conventional debt but provide significant public
benefits and merit a lender of last resort. This is relevant
for rural areas. The first TIFIA real estate project in Mount
Vernon, Washington, is next to an Amtrak station in the county
seat of a rural county that also contains three Native American
reservations. That is an example of how this program matters
everywhere.
Three, commercial real estate as a sector will likely see a
medium-term lack of liquidity; however, the broader economic
and social need for capital to flow in order to adapt the build
environment to new economic and demographic realities is
urgent. Available facilities should be deployed and not idled
on the sidelines.
This is a time where there is a broad need for government
to do more with the same level of resources and deliver
positive economic, social, and environmental returns. Transit-
oriented development is an opportunity to do so, which merits
this committee's scrutiny.
Thank you for the opportunity to inform your considerations
on this topic.
[The statement follows:]
Prepared Statement of Dr. Tracy Hadden Loh
Good afternoon, members of the committee, and thank you for the
opportunity to offer testimony as you explore the potential of applying
innovative financing tools administered by the Department of
Transportation's Build America Bureau to produce desperately needed
affordable housing in ideal locations: near transit service.
My name is Tracy Hadden Loh, and I am a fellow with the Bass Center
for Transformative Placemaking at Brookings Metro. Transformative
placemaking is an integrated practice that breaks down the siloes
between professional disciplines-including real estate and
transportation planning-to advance local growth and development through
holistic, interconnected strategies. I'm here today to share insights
gleaned from our work at the Center to create new knowledge, policies,
investment strategies, practices, and tools to build more great places
that work for more people.
According to the Census Bureau's 2021 Rental Housing Finance
Survey, the three most common sources of mortgage loans for multifamily
housing are commercial banks, mortgage banks, and credit unions.\1\ In
that survey, these sources provided capital to an estimated 4,569
properties, while alternative sources of financing (including public
options) serviced only 137 properties-a trickle next to a stream. This
could be interpreted as an indication that conventional lenders have
the multifamily market covered, and are multifamily builders' preferred
source of capital. Is a public option needed?
---------------------------------------------------------------------------
\1\ U.S. Census Bureau. (2021) Rental Housing Finance Survey
(RHFS). https://www.census.gov/data- tools/demo/rhfs/#/
?s_tableName=TABLE5&s_moe=showmoe
---------------------------------------------------------------------------
The answer to this question depends on the goal that policymakers
are trying to achieve. It is clear that in good times, traditional
finance has learned how to invest in multifamily construction, and
builders work with these capital sources. The caveat is that right now
these are not the best of times. Additionally, we are not necessarily
getting the most needed housing in the most needed locations.
Multifamily housing production is facing challenges, and there is an
opportunity to respond.
The remainder of this testimony will outline the three-part case
for why the public sector should consider creating new tools for
multifamily lending, especially for transit-oriented development. I
will then specifically address the potential of the Build America
Bureau's lending tools and how they are-and are not-suited to this use
case.
The three-part case for more tools for public sector multifamily
finance
First, as my colleagues at Brookings and elsewhere have recently
noted, ``Making apartments more affordable starts with understanding
the costs of building them.'' \2\ Recent research on the inputs to
production of multifamily housing notes that while the majority (50% to
70%) of project costs are ``hard costs'' related to labor and
materials, the 20% to 30% of a typical project's ``soft costs'' related
to permitting and financing are of particular public sector interest
because these costs are directly shaped by public policy and
regulation, and ``affordable housing projects often have higher soft
costs due to the complexity of financing.'' \3\ Any intervention that
reduces the cost of financing for affordable housing projects can
directly improve their feasibility and affordability.
---------------------------------------------------------------------------
\2\ Hoyt, H. & Schuetz, J. (2020, May 5) Making apartments more
affordable starts with understanding the costs of building them.
Brookings Institution. https://www.brookings.edu/articles/making-
apartments-more-affordable- starts-with-understanding-the-costs-of-
building-them/
\3\ Hoyt, H. & Schuetz, J. (2020, May 19) Flexible zoning and
streamlined procedures can make housing more affordable. Brookings
Institution. https://www.brookings.edu/articles/flexible-zoning-and-
streamlined-procedures- can-make-housing-more-affordable/
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Second, real estate is a cyclical industry because of its reliance
on finance and, therefore, economic cycles. As shown in Figure 1,
multifamily housing production has fluctuated dramatically over time-
much more so than natural demand (i.e., population), with downturns in
production typically coinciding with recessions.\4\ However, most
recently, new multifamily starts have collapsed even without a
recession, due to higher interest rates and lower property values that
are a factor of rising operating costs (e.g., insurance) reducing net
income.\5\ A major lesson learned from the Great Recession was that
there are better economic outcomes during and after economic downturns,
when government backing is available to help move capital counter-
cyclically.\6\ While the Federal Housing Administration does this
through mortgage insurance, it is also hypothetically possible for the
Federal Government to do this through direct finance. However, any
potential change to the Federal role in multifamily finance should be
carefully considered to avoid exposing the public to unbearable costs
and/or risk.\7\
---------------------------------------------------------------------------
\4\ Figure 1 can also be accessed online at https://
fred.stlouisfed.org/graph/?g=1ohWg.
\5\ Goodman, L., et al. (2023, November 30). Housing Finance: At a
Glance Monthly Chartbook, November 2023. Urban Institute. https://
www.urban.org/research/publication/housing-finance-glance-monthly-
chartbook- november-2023
\6\ Passmore, W., & Sherlund, S. M. (2018). The FHA and the GSEs as
Countercyclical Tools in the Mortgage Markets. Federal Reserve Bank of
New York Economic Policy Review, 24(3) https://www.newyorkfed.org/
medialibrary/media/research/epr/2018/EPR_2018_fha-and-
gses_passmore.pdf?sc_lang=en ; Young, S.D., Browne, E.K. & Moroz, P.C.
(2021). The Countercyclical Nature of the Federal Housing
Administration in Multifamily Finance. Cityscape: A Journal of Policy
Development and Research, 23(1), 319-338. https://www.huduser.gov/
portal/periodicals/cityscpe/vol23num1/ch15.pdf
\7\ Congressional Budget Office. (2015). The Federal Role in the
Financing of Multifamily Rental Properties. https://www.cbo.gov/
publication/51006
Figure 1. US multifamily housing production and population trends
Third, the case of transit-oriented development is a unique use
case for a Federal role in multifamily finance that directly addresses
the need to balance risk and reward in the public interest in
multifamily lending. As the literal book on transit-oriented
development notes, a ``strong real-estate market 'floats all boats, but
when the tide goes out it is the boats in the best position relative to
transit that continue to float.'' \8\ This assertion, reported to
researchers in a qualitative interview, is consistent with the findings
of studies testing relationships between location affordability (i.e.,
lower transportation costs from transit access) and foreclosure
outcomes after the Great Recession, for both single-family and
multifamily properties.\9\ While the evidence indicates transit-
oriented development has lower foreclosure risks, some transit-
oriented development projects also have higher risks related to the
complexity of executing mixed-use projects or those that involve joint
development with a transit authority and higher hard costs related to
infrastructure that make them unattractive to conventional lenders and
in need of alternative financing.\10\
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\8\ Cervero, R., et al. (2004). Transit-Oriented Development in the
United States: Experiences, Challenges, and Prospects. Transit
Cooperative Research Program. https://nap.nationalacademies.org/
catalog/23360/transit- oriented-development-in-the-united-States-
experiences-challenges-and-prospects
\9\ Wang, K. & Immergluck, D. (2019). Neighborhood Affordability
and Housing Market Resilience. Journal of the American Planning
Association. 18(5). https://doi.org/10.1080/01944363.2019.1647793
\10\ Venner, M. & Ecola, L. (2007). Financing Transit-Oriented
Development: Understanding and Overcoming Obstacles. National Academies
of Science: Transportation Research Board. 1996(1). https://doi.org/
10.3141/1996- 03
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Over the past three decades, the Federal Government has spent an
average of about $14 billion each year on transit.\11\ Mass transit and
rail are both cumulatively and currently the third- largest category of
public spending on infrastructure, after highways and water.\12\ Given
the magnitude of this investment, there is a clear public interest in
maximizing the utility and performance of the resulting assets, and
land use is key factor in transit ridership trends.\13\ Locations
proximate to transit are also ideal for lower-income households who
need affordable housing, because these locations also reduce their
transportation cost burden.\14\
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\11\ Congressional Budget Office. (2022, March 22). Federal
Financial Support for Public Transportation. https://www.cbo.gov/
publication/57636
\12\ Congressional Budget Office. (2018, October 15). Public
Spending on Transportation and Water Infrastructure, 1956 to 2017.
https://www.cbo.gov/publication/54539
\13\ Watkins, K., et al. (2022). Recent Decline in Public
Transportation Ridership: Analysis, Causes, and Responses. Transit
Cooperative Research Program. https://nap.nationalacademies.org/
catalog/26320/recent-decline-in- public-transportation-ridership-
analysis-causes-and-responses
\14\ Renne, J.L, et al. (2016). The Cost and Affordability Paradox
of Transit-Oriented Development: A Comparison of Housing and
Transportation Costs Across Transit-Oriented Development, Hybrid and
Transit-Adjacent Development Station Typologies. Housing Policy Debate,
26(4-5), 819-834. https://doi.org/10.1080/10511482.2016.1193038
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The current applicability and challenges of Build America Bureau
lending tools
The U.S. Department of Transportation (DOT) has over $100 billion
ready for deployment at very low interest rates through the
Transportation Infrastructure Finance and Innovation Act (TIFIA) and
the Railroad Rehabilitation and Improvement Financing (RRIF)
program.\15\ These programs have traditionally helped finance major
transportation projects, such as constructing roads, bridges, and
tracks. Both the 2015 Fixing America's Surface Transportation (FAST)
Act and the 2021 Infrastructure Investment and Jobs Act contained
reforms intended to make it easier for transit-oriented development to
leverage TIFIA and RRIF. Since 2021, the DOT has also made
administrative changes to the program to facilitate deployment.
---------------------------------------------------------------------------
\15\ Build American Bureau. (n.d) Transit Oriented Development
Financing Overview. [PowerPoint Slides]. U.S. Department of
Transportation. https://www.transportation.gov/sites/
buildamerica.dot.gov/files/2024- 01/2024_FinancingTOD.pdf
---------------------------------------------------------------------------
The first real estate project to close on a TIFIA loan happened
last month (May 2024).\16\ This is because the Biden administration has
prioritized figuring out administrative issues with the programs and
providing technical assistance to potential users. However, additional
statutory and regulatory changes and clarifications are needed to make
this resource more accessible:
---------------------------------------------------------------------------
\16\ McAdams, B. & Loh, T.H. (2024, May 30). How local governments
can put their assets to work. Brookings Institution. https://
www.brookings.edu/articles/how-local-governments-can-put-their-assets-
to-work/
--Because TIFIA and RRIF were originally intended for transit, rail,
and roadway projects, there remains a requirement that projects
undergo a review for environmental impact. That doesn't make
sense for infill real estate development. Projects are likely
eligible for a categorical exclusion under the National
Environmental Policy Act (NEPA), but it's a time-consuming,
bureaucratic headache for public-private investments that
succeed or fail based on the time it takes for a project to go
from conception to occupancy and stabilization. Other agencies-
such as the Department of Housing and Urban Development,
Department of Agriculture, and Economic Development
Administration- have NEPA processes that are much more
efficient. There is a need for resources to support either an
---------------------------------------------------------------------------
interagency collaboration or a new process within the DOT.
--Similarly, ``Buy America'' requirements that are impactful and make
sense for billion- or trillion-dollar infrastructure projects
are unnecessary deal-killers on smaller-scale real estate
projects. An administrative waiver to speed up the more
pressing policy priority of building housing near transit makes
sense.
--Congress should consider increasing the maximum loan-to-cost (L2C)
threshold for TIFIA from 49% to match the RRIF program, which
allows loans up to 75% L2C for transit- oriented development
and 100% L2C for public infrastructure. This would reduce the
burden on project sponsors to find gap financing from other
sources, which for some projects will make the difference
between feasibility and impossibility. It is also more
consistent with typical real estate practice, in which most
real estate developments borrow 60% to 70% of their project
costs from commercial lenders and secure the remaining 30% to
40% from private equity (at a much higher cost).
--TIFIA borrowers are required to have an investment grade rating in
order to receive a loan. That's unrealistic for a tool intended
to encourage transit-oriented real estate development. Rating
agencies don't typically even rate the debt for these types of
projects. Applicants have found some workarounds, but it's
another instance in which the tool needs an update to work
better for this new use.
--While RRIF does not technically require an investment grade rating,
the publication of guidelines for setting the RRIF credit-risk
premium rate (based on a project's credit rating, collateral
ratio, pre-lease or pre-sale rates, etc.) so developers can
have some early expectation of the outcome of this critical
step in the underwriting process could make or break the value
and feasibility of RRIF as a debt source.
--The development of model documents-including a pro forma financial
model-for transit-oriented development projects could provide
more clarity than any number of webinars, workshops, or pages
of guidance. This should be an immediate priority for the Build
America Bureau.
--There are questions about whether the definitions in Chapter 53 of
Title 49, which covers public transportation, authorize the
Federal Transit Administration to oversee transit-oriented
development projects. This could be clarified in the statute,
or the Build America Bureau could be given project oversight
authority for transit-oriented development.
conclusion
Transit-oriented development is a logical and elegant solution to
multiple problems. However, that does not mean it is easy. The barriers
to using TIFIA and RIFF financing for real estate are significant, but
there is new motivation to justify addressing them for several key
reasons:
--Any counter-cyclical housing lending is helpful, and affordable
housing near transit achieves many broadly shared policy goals
(such as production, improving the efficiency of existing
Federal transportation investments, and climate).
--Some projects will never be strong candidates for conventional
debt, but provide significant public benefits and merit a
lender of last resort. The first TIFIA real estate project-in
Mount Vernon, Wash., located next to an Amtrak station in the
county seat of a rural county that also contains three Native
American reservations-is an example of this.
--Commercial real estate as a sector will likely see a medium-term
lack of liquidity because of a confluence of factors,
especially rising defaults in both office and multifamily and
persistently higher interest rates. However, the broader
economic and social need for capital to flow in order to adapt
the built environment to new realities is urgent. Available
facilities should be deployed, not idled on the sidelines.
We are in a time where there is a broad need for government to do
more with the same level of resources and deliver positive economic,
social, and environmental returns. Transit-oriented development is an
opportunity to do so, which merits this committee's scrutiny. I thank
you for the opportunity to inform your considerations on this topic.
Senator Schatz. Thank you, Dr. Loh.
Mr. Nagraj, please proceed with your testimony.
STATEMENT OF MR. ADHI NAGRAJ, CHIEF DEVELOPMENT
OFFICER, MCCORMACK BARON SALAZAR
Mr. Nagraj. Great, thank you. Good morning. Thanks for
having me. And it is really--I see you on TV all the time, so
it is nice to see you in person. And it has been 25 years,
Senator Reed, so good to see you again. It has been a while.
My name is Adhi Nagraj, and I am an attorney and the Chief
Development Officer at McCormack Baron Salazar. In this
capacity, I oversee affordable housing and mixed-income real
estate development projects around the country. Based in St.
Louis, Missouri, MBS is one of the Nation's leading developers,
managers, and asset managers of economically integrated urban
neighborhoods.
Since 1973, MBS has been an innovator in community
development and urban revitalization, including in TIFIA-
eligible transit-oriented neighborhoods. In all, we have built
22,000 high-quality affordable and mixed-income apartments for
families, children, seniors, and veterans in 47 cities.
Over the past several decades, MBS has worked closely with
the U.S. Department of Housing and Urban Development, other
Federal agencies, senators, members of Congress, as well as
state and local partners to finance our properties and keep
rents affordable for our residents. The primary tool that we,
and most other developers, use to finance affordable housing is
the Low-Income Housing Tax Credit administered by the IRS.
Every individual project that MBS constructs is owned by a
separate special purpose entity that receives an allocation of
credits that it sells to private investors who secure limited
partnership interests in the projects. In exchange for
receiving the tax credits and other benefits, the investor
provides the equity that we need to build housing.
In addition to securing equity, MBS and other affordable
housing developers often take out private loans from commercial
banks or the FHA to finance construction. As interest rates
rise, the amount of debt any project can leverage goes down,
which is why this inflationary market with high interest rates,
increasing construction costs, and a soaring insurance market
has been particularly challenging for the affordable housing
industry.
For these reasons, we researched with enthusiasm the
prospect of utilizing TIFIA or RRIF loan products, essentially
low-interest 35-year fully amortizing loans to help close the
gaps of our projects around the country. As a national leader
in urban infill development, often at transit locations, MBS
felt that our affordable housing developments in local
communities would significantly benefit from this tool.
However, legislative action is needed to effectively pair
TIFIA with LIHTC. Below is a summary of technical challenges
and potential solutions:
One is the ratings of partnerships, so again, as has been
spoken about, when developers build new buildings, we create
special-purpose entities, new limited partnerships or LLCs to
prevent cross-collateralization across multiple properties. And
so the investment-grade requirement, when you set up a new
entity it has no borrowing history, and so that makes us
ineligible to use the TIFIA product.
The development community would need a legislative change
to this rule in order to use TIFIA funding. One potential
solution is to use the underwriting metrics from FHA or another
HUD office familiar with assessing risk for affordable housing
transactions in lieu of securing a specific rating for a
borrower.
Two, is timing: All funding sources have to be legally
bound prior to or simultaneously to closing on a TIFIA or RRIF
loan. The challenge is that many state housing finance agencies
require developers to secure written commitments for all
funding prior to applying for tax credits and tax-exempt bonds.
It creates a chicken-and-egg dynamic. We can't secure a TIFIA
loan without securing tax credits, but we can't secure tax
credits without securing TIFIA.
One workaround would be for DOT to underwrite specific
deals and issue conditional commitments to projects that would
make closings conditional upon meeting other obligations,
including securing other financing. This would allow developers
to use the TIFIA conditional commitment to secure credits and
bonds, and then we can close on all financing simultaneously.
Two other things that I will note in my remaining time,
both have been discussed a little bit, one is the role of
intercreditor agreements: So as was just mentioned, TIFIA
finance is up to 49 percent of your project costs, I would say
in the affordable world, with restricted rents and high
operating expenses, we actually don't get that close to 49
percent, because there are expensive projects that are near
transit, and the NOI and debt that you can leverage is not
close to 49 percent--net operating income--sorry. In the market
rate world that has higher rents you do--the 49 percent does
become a barrier.
We then have a gap in the financing, so we could have a
TIFIA loan, project equity, and there is a gap. The gap could
be filled by a commercial lender, but then we would have to
negotiate intercreditor agreements between a commercial bank
and the DOT in order to negotiate things like what happens upon
foreclosure, refinancing, surplus cash flow, just all the risks
of a commercial lender working with the Federal Government. So
we would have to work through that challenge, and it would be
great to have more certainty on rules around that.
The last item has to with resyndications. At the end of a
15-year tax credit compliance period in the affordable world,
owners such as MBS look to resyndicate or rehabilitate the
properties; that is where the investor exits the partnership.
We can bring on a new investor, source new equity to
rehabilitate the properties, and there is no guidance and
regulations around TIFIA, about what to do in year 15 when you
want to resyndicate and bring in a new investor.
In conclusion, the TIFIA program could be a valuable tool
to accelerate the production of affordable housing apartments
across the country at transit stations, meeting DOT's GHG
reduction goals. However, the challenges outlined above would
need to be addressed before the affordable housing community
could utilize the program and better incorporate it into the
existing array of financing tools, especially including the
Low-Income Housing Tax Credit. Thank you.
[The statement follows:]
Prepared Statement of Mr. Adhi Nagraj
My name is Adhi Nagraj, I am the Chief Development Officer at
McCormack Baron Salazar (MBS). In this capacity I oversee affordable
housing real estate development projects across the country. Based in
St. Louis, Missouri, MBS is one of the Nation's leading developers,
managers and asset managers of economically integrated urban
neighborhoods. Since 1973, MBS has been an innovator in community
development and urban revitalization in 47 cities, having built more
than 22,000 high-quality affordable and mixed-income apartments for
families, children, seniors and veterans.
As Congress and the Administration have appropriately prioritized
infrastructure investment in the post-pandemic era, it is important to
keep affordable housing in that conversation. The U.S. has a shortage
of 7.3 million rental homes affordable and available to renters with
extremely low incomes, according to the National Low Income Housing
Coalition. In fact, no state has an adequate supply of affordable
rental housing for the lowest-income renters. Housing insecurity
negatively impacts job retention, academic performance, and mental and
physical health, including the spread of Covid-19 among essential
employees just a few years ago. Housing is infrastructure.
As you may know, housing policy in recent decades has moved away
from 100% government supported model that isolated economically
vulnerable residents to a more resilient mixed- finance, mixed- income
model that brings together public, private and philanthropic interests
to strengthen communities and uplift households. Putting the financial
pieces together for development and sustaining the community once built
is as much art as science. And economic fluctuations add great stress
to the model.
Over the past several decades, MBS has worked closely with the U.S.
Department of Housing and Urban Development, other Federal agencies,
Senators and Members of Congress, as well as with State and local
partners, to finance our properties and keep rents affordable for our
residents. The primary tool that MBS and most other developers use to
finance affordable housing is the Low-Income Housing Tax Credit,
administered by the Internal Revenue Service. Every individual project
that MBS constructs is owned by a separate special purpose entity that
receives an allocation of credits that it sells to a private investor
who secures limited partnership interests in the project. In exchange
for receiving the tax credits and other tax benefits, the investor
provides the equity needed to construct the building.
In addition to securing equity, MBS and other affordable housing
developers often take out private loans from commercial banks to
finance construction. As interest rates rise, the amount of debt that
any project can leverage goes down, which is why this inflationary
market with high interest rates--compounded by increasing construction
and labor costs and a soaring property insurance market--has been
particularly challenging for the affordable housing industry.
For these reasons we researched with enthusiasm the prospect of
utilizing the TIFIA or RRIF loan products--essentially low interest 35-
year fully amortizing loans--to help close the gaps of our projects
around the country. As a national leader in urban infill development,
often at transit locations, MBS felt that our affordable developments
and local communities would significantly benefit from this financing
tool.
However, our research found that TIFIA didn't pair well with the
Low Income Housing Tax Credit program due to incompatible rules at DOT
and IRS. Legislative action is needed to effectively pair TIFIA with
LIHTC.
Below is a summary of technical challenges with potential
solutions:
ratings of partnership
Under TIFIA rules, borrowers need to have an investment-grade
rating. However, in the LIHTC industry, developers create special
purpose entities that own individual affordable housing projects and
have no borrowing history, therefore making them incapable of securing
investment-grade credit ratings. Under the RRIF program the rating
doesn't have to be any specific grade so this is less of an issue, but
RRIF has a much narrower geographic focus and therefore fewer projects
qualify. The development community would need a legislative change to
this rule in order to use TIFIA funding. One potential solution is to
use underwriting metrics from FHA or another HUD office familiar with
assessing risk for affordable housing transactions in lieu of securing
a specific rating.
timing
All funding sources have to be legally binding prior or
simultaneously to closing on TIFIA/RRIF loans. The challenge is that
many state housing finance agencies require that developers secure
written commitments for all funding prior to applying for tax credits.
It creates a chicken-and- egg dynamic--we cannot secure a TIFIA loan
without securing tax credits, yet we cannot secure tax credits without
securing a TIFIA loan. One work around would be for DOT to underwrite
specific deals and issue ``conditional commitments'' to projects that
would make closings conditioned upon meeting other obligations,
including securing all other financing. That would allow developers to
use the TIFIA conditional commitment to secure tax credit and close on
all financing simultaneously.
intercreditor agreements
The restrictive RRIF program finances up to 75% of eligible costs,
and the TIFIA program finances 49% of eligible project costs. Under
RRIF, developers can raise the capital stack 75/25 debt to equity.
However, since TIFIA can only provide a loan equal to 49% of project
costs, projects often need another lender to help finance the
transaction. There's a high likelihood that incorporating a commercial
lender into the capital stack will create problems, given the need to
negotiate intercreditor agreements between DOT and the subordinate
lender, negotiating for example events of default, split of surplus
cash, and foreclosure. Additionally, commercial lenders will not be
able to meet the DOT maturity terms which means the commercial banks
will have a shorter term, and a repayment schedule or residual
refinancing risk needs to be negotiated. Refinancing the subordinate
loan in the middle of term of the senior DOT lender creates refinancing
risk due to interest rate uncertainty.
year 15--resyndications
At the end of the 15-year tax credit compliance period, owners such
as MBS often look to resyndicate properties. During this process,
developers secure new tax credits, sell them to a new limited partner,
and generate additional tax credit equity needed to pay for the costs
to rehabilitate the property and extend the term of affordability.
However, the TIFIA rules don't explicitly allow for a refinancing
during the 35-year loan term, which would need to be addressed given
the frequency and need for properties to be resyndicated after the
compliance period ends.
conclusion
The TIFIA program could be a valuable tool to accelerate the
production of affordable housing units across the country. However, the
challenges outlined above would need to be addressed before the
affordable housing development community could utilize this tool and
better incorporate it into the existing array of financing tools,
including and especially the Low-Income Housing Tax Credit program.
If you have any questions, please email me at
[email protected], or call me at 510-289-1502.
Sincerely, Adhi Nagraj
Chief Development Officer
McCormack Baron Salazar
Senator Schatz. I want to thank all of our testifiers,
really good input here. And I am probably going to do a second
round. But I want to sort out of all the recommendations that
you are making, what can be done administratively, and what
can--even in that category, what would require a rule change
rather than just a process change, and then what needs a
statutory change?
So, Dr. Farajian, I think you are up to explain which ones
of these recommendations need a legislative action, and which
ones are kind of on the administration? On the investment-grade
rating requirement that is statutory; am I right about that?
Dr. Farajian. Yes.
Senator Schatz. Okay. So that is on us. It sounds like,
although NEPA, Buy America, and Davis-Bacon are clearly
statutory, there is some administrative flexibility to at least
make it work better. Am I getting that right?
Dr. Farajian. That is correct.
Senator Schatz. Okay. And tell me about the amortization
period under a TIFIA loan, we were talking earlier, it is 30
years, or it may be up to 40, or how does this work?
Dr. Farajian. It is typically 30- or 35 years, in addition
to the construction period that could add up to 40 years, for
example, if you apply 5 years for construction.
Senator Schatz. Do you mean after the completion of
construction, so that the loan period starts when the
construction is complete?
Dr. Farajian. Yes. So we don't count the construction
years. If you count 5 years of construction, 35 years of the
loan payment period, 40 years total amortization.
Senator Schatz. And Dr. Loh, you were saying that is a
problem?
Dr. Loh. It is only attractive to some kinds of developers.
You know, I would say for some developers, being able to
amortize over a longer time period is really attractive. So for
example, for the public sector who is probably going to get
involved in a lot of these kinds of projects anyway in order to
credit enhance them and meet that requirement. But in
conventional commercial real estate, typically projects
refinanced at the end of the construction period, and then they
are looking for a ten-year loan.
Senator Schatz. And I am just picturing a capital stack
that includes like a 30- to 35-year amortization period, and
then the remaining, say, 51 percent that is at a ten-year
amortization period; can that even function? Can you sort of
refinance the TIFIA loan and consolidate after the project is
built? Does this work?
Dr. Loh. Yeah, I think TIFIA loans can be refinanced
anytime.
Senator Schatz. Okay.
Dr. Farajian. They can be refinanced without any penalty.
So that is one of the flexibilities we provide. And also, we
are flexible in terms of the term. Some borrowers want a 10-
year loan or a 15-year loan.
Senator Schatz. Got it. Okay. Not a problem for us to
solve. Template documents sound very smart. Can you please
report back to the committee about that? The loan-to-cost
threshold, is that also statutory?
Dr. Loh. Yes, that is statutory. And I think that, you
know, what I am proposing here is just to synchronize TIFIA and
RRIF. You know, why favor projects that happen to be near a
railroad station as opposed to a light rail station? I think in
a normal person's mind, they think that these are rail
stations.
Senator Schatz. I am the T-HUD Chair, and I am not sure I
could describe the difference between the two of those things.
Can we go back to sort of how difficult the investment-grade
rating requirement is, Mr. Nagraj? Just talk to me about how
that basically doesn't work in the marketplace.
Mr. Nagraj. Sure, it doesn't work. So you know, if we are
looking to develop 100 units of affordable housing or mixed-
income housing somewhere in the city, we would set up a new
limited partnership. We would source debt and equity, hire the
architects, do the environmental testing, all the work that we
need to do. That entity has no, you know, 10- 20-year borrowing
history. It is a new special purpose entity that was set up
just to own and operate one building.
So it becomes a non-starter. And we do that purposely
because we don't want to cross-collateralize 100 units here,
with 100 units in Baltimore, and then all of a sudden to make
each other at risk. So we very purposefully set up special-
purpose entities to individually own, when we do that, of
course, there is this inability to have any kind of investment
grade.
Senator Schatz. So basically, the only way you can do this
is if you are big enough to already be investment grade and you
are doing a number of projects, or you are a county?
Mr. Nagraj. That is right. And I again think about the FHA
model of, when we propose a project to FHA, they say, hey, what
are your costs? What are your streams of rents? Are your rents
supportable? Is your debt supportable? You know, kind of prove
to us that this project can operate successfully long term.
They don't look at the borrowing history of the borrower; they
look at the validity and the viability of the actual project.
Senator Schatz. And that is to say nothing about the sort
of administrative burden, time, and money it takes to actually
get your credit assessed even if you could, because this
requirement, which sort of exists for counties, you know, by
the way, on the tribal side, this is also a problem because
some tribes, you know, go to Wall Street and make their pitch
and get their, you know, A-minus or B-plus credit rating or AA
credit rating, but a lot of them are too small to go in and do
that kind of analysis and demonstrate that kind of
creditworthiness. So this is like, you know, in multiple ways
not working.
Dr. Loh, you were going to say something?
Dr. Loh. Yeah, I mean, this is about protecting the public
from risk which, as a taxpayer, I am in favor of, but, you
know, the question is: how much risk? If a trillion-dollar
infrastructure project defaulted, that does feel like that
would be kind of bad. But these real estate projects are much
smaller, and requiring an investment-grade rating is like
crushing an ant with a boulder in terms of, like,
congratulations, the ant is dead, the public is protected from
risk. But you could have gotten it with something much smaller
and more practical.
Senator Schatz. Or just like normal underwriting?
Dr. Loh. Correct.
Senator Schatz. Okay. And that is the point I think you
are--yes.
Dr. Loh. Yes. I am not proposing, do not vet these
projects, and do not protect the public from risk. Instead,
underwrite the way that all other real estate is underwritten?
Senator Schatz. Right. Which is, you look at the project
and see whether it makes any sense. What about this requirement
that the TIFIA money be sort of the last dollar in?
Dr. Farajian, is that something you can fix, or is this all
going to end up being on us to pass a new bill that includes
all these technical fixes? But I am trying to sort out which of
these things you think the Department could fix without our
intervention?
Dr. Farajian. The requirement that we have is to make sure
that at the time that we close a loan, the project is fully
funded. So there are no more gaps in the project. Because there
have been cases in the past that we would underwrite a loan, we
would approve the loan, the project would start construction,
but there is still a gap, and the project cannot be completed.
But that doesn't mean that we would like to be the last dollar
spent on the project. We can be the first dollar spent on the
project. By the time that we close a loan, we would must see
the project fully funded.
Senator Schatz. Right. But if those requirements exist for
other parts of the capital stack, then aren't we actually
stuck?
Dr. Farajian. We can actually work with them to close
simultaneously. So we work with other lenders to close at the
same time, to make sure that they know that our loan is being
closed, and we know that their loan is being closed.
Senator Schatz. Vice Chair Hyde-Smith.
Senator Hyde-Smith. Thank you, Mr. Chairman. As I noted in
my opening remarks, the TOD has not gained nearly as much
traction in rural areas but has seen growth in larger, more
urban population centers as a means of creating connected
communities. But my first question for all three of you, the
panel, is kind of twofold. What unique challenges do less
densely populated areas face when considering a TOD project?
And how can the Federal Government assist small or midsize
communities in ensuring that the benefits of TOD are not just
constrained to urban areas? And I will start with whomever.
Mr. Nagraj. Thank you for the questions. Those are real
challenges. On the first question around unique challenges to
less densely populated areas, infrastructure costs are
significant. So when we are building in more remote locations
around the country, just the trenching, the power, the water,
all the costs that are not going to yield an immediate return
on your investment because you have got to do a high amount of
infrastructure before you can go vertical.
So essentially, finding a subsidy, or finding some source
to pay for that infrastructure cost, because essentially as we
build around the country, and in Huntsville, Alabama, or
Winston-Salem, North Carolina, we are creating new roads, and
streets, and utilities that didn't exist anymore. So finding a
source to help finance that would be critical, and because only
once we do that can we go vertical. So I think that would be a
critical piece.
Senator Hyde-Smith. Very good.
Dr. Loh. I would just like to jump in and add that, you
know, what rural communities want is to be connected, you know,
connected to their larger regional economies and to the
national economy. They don't want to have to leave and go
somewhere else in order to be connected. And part of
maintaining, for example, you know, rail service at smaller
stations in more rural areas is to do this kind of place-
making, real estate land development around the station in
order to make sure that the station has demand, and remains a
vibrant anchor that can justify the rail service that preserves
connections between communities that have historically been
connected.
Senator Hyde-Smith. Thank you. Very logical.
Dr. Farajian. Thank you for that question, Senator. A
couple of issues that I hear from rural communities I can
quickly summarize for you. One is, we have a program called the
Rural Project Initiative, under which we cut the interest rate
from Treasury rate, which is the regular rate that we charge,
to half of Treasury rate. That is very popular with a lot of
rural communities. We have financed many projects since 2019
when we rolled out of that initiative.
We have ten projects right now in our Rural Project
Initiative pipeline, four of them being TOD. The biggest
challenge that I am hearing from them is a legislative
requirement that those projects to receive half Treasury rate,
those projects need to cost less than $100 million. And $100
million years ago would have been a substantial amount of money
for a lot of these projects. Today, a lot of these projects are
hitting that threshold. That is a big challenge for them.
The other challenge is we can waive the requirement for
them to reimburse the Bureau's advisor cost, and we pay for
those advisor fees out of our TIFIA subsidy budget that we
receive, but as long as the projects cost less than $75
million. That is another challenge, that a lot of these rural
communities, they have to pay upfront for the Bureau's advisor
fees that, unfortunately, we cannot pay for, even though we
have the budget for it, because of that [$75 million total
project cost] limitation.
The third challenge is having capacity at the local level
to comply with Federal requirements, for example understand how
to go through NEPA process, understand how to go through
underwriting process. We have a couple of technical assistance
programs to help those projects; Innovative Finance and Asset
Concession Program I mentioned earlier, Thriving Communities,
Regional Infrastructure Accelerator Program.
The experience has been very good. We are working with a
lot of rural communities, but of course, there is more need out
there than what we have so far met. So we will be happy to
expand those programs and work with more communities to build
more capacity at the local level.
Senator Hyde-Smith. Very, very helpful.
Mr. Nagraj. Excuse me?
Senator Hyde-Smith. My next question is that--oh. I am
sorry?
Mr. Nagraj. Could I make one more? Sorry, to interrupt you.
Senator Hyde-Smith. Absolutely.
Mr. Nagraj. Just one more point on this, that I am
reflecting back on some projects we are looking at in Missouri,
and other kind of lower, lower-dense communities, and that is,
I think it is worth revisiting the transit requirements and
specifically what we are seeing is this -- the term ``intercity
bus'', and some of the requirements that we have, they have
kind of curious definitions. And I know this is a little bit in
the weeds, but it is super important. And I think it prevents
projects from either qualifying or not.
The definition around intercity bus includes bus routes
where 50 percent or more of the passengers do not make a same-
day return trip, which is curious, if we are trying to promote
TOD and greenhouse gas reduction, the fact that we are trying
to incentivize people not making a return trip is, I think, too
restrictive. And when we look at the definition of bus rapid
transit, fixed-route bus systems that operate at least 50
percent of the service on a fixed guideway, so requiring a
fixed guideway or a separated lane, when I think about a lot of
rural communities, it is just intercity buses, I think if we
eased up on those definitions, it would open up the door for a
lot more eligible projects.
Senator Hyde-Smith. Thank you, Mr. Chairman. I am over my
time.
Senator Schatz. Senator Reed.
Senator Reed. Well, thank you very much for your excellent
testimony. And Dr. Farajian, thank you for coming up to Rhode
Island, meeting with state leaders, and talking about how we
can really get moving on this project. And I have to commend
Dr. Loh, and Mr. Nagraj, for the wisdom of going to Brown
University. It has eminently been demonstrated here today. You
are well educated.
It strikes me, Dr. Farajian, that HUD has been in the
business of housing, affordable housing, for a long time, the
FHA. Are we trying to coordinate and essentially make your
regulations look a lot like their regulations? I know there are
some exceptions, but is that an ongoing project?
Dr. Farajian. Thanks for that question, Senator. Yes, we
have been talking to HUD, working with HUD, trying to learn
from them. As you said, they have a lot of experience in this
field, it is new for us. We are trying to learn as much as we
can. There are differences in terms of legislations we have, in
terms of regulations we have, and then some of our policies and
regulations were not developed or drafted for TOD, and we need
to go back and revise them. So we are going through that
process now.
Senator Reed. Yeah, it seems that we have a responsibility,
just a general sort of macro view and we are talking about
housing here, we are not really talking about developing
transportation facilities; that they have to be there, so this
should be about housing. And if we simplify it to make it look
just like, or as close as we can, to FHA policy, et cetera, I
think we will be in a much better position; is that fair?
Dr. Farajian. Yes, I agree with you on that. And we are
doing our best, to the extent possible, to be close as the
process proceeds.
Senator Reed. And we have to do our best too.
Dr. Loh, your comments, and then Mr. Nagraj; do you have
any comments?
Dr. Loh. Yeah. I mean, I am certainly in agreement. I think
that HUD does have a ton of experience at protecting the public
interest while at the same time helping these projects actually
happen.
Senator Reed. Thank you.
Mr. Nagraj. Yeah, I was going to say that FHA has a lot of
sophisticated staff who are used to underwriting these
projects. FHA also works with servicers, kind of third-party
companies opposed to FHA staff working with a hundred or more,
hundreds of developers and developments around the country,
they contract with individual companies and then the
contractors' contract with us, so it reduces the administrative
burden.
Senator Reed. Right. And there is an outreach program
essentially, so that some developers might not be aware of
that, because there is a transit facility nearby they could
participate in this, but with that outreach, they would. One
other issue I think, Mr.--excuse me----
Mr. Nagraj. That is all right. It happens all the time;
Nagraj.
Senator Reed. Can I call you Adhi, [Aad-hi]?
Mr. Nagraj. Adhi.
Senator Reed. The reason we know each other from 25 years
is he was in the city here in Providence, Rhode Island, so we
are all pals. Should we put some emphasis or incentives for
affordable housing? Right now there is nothing in there, so
essentially someone could come into you and say: I want to
build luxury apartments $1.5 million until you get to the top
floors. And you would say, okay, well, let us go. Should we
have some affordable housing emphasis, either incentives or
rules?
Mr. Nagraj. I certainly think so. I think so. According to
the National Low Income Housing Coalition we have a shortage of
over 7 million homes for low-income people. Low-income housing
impacts job retention, academic performance, mental health,
physical health so I think we have to have those kinds of
incentives.
There have been studies in California with all the TODs
around there that low-income people near transit have higher
transit usage than wealthy people, market rate people, and it
is because market rate people have a lot more options between
private cars, and Uber, and Lyft, than do low-income people. So
I think we can enhance our GHG reduction goals by including
some affordability requirement on these developments.
Senator Reed. And your comments, this is a presumption, I
don't know, but in rural areas you would more likely not find
luxury--I mean, rural-rural areas luxury apartments. That is
the place where you would probably have a real demand for
affordable housing; is that accurate?
Mr. Nagraj. That is right. We work in a lot of communities
where there is need for housing but the incomes just haven't
caught up with the need, and so those are communities,
especially where we need to support the middle-class jobs, the
lower-class jobs, and people who do need to commute a long way
to their employers. So I think it is critically important
there.
Senator Reed. Very good.
Dr. Loh. Can I add just a little bit to this?
Senator Reed. Yes, ma'am, please.
Dr. Loh. So what I would encourage the subcommittee to
consider, is just given that this program has had trouble
achieving escape velocity in producing any housing, that just
be careful about making it more complicated, to making the
projects that would use the source of financing more complex.
That said, I do think there clearly is a special case for more
generous terms for projects that include affordable housing.
But I have heard a lot of creative ideas about how the
Build America Bureau is thinking about being more generous, you
know, like for example, reducing the rate below the Treasury
rate for certain kinds of projects. If the subcommittee will
consider increasing the loan-to-cost ratio for TIFIA, perhaps
that could be tied to increase affordability.
Senator Reed. No, I concur, a simplification, that is why I
am suggesting we look at what HUD does. It has been in the
field a long time. And we try to be just like that so it is
simpler for the developer. And also the Buy American versions,
the chairman mentioned, probably and you commented probably not
necessary given the type of construction we are doing, and the
cost we have to maintain, so, ``Keep it simple, stupid'', is my
rule. Thank you.
Mr. Nagraj. And Senator, if I may add? I would just like to
continue on that thought, that the rural project initiative
that I mentioned earlier have a Treasury rate that has been
very successful. It is for a policy that Congress deemed
necessary, and we have a lot of interest in it. A similar model
can be used for other type of policies that Congress wants to
promote.
Senator Reed. Thank you very much for that. Thank you.
Thank you, Mr. Chairman.
Senator Schatz. Senator Hyde-Smith.
Senator Hyde-Smith. I just have one more that I am going to
do it the same way. The TOD projects are primarily driven by
the local entities due to the need for land zoning and things
like that. But the success of combining TOD and affordable
housing is dependent on these local relationships. And how can
transit agencies better partner with housing authorities,
developers, and other stakeholders at the local level to
increase the supply of affordable housing? How can we improve
that?
Dr. Farajian. I can go first. Well, thanks for that
question, Senator. And thanks to all the good work that members
of the subcommittee and committee put into passing the
Bipartisan Infrastructure Law. We have got a couple of very
effective tools that I mentioned in my testimony, one of them
being the Innovative Finance and Asset Concession Grant
Program, which right now we are evaluating the applications
that we have received.
It allows us to provide funding to transit agencies, or
other public project owners, project sponsors, like
municipalities and DOTs, that own assets that are underutilized
but have potential for better utilization.
The goal is to scan those assets, screen them, identify the
ones that have potential for further development, create a
database of those assets, and share them database with public
and private companies that could then create partnerships with
public entities and develop them. Most of those assets, by
default, are going to be located around transit stations,
because those assets that need to be scanned under the program
to be eligible for TIFIA financing.
So we saw a lot of interest. I am very optimistic about the
program. Of course, it is new, we are just establishing it, we
are rolling it out, but we saw significant interest. In the
discussions that we have had with many transit agencies, they
have highlighted to me that while they have assets, many
agencies don't know where those assets are, and what is the
true value of those assets, what can be done. So hopefully
through this program, we will be able to unlock value from some
of those assets.
Senator Hyde-Smith. Thank you.
Dr. Loh. I will just pile on there and say that transit
agencies, systematically, are underfunded to achieve their core
mission of delivering transit service. And so it is really
difficult for them to think even bigger than that core mission
and get at this integration between land use and
transportation, even though commonsense indicates, man, these
transit agencies have all these really valuable assets, why
don't they just develop them?
You know, this is a capacity issue regarding achieving
their core mission. And so any way to uniquely support
additional capacity, especially bringing expertise and capacity
from the private sector, which does the vast majority of real
estate in the United States, to these kinds of public assets,
is the solution that we need right now.
Otherwise, you know I think that the challenge of transit-
oriented development is that costs are systematically higher.
The infrastructure costs are higher because a lot of this land
is needed to continue serving a transit purpose, even as it
also makes sense for it to serve a housing purpose. And so that
systematically makes the projects more expensive.
There is pressure on these projects to include significant
ability because we know that is who needs to live near transit
the most. But once again, all that does is increase the gap
between feasibility and the project's cost.
So anything that the Federal Government can do in order to
provide both the capacity and the resources to close that gap,
I believe that the public will be more than paid back any broad
public benefits that will come from better integrating land use
and transportation in terms of changes to travel behavior and
strengthening housing markets.
Senator Hyde-Smith. Okay.
Mr. Nagraj. If I could just add one more thing. Just a
concrete example, in the Bay Area, the Bay Area Rapid Transit
BART System, secured a large planning grant to look at all
their stations and look to see what are financially feasible
TODs that they could have at their individual stations and what
should the affordability requirements be,
Frankly, a really difficult thing is, what to do with the
parking lots, because people do get upset if they lose their
parking, and how to finance replacement parking. And so they
secured a large planning grant and that it was transit and
planners working together, because I agree at a lot of these
transportation organizations, keeping their transit systems
alive, especially right now, is our primary challenge, and it
is a daunting 25-hour task and the partnership work.
But as we worked around the country, when you talked about
partnership with agencies right here, or close to here in
Baltimore, at Perkins Homes, in Atlanta, in Syracuse, all these
are communities where housing authorities and cities are
working together to plan communities to accommodate the
divergent needs of a community, because no community has is a
monolith.
But they are able to spend time on the planning, and the
outreach in order to make sure that the agencies and the people
are on board, so that we can, we can build up. And because of
the challenges that Dr. Loh just talked about, that is where
feel like, if we could unlock the TIFIA financing scheme it
could help overcome a lot of these challenges on TOD that we
don't face in projects that are not near transit.
Senator Hyde-Smith. Thank you all. Thank you, Mr. Chairman.
Senator Schatz. Senator Van Hollen.
Senator Van Hollen. Thank you Chairman Schatz, Ranking
Member Hyde-Smith.
Thank all of you for your testimony. I have been trying to
keep one ear on your testimony on C-Span before I got here, but
I apologize if I sort of retread territory you have already
covered.
But in my State of Maryland, the Maryland Department of
Transportation has a growing interest in pursuing TOD projects,
generally, and it is reviewing opportunities for TOD at current
and future stations along existing and future transit
corridors, including the future West Baltimore Redline Station
in Maryland. We are trying to revive the Red Line in Baltimore,
and that recently received a TOD Planning Grant.
So Dr. Farajian, as Maryland, and Maryland DOT
specifically, evaluates these TOD opportunities, what should we
be factoring into the decision process when considering whether
it is a good TIFIA candidate or not? And what is the benefit to
Maryland for using the TIFIA Program for financing these
projects, versus the private market or other existing state
financing options?
Dr. Farajian. Thank you for that question, Senator.
Maryland is not unfamiliar with our programs. We have closed a
couple of loans in Maryland before. I believe on Purple Line,
we have two loans right now, the initial loan and the
subsequent loan we provided, as well as a couple of other
projects. We have worked with Maryland DOT closely, we are
actually in discussions with them on various issues, we will be
more than happy to work with them.
My recommendation to them is to come to us and talk to us
about those projects as early as possible. I have experts that
will be able to walk them through some of the requirements, and
make sure that they don't do anything on those projects that
would preclude them from being eligible for TOD loans.
I mentioned earlier we have a couple of grant programs that
I am not sure if Maryland has applied to the Innovative Finance
and Asset Concession Grant Program that we are evaluating now,
but the new round of course is going to go out as soon as we
get the fiscal year 2025 budget approved. I would definitely
suggest to them if they haven't applied, to apply for that. And
we work with many counties, including Montgomery County.
We just gave them a grant to establish what we call a
Regional Infrastructure Accelerator in Montgomery County. We
will be more than happy to work with them, because as you
mentioned, there are a lot of opportunities in Maryland, a lot
of good projects. And my staff and I would be happy to meet
with anyone that you think would like to discuss any of these
opportunities in more detail.
Senator Van Hollen. I appreciate that, and they may well be
listening. We will look forward to putting that you two in
touch. As you say, I mean, Maryland has used TIFIA loans before
the Purple Line you mentioned. I don't believe MDOT has used a
TIFIA loan in connection with the TOD before. This is a more
innovative new approach, and that is why we look forward to,
you know, meeting to get a better sense.
And I guess partly because this is a newer idea, it is an
undersubscribed program, which means there is a lot of
opportunity here for those who are sort of paying attention.
But what can Congress do to better help communities,
states, and Montgomery County, other counties in Maryland,
other places around the country, learn more about and access
the TIFIA Program at the Build America Bureau? So how can we
make this more attractive to transit agencies?
Dr. Farajian. There are a couple of factors that we can
propose. Some of those factors require legislative change,
especially related to TOD projects. I believe the number one
factor that everyone here agrees is the rating requirement that
is preventing a lot of projects to be eligible for TIFIA loans;
that is a legislative requirement.
For smaller projects, sometimes the size limit of the
project can make them not feasible because some of the fees are
fixed fees; for example, conducting a NEPA study, whether a
project is a $50 million project or a $500 million project. For
some of those projects, providing more incentives and
initiatives through Congress that would be helpful for them;
being able to waive, for example, their fees, or being able to
provide lower interest rate to some of those projects.
We do provide a lot of technical assistance that has been
very successful at the Bureau. Our TOD project pipeline has
grown significantly. The overall pipeline for Bureau has grown
significantly, from almost $4 billion back in 2019, now we are
at about $40 billion today. But we will continue the outreach,
we will continue capacity building at local level.
The other thing that I can tell you is what we are doing
now at DOT is to make sure that we streamline our process,
procedures, and everything that we can do internally to make
sure that this new program, TOD, can fit within the broader
programs that we have that were initially develop for highway,
transit, or rail projects, not necessarily vertical
development. That is an ongoing battle, ongoing process, so we
need to go back and change some of the regulations and policies
that have been in place for quite a long time to make sure that
they are not putting additional burden on some of these TOD
projects.
Senator Van Hollen. Well, thank you for that, and I think
we can sort of break these barriers and impediments into sort
of two categories, well maybe three: One, is just getting more
information out about these; two, is streamlining the process
internally, but then you mentioned some of the legislative
barriers that require the new laws, for example, with the
rating systems.
So if I could just ask our other two witnesses to comment
on some of those suggestions for streamlining and improving
this program and whether you have any additional thoughts as we
move forward?
Dr. Loh. Thank you, Senator. You know, I think this is the
right question to ask. Requirements that make sense for
billion- and trillion-dollar infrastructure projects should
apply to those, do not necessarily translate to real estate
projects that are much smaller but are a critical piece of
those billion- and trillion-dollar infrastructure projects
being successful, right? The Purple Line doesn't work if it is
a Purple Line to nowhere.
Senator Van Hollen. Right.
Dr. Loh. And we want every station to be somewhere, and it
is always possible, of course, technically possible, to comply
with Federal requirements, but if that results in projects
where the percent of the project costs that his lawyer is
getting paid is as big as the percent of project costs that is
low-income households having somewhere to live, that also has
great transportation that, while great for lawyers, is
unfortunate for the public.
And so rightsizing the Federal administrative requirements
on these projects is something that I think, ultimately, does
serve the public interest and does not expose the public to
more risk.
And so, Buy America is a great example of that in the
context of real estate. We want this to be great housing,
right? Really good quality, built to contemporary building
standards, but the kinds of heating and cooling systems that
are used in the best quality LEED buildings now are only
manufactured abroad.
We aren't at the point where we have created a market for
that in the United States. When we are ready, and that can
happen, that will be great, but trying to force it to happen,
trying to move the market one individual transit-oriented
development project at a time, that doesn't work, and it
doesn't scale the same way that it does work when you put those
kinds of market-moving policies into a trillion-dollar
infrastructure project.
Senator Van Hollen. Thank you. I know, Mr. Chairman if you
can keep it really short, your response.
Mr. Nagraj. Sure. I will keep it really short.
Senator Van Hollen. Thank you.
Mr. Nagraj. McCormack Baron Salazar is working at Perkins
Homes, just next to Downtown Baltimore, Fells Point, 800 units
of mixed-income housing with the city, and the housing
authority, and the state. And so we are in the middle of
redeveloping the public housing, and what we are seeing with
this densification is area median incomes are rising, it is
kind of what we want in redeveloping a very distressed, low-
income community, and the need for mobility is increasing.
So we are seeing, as we are kind of creating a new little
mini-city in this otherwise disinvested neighborhood, the needs
of the residents are growing. They need to be more mobile. I
hope people see it as a false choice between transit and
housing. The more housing we build at transit stations, the
more it is going to increase ridership, and the more fare
revenue is going to increase from the transit stations.
So we do feel like this is synchronous. We talked earlier
about the transit usage of low-income folks being higher than
those with means because low-income folks don't have a ton of
options, unlike folks who own cars, and Lyft, and Uber
everywhere.
So we think that that synergy is really important, and are
hopeful that we can work this out because that spread on loans
is massive between a TIFIA loan and a conventional loan. It can
yield millions of dollars of savings, and that savings, while
we don't want it to go to the lawyers, and no offense to the
lawyers, could expedite the acceleration of new housing being
built.
Senator Van Hollen. Well, thank you. Thank you for
mentioning Perkins Homes. I am glad you are working on that
project. And really thank all of you. It has been very
informative.
Mr. Nagraj. Thank you.
Senator Van Hollen. Thank you.
Senator Schatz. Thank you, Senator Van Hollen.
To close, you know, I think over the next year or so, I
think the economy is doing fine. I think the real estate
economy is not doing fine because of the interest rate
environment. And I think this is the exact right time to start
deploying these TIFIA loans for housing, because they are
countercyclical, because of the spread between a commercially
available loan and a TIFIA loan is massive at this point.
And so our timing, although it is arguably 9 years delayed,
some of this, you could be subject to criticism. Some of this
was the previous administration sandbagging the Federal Law,
but it is just worth pointing out that it is sort of go-time.
And so along those lines, HUD has standard underwriting
procedures. Dr. Farajian, why wouldn't we just sort of borrow
those as opposed to reinventing the wheel here?
Dr. Farajian. Thanks for that question, Senator. You are
absolutely right. They do have underwriting procedures, we have
been talking to them. There are some administrative challenges
in terms of borrowing everything that they have, or even having
access to everything that they have. We are working through
some of those challenges, two different agencies, different
processes and procedures. We are working with them, as I
mentioned earlier, we are collaborating with them, but we have
got to be mindful of some of those challenges that have slowed
us down.
Senator Schatz. I am not sure what you are talking about.
It sounds like you are getting resistance, but I can't tell
whether it is sort of interagency cultural resistance or like
an actual problem.
Dr. Farajian. It is just when two agencies are trying to
make two programs that are different and separate from each
other, work, and get together and make things work; there is a
need to have an interagency agreement, there is a need to get
the lawyers involved and make sure that the information that is
being shared is all being shared in the right way, in the
formal way. So there are steps that we need to go through--when
we are trying to go through this.
Senator Schatz. Sure. But we are not talking about private
information; we are talking about a sort of template for
analyzing whether something is a viable project. And I have a
hard time believing, since you are in the Federal Government,
and so is the other agency, that I get that you need to work it
out, but you know, I will follow up through staff and directly
with both Secretaries, but I just don't want us to get stuck.
And I know how hard some of this stuff is, but not for good
reasons. There may be good reasons that some of this HUD stuff
doesn't work at DOT fine, but underwriting procedures, you
don't make them up, they are not like boutique-ey little things
where you say: Well, this is how I do it, you know, from the
transportation perspective.
Evaluating the viability of a project is a thing that
people do, and mostly those things ought to rhyme. My
understanding is a bunch of these projects potentially have an
FHA portion of their capital stack, and potentially a TIFIA
portion of their capital stack. I am getting nods, correct?
Dr. Farajian. Yes.
Senator Schatz. Okay. So if that is true, and something
comes in through FHA and Ginnie Mae, hasn't the Federal
Government established its creditworthiness, on the
creditworthiness of the project? And do we need DOT to do its
own analysis and require somebody to go to S&P, or Moody's, or
whomever? Or can the fact that something has moved through this
other Federal process and we have decided that is basically
investment grade, some of the lowest risk stuff around, why
wouldn't that suffice in terms of meeting the statutory
requirement?
Dr. Farajian. Well, the statute is very clear on requiring
the borrowers to have the rating agencies to rate the TIFIA
loan, so that is why we have to require it.
Senator Schatz. Do you agree with that, Mr. Nagraj?
Mr. Nagraj. I agree.
Senator Schatz. I think overheard that you are.
Mr. Nagraj. I agree that the statute says it. I do, as you
are talking, you know, as a practitioner, I feel like there is
kind of a small idea, and then a big idea. Maybe the solution
was somewhere in the middle. The small idea is kind of
coordination with a different department using, as you said,
the same set of Regs and documents, and pro formas, and one set
of lawyers.
The big idea that I brainstormed was, you know, if there is
a joint, you know, TOD office and there are folks from HUD,
FHA, and DOT that are all kind of--and not to create a
different bureaucracy, but I think it would kind of accelerate
and create a super agency that could be the coordinating entity
that developers and developments around the country work with.
That for me is a bigger idea. It is a bit of consolidation,
or kind of a super agency. But somewhere, whether it is kind of
mere coordination or the creation of a joint TOD office, I
think there has to be one set of docs, one set of Regs, so that
we are not getting underwritten several times by different
public agencies.
Senator Schatz. I am 100 percent sure I can't pass a super
agency in this Congress, so let us go for a working group. In
all seriousness; I think we don't need a new statute, and a new
architecture, and a new law, we could just start working
together better, and certainly both Secretaries could say: You
guys are going to work together, and here is the team. It can
be informal, it can be a task force by memorandum, whatever,
but I like the idea.
And I am not quite satisfied, Dr. Farajian, that we
couldn't meet the requirements if another executive agency is
evaluating this, and determining its creditworthiness, so I am
not a lawyer, but I think we should try to put our heads
together and figure out if there is a work around here,
especially in the short run.
Dr. Farajian. Senator, I will take that back, and have the
lawyers look at that.
Senator Schatz. Okay. And if they have a bad answer, don't
give it back to me. And certainly don't put it in writing. I am
just kidding.
But look, I'm thinking about legislative intent, right, we
are saying the Congress said: Oh, and make sure this stuff is
creditworthy. I am not sure we are opining about the particular
mechanisms. Now, sometimes the plain language of the statute
doesn't give us a lot of room to maneuver, but sometimes it
does.
And so I just think we need to press on this, especially
even if we were able to make some of these changes, we still
have to work them up and go through the legislative process. It
could be, optimistically, 5 months, it could be, you know,
pessimistically, way more than that.
So we have got to work on parallel tracks to fix some of
this stuff administratively. You know, I hope for the best and
plan for the worst.
The final question I have is just on the pipeline. You said
there are, I guess, 20-23 projects in the current pipeline; is
that correct?
Dr. Farajian. It is changing every day, and it depends on
the definition of ``pipeline''. We have received 48 letters of
interest.
Senator Schatz. Okay. So that is actually what I was going
to ask because, like, you know, I deal with the great people at
the Hawaii Housing Finance Development Corporation, and
sometimes they have a spreadsheet that is like: Look, 28,000
units, right. And then you kind of go like: Well, where are
they? Do they have their entitlements? Do they have their
commercial loan? Do they have a site control? Do they have all
the rest of it?
And so, what you are saying is the pipeline could be very
early: Hey, we would like to learn about this, or it could be
relatively far along. Is that the way I should understand this?
Dr. Farajian. The 48 projects have submitted letters of
interest, which is the first step to start our process.
Senator Schatz. Okay.
Dr. Farajian. They are a little bit more developed than
some of the other projects that have just talked to us and said
that we have an idea. So we have many more projects that have
talked to us. They said, we have an idea, but they have not
submitted anything in writing yet.
Senator Schatz. How many are close to being consummated?
Dr. Farajian. Twenty-four out of those 48, we have assigned
what we call ``project development leads''. These are
individuals within Build America Bureau, a single point of
contact, who is working with them very closely.
Senator Schatz. So they are case managed sort of one by
one?
Dr. Farajian. Yes, one by one, to help them, as I mentioned
earlier, to maneuver through some of those challenges that we
know exist for those projects.
Senator Schatz. So let us just talk about throughput, so it
is 48, or it is 20-something, or whatever; by the end of the
year, what is an optimistic number of projects that will have
gone through this pipeline and all the way to getting a loan?
Dr. Farajian. So we just closed one deal. We have two other
projects in credit worthiness right now, that we are actively
underwriting loans for them. It is hard to say whether they
close a loan or not, because the ball is sometimes in their
court, and making sure that they can get things done on their
side. But I believe one of them, which is a housing project,
has a very, very high chance of closing at this point.
Senator Schatz. So I guess my question is, I am asking you
for your intuition. And if I were you, I would be a little
nervous about supposing what might happen, but I am going to
press you a little bit. It seems to me that you are optimistic
that this thing has been delayed, pretty much intentionally in
the previous administration, and then you have your normal,
kind of like, Federal Government getting the wheels turning.
And now we are at a point where this thing may be nonlinear
in its growth. Is that what you are anticipating? Like, if we
come back six, or eight, or twelve months from now, do you
think you are going to have some more success to report?
Dr. Farajian. Yes, Senator. I think the first few deals
will be very difficult to close because we have a lot of
challenges that we need to work through. But once we have a few
of those deals through the process, once we have answered a lot
of questions that we are already working on, I think the
process is going to become much simpler next year for a lot of
these deals to go through the process.
Senator Schatz. Okay. And we are going to continue to track
this, but I would like you to convey both to your department,
and also we will convey it to HUD and to the White House, that
this is something we are watching and that sometimes you pass a
law, and it just sort of self-executes, right?
Sometimes you have to do the do, and you have a lot of work
to accomplish. If there is a place for this committee to nudge
the bureaucracy along, if there are things that we can do to
provide top cover or momentum, we want to do that.
I mean, this is a highly technical space, and yet we had
pretty good participation in this hearing. And usually, if it
is something that requires a deep level of technical expertise,
members find another place to be. But we are really interested
in this, and so I want you to know we are going to be tracking
this, and we are available for small favors that are in the
four corners of the statute.
So I want to thank all of the testifiers for being here
sorry, I am going into my closing script. I am going to make it
up.
ADDITIONAL COMMITTEE QUESTIONS
The record will remain open for the next two weeks so that
any member can submit questions for the record.
SUBCOMMITTEE RECESS
Senator Schatz. Thank you for your time and testimony.
[Whereupon, at 11:14 a.m., Tuesday, June 18, 2024, the
hearing was adjourned, and the subcommittee was recessed, to
reconvene subject to the call of the Chair.]
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