Xiao Yuan 0:00
You know, a developer would go to a municipality and say, hey, look, you know, my project currently cost x. And you know, it has a return of y. But this return is too low that my bank is not willing to do it. My equity partners aren’t willing to do it. It’s not a bankable deal, right. So in order for me to go and engage this project embark on this project, I need some invisible incentives. And so you know, TIF is just a form of a municipal incentive for the developer to build a project. So you can kind of think about think about it is it’s really buying down the amount of equity needed to really sort of create a more robust real estate return.
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J Darrin Gross 1:02
Welcome to commercial real estate pro networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals to provide their experience and insight to help you grow your real estate portfolio.
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Today, my guest is Xiao Yuan Xiao is the managing director of Hagmann Capital and manages the day to day operations as well as leading all bond structuring and negotiations or Hagmann capital portfolio. And in just a minute, we’re going to speak with Xiao about TIF bonds. That’s the Tax Increment Financing bonds, and what they are and how they’re used.
But first couple things. If you like our show, you can help us out. You can like share, and comment on our on our podcast here. We always love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Xiao Yuan, welcome to C R E PN Radio.
Xiao Yuan 2:56
Thanks for having me. I appreciate you taking the time to learn a little bit more about what I do.
J Darrin Gross 3:02
Well, I’m really looking forward to this. I did a little research before or in preparing for this. And it was kind of fascinating and I’m dying to learn more about it. So but before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Xiao Yuan 3:21
Sure. I’m Xiao Yuan. I am the managing director of Hagaman capital. So Hageman Capital is a entity that we created in 20, late 2020 To purchase developer backed TIF bonds. So prior to really creating Hageman Capital, The Hageman family’s farming family out of Remington, Indiana, who feed Hageman, the the patriarch and family started a seed company and sold it in 2013. And so that created a liquidity that for us to really invest in our traditional commercial real estate, and some private equity plays as well. And so our focus, originally Hagaman was mostly commercial real estate. We were LP and JV investors and a lot of multifamily deals. But what we realized was that we saw a trend in the commercial real estate space in at least in Central Indiana and a lot of the Midwest was that developers were asked to essentially buy their own taxes or refinancing bonds. So the way that municipalities used to do it is that they would use you know, really all future property taxes of a maybe a very large TIF district or an entire municipality itself to incentivize the project. But really, the last few years, municipalities realizing that that’s not something they wanted to do. They didn’t want to put their credit on the line. And so instead what they did was asked Developers will support their own projects by essentially promising the future tax revenues generated from their project. And so that created a void and that, you know, what was, you know, municipal that TIF bonds have a pretty high rating, you know, typically very high investment grade rating. What developer bad projects are, is that it really is, I mean, the credit of the developer. And, you know, there, there really isn’t much more to it, right. So it’s, you know, if the developer or the private property owner can pay your taxes and the taxes stay high, you know, you as the bond bond holder, we get paid. And typically, you know, that is not a that’s not a very marketable security, or it just lacks a lot of liquidity. So what you’re going to Hagan realize is that, you know, we were typically really good at understanding commercial real estate risk, all we’re really doing now is applying it to, to, you know, Tax Increment Financing bonds, that, you know, we we understood property taxes, we understood, development risk, we understood construction risk, you know, we’ve taken on those risks ourselves. So, you know, what’s the difference, if we were to essentially do that with a bond that so that’s why that’s how you’re gonna capital was created was to both provide liquidity in a space that lacked liquidity or not a lot of folks were, were engaged in that, you know, our, really our expertise really is not just real estate, but it’s also you know, bond structuring, as well. So my background was in capital markets at a large regional bank. And my specialty was in high yield municipal finance. So prior to joining Hagen, and that’s what I was doing, and TIF really was, was a big part of it. So that’s just a little bit about us. And, you know, kind of how we operate, and really the history of the company.
J Darrin Gross 6:55
Now, I appreciate you sharing that, because it’s kind of fundamental to understanding what you guys are and kind of what to talk about. So, I want to first kind of differentiate them and make sure I understand so. So bonds are debt. Right. I mean, the so the, the TIF bonds. You mentioned the developer back TIF bonds, where they previously be I thought I heard you say that primarily, they were municipality backed bonds. Was that Did I hear that? Right?
Xiao Yuan 7:29
Yeah. So you know, the way that most developers can get incentives on the project, you know, back in the day, you know, what, what ultimately would happen is, you know, a developer would go to a municipality and say, hey, look, you know, my project currently cost x. And you know, it has a return of y, but this return is too low that my bank is not willing to do my equity partners are willing to do it. It’s not a bankable deal. Right. So in order for me to go and engage this project, embark on this project, I need something that’s more incentives. And so you know, TIF is just a form of a municipal incentive for the developer to build a project. So you can kind of think about think about it as it’s really buying down the amount of equity needed to really sort of create, you know, a more robust real estate return, right. But back in the day, what a municipality would do is, they say, hey, we’ll give you the Tax Increment Financing incentives. But so we’ll go out and issue a bond. But if let’s say the property taxes from your bond, doesn’t cover the debt service, because you know, for whatever reason, maybe your project is delayed, or the assessor’s office is, you know, very generous to you, for whatever reason, you know, there may be sort of a shortfall between the bond debt service and the, you know, the revenues that that are generated from just one project. And so what municipalities used to do is say, if that were to happen, we will pledge other revenue sources, typically sort of the gross collective property taxes of the of this plant taxing district to repay the bonds, right. And so, it, you know, obviously, the cost of financing and dosage situation, but it’s really kind of a credit of Municipal Credit at that point, right? The backstop is the municipality. And so while the financing costs were extremely cheap, the risk component for the municipality is much higher, you know, they’re really taken. They’re really taking on higher risk, more risk. By doing so, it especially if a project you know, ends up maybe not being what it what it was built to be. And so, the recent trend at least into Indiana is that municipalities have kind of gone away from the structure. But instead, you know, they’re telling the developers that gay will give you the TIF, you know, the tax the future taxes generated from the property that you’re about to build. But if there’s a shortfall, and you can’t pay your pay the bondholders, we’re not going to back in. Right. So you developer will end up having a back end with your balance sheet or having a back end with you know, sort of it seemed more of like non recourse dad recourse the real estate but non recourse to developers themselves, right. And so, so that’s really the distinction. It’s overnight, you know, you went from these, you know, double a triple eight municipalities that are supporting Tax Increment Financing debt, to really these are just developer support bonds, which, you know, does it just haven’t traded well in the marketplace? And so, so, what we decided to do was essentially invest in the ladder pool, right? Because we understand the risk, we understand, you know, what is what really, what is our worst case scenario if somebody doesn’t pay our bonds? Right. So that’s, that’s kind of the, I would say, the high overview of, you know, what municipalities used to do when they were back in the bonds versus what they’re doing now.
J Darrin Gross 11:26
Got it? So a couple of questions from that. So the, my understanding, and I do a fair amount of like, performance bonding for contractors now. And so having to, to be familiar with their balance sheets, and, and you know, how the, the underwriters always want there to be more cash than they need, you know, so they can pay all their debts. And, you know, not not have a claim against a bond on a performance bond, I’m assuming to be some similar underwriting that you guys look at when you’re looking at these, these contractors, you mentioned, you know, they have enough of the balance sheet to to pay the potential shortfall. Is that? Am I reading that? Right? Is that what a lot of what you guys do when you’re when you’re looking at a bond to buy? Is that? I mean, cuz you’re essentially, are you not providing the capital to the contractor? Or are you are you buying, you’re buying the obligation for a rate of return from the contract? Or how’s that? How’s that structuring?
Xiao Yuan 12:31
Yeah, so I mean, what we’re really doing is we’re providing capital to the developer that is getting this tax increment financing incentives. And so you do have to underwrite plots or risk, but at the end of the day, right, I mean, the project produces income, you know, it’s not just, you know, I mean, these are commercial real estate projects that are income producing, you know, we’re not going to go buy a bond on a, you know, a single family home, that they’re not sort of this perpetual income. And, you know, like, most commercial real estate developers, especially the good ones, right, is that they, they’re, they’re gonna pay their taxes on the property with the income from the property. So we actually, I mean, we spent a lot more time looking at that the actual development project itself, as opposed to, you know, maybe the sponsor Now, granted, sponsor reputation. And sponsor risk is a real thing, that we do really, you know, heavily scrutinized that, but at the end of the day, you know, if it’s a good project, and, you know, good sponsor, good developers, you know, those are really the the aspects that we’re underwriting.
J Darrin Gross 13:36
Got it. So it’s more like just a commercial bank loan, from a standpoint of view, the project, the viability of the project, more so than the than the actual the contractor.
Xiao Yuan 13:48
J Darrin Gross 13:49
Gotcha. And, and so that the debt, is there a lien position against the project? If there was a, something went wrong? Are you in a position where you have any kind of a lien against the property?
Xiao Yuan 14:08
Yeah, so taxable refinancing is essentially taxes, right? So you don’t, you know, these are just future property taxes that are generated from from your project. So the debt service on these bonds are correctly correctly from the taxes generated from the project. So, you know, if you don’t pay, you know, that service on your bond, you know, typically what happened is you just didn’t pay your taxes. So, in that sense, we do have a lien, right. We have a, you know, we essentially had a tax lien that if you didn’t pay your taxes, then you know, the there could be essentially a trigger foreclosure or tax sale. Now, what’s more likely happening the developers construction lender or first mortgage holder is probably going to pay those taxes. Just because they don’t Want to be wiped out by a position that is, you know, essentially maybe 10 to 15% of the capital that. But But ultimately, you know, it’s treated like a tax lien. Now, the only caveat is that if, you know, let’s say the assessor assesses the properties lower than what the debt service would be, then you technically wouldn’t have you know, how to tax lien in those situations unless you have maybe some sort of a side agreement or a taxpayer agreement of some sort. So that’s the caveat, right? That if there’s enough taxes to pay debt service, and somebody doesn’t pay their taxes, then that’s a tax lien. But if there’s not enough assessed value in taxes to pay the debt service, and somebody does pay their taxes, that’s not necessarily a tax rate.
J Darrin Gross 15:54
So in just a brought up a couple of things, that is a bond, it’s a debt, but it’s, it’s strictly through the taxes that are that the payments to the bond are being made. Is that understood that? Right? Correct. Okay. And so, if there’s a lender, like you said that if the taxes aren’t getting paid, the lender would likely pay those. So your your position in the the discharge of the, the property, if it were to go to foreclosure, you’re not in first position, I assume that the lender would be in first positions that
Xiao Yuan 16:36
No, you are in first position, because it’s a tax lien.
J Darrin Gross 16:39
it’s above taxes, that the lender can’t. So I thought that
Xiao Yuan 16:43
Which, which is always the case, right? I mean, right. Right. It doesn’t matter, you know, you don’t pay property taxes on your house. I mean, it doesn’t matter how big your mortgage is, your mortgage lender is gonna get wiped out. And, you know, that is kind of the nuance that, I think, you know, you have to understand, when you’re looking at these deals is that each different state has, you know, slightly different sorts of tax do procedures. In Indiana, it’s generally pretty favorable, who, you know, I would say it’s more municipal municipally favor? And so, you know, we have really well, we say, you know, we have first position, you know, we do right. Now, granted, the, sort of the other side of it is our capital comes in before the construction lender, you know, it’s really TIF capital, TIF equity is really treated as, you know, equity in the capital stack, and chances are that that lender is going to want to see that money comes in first, right? So it’s not sort of this, you know, you’re in the super protected position, it’s that, you know, taxes for whatever reason, if your project under taxes don’t, don’t tend to do well, you know, or the set values decrease, you know, you’re subject to those types of risks.
J Darrin Gross 17:59
Got it? So, as far as the, the the capital that you guys are, are putting up, and, you know, it’s used, is it, is it designated on more like infrastructure? Or is it or is it just a part of the whole project? Or is there any primary way that that the funds are used?
Xiao Yuan 18:24
Yeah, so my answer is yes. Or, hey, that’s the joke is it, you know, tip kind of falls in the gamut of infrastructure use. So, you know, if you, let’s say, you build a commercial warehouse, and you need to have roads leading up to it, you know, TIF dollars can be used for that, or it can be used for parking garages. That is, you know, resonant and creative, to your multifamily deal. You know, but I mean, typically, would also go as far as potentially supporting bricks and sticks. So as really just kind of a part of the capital stack. So it’s, there’s a wide range to it, that also kind of change the taxability of the income from the bonds. So if you’re essentially buying a bond that is only supporting infrastructure, there’s some tax advantages compared to if you’re buying a bond that potentially supports bricks and sticks, where you really, really can’t get tax advantages from that at that point.
J Darrin Gross 19:23
Got it. And the bonds who so you guys are putting up the capital, the bond? Is that? How is it I guess what I’m trying to understand this, the municipal agreement is just baked into the tax or is there is part of what you’re doing? Is that going to affect tax rates? You know, if I’m a member of the community, am I affected or is it strictly related to that property and the tax base or the access to buy the property
Xiao Yuan 19:54
that’s strictly related to the property itself? Right. So you know, the really Uh, you know, we kind of joke, the best thing for the community is, you know, some developer, getting a tip that falls off after a certain amount of years. Because all that tax base is gonna go back to the community. And so, you know, you as the, you as the resident is really not impacted by, you know, it says the developer back bond, right? If, if there’s a shortfall for any reason, if they can’t pay that service, you know, your property taxes are gonna go up, because you, you know, you own a house, that’s, you know, three blocks away. But, you know, ultimately, that’s kind of an advantage, right? That is really sort of more more on the developer shoulder. So it’s not, it really doesn’t impact tax rates. It’s more just, you know, what is the actual taxes generated from the property you’re going to build?
J Darrin Gross 20:50
Got it? Okay, well, this is all starting to make more sense now that it is specific to the property. Because I was thinking when I was preparing for this more like, you know, a tax bond, measure that you you’re, you know, you vote on, based on they’re gonna do new schools, or roads, or whatever it is, or renew a bond for whatever it might be, and you the public votes on that. But in this case, it sounds like, is there a need for a vote? Or is it more about the just it’s the municipalities able to grant the status to the property itself? And that property then carries the weight of the bond? And I say, the municipality, but I want to make sure I understand, doesn’t municipality have to grant any status? Or is that something strictly between you? And the issuer of the bond and the payer? The developer?
Xiao Yuan 21:52
Yeah. So a couple of couple of answers. I, you asked a couple of questions. So the first question is that there need to be a vote, the answer is not from the public, because it doesn’t impact their pet tax rates, it doesn’t impact how much taxes they’re going to be paying as a result of this development. So there doesn’t need to be a vote from the public. The second part is, you know, the municipality ultimately needs to grant you the right for the for TIF, right, because what you’re really taking aways are taken away their future taxes for a number of years that you get to monetize. So so the only way that you can do that and use essentially going through a municipal process that they’re in which they’re granting you the ability for TIF, right, because you know, what, what’s ultimately happening is, you know, on day one, if you just have a vacant piece of land, that doesn’t generate a lot of tax revenue, the increment really comes from the fact that you build something that is more than just, you know, dirt, the you know, let’s call it 300 units of apartments. You know, in that case, right, the taxes on 300 units is a lot more than no units. And so the difference of those taxes is the increment, right? So if you didn’t do the project, you know, what, what, what would have been the what would have been the taxes, versus if you did do the project, what other than the taxes and the difference in that is increment. And so that is really what the municipalities allowing you to capture. So it’s not that, you know, they’re really taking money out of their pocket, in that sense, it’s that there has to be development in order for taxes to be there. And by allowing you to capture the increment, they’re allowing, essentially building their their tax base in the future, right, because once the sort of the test period runs off, the municipality captures the taxes that is generated from your development.
J Darrin Gross 23:50
No, makes sense. I am kind of slow at this, but I’m getting that as we’re going through it here. It’s just an interest. So it basically it’s the part of the capital stack, you get it by appealing to the municipality to grant the status, and then that allows the developer then to do they then, you know, engage with somebody like your firm or, or who who issues the I mean, because it’s capital at that time. I mean, it’s, it’s, it’s debt, you’re part of the project. So they, they have a plan, they have a budget. They have a lender that says they’ll meet, you know, this much, or they’ll, you know, lend this much. I’m assuming they have to come with some sort of equity themselves, so that the developer, the owner of the project, and then you’re a part of that, that stack in my mind, is that yeah, my writer, okay. And then my next question would be so if, if a project does have a TIF bond that you guys are the issuer of what’s the right person Sure, okay. Yeah. So that’s the, I’m not saying a word right there. But because you’re putting the capital up, right? Or you’re,
Xiao Yuan 25:09
we’re just buying the bond. Yeah, I’m not lending against that we’re buying the bond.
J Darrin Gross 25:15
But when you buy it, then you’re gonna receive payments from the revenue right? Now, you own the debt. Correct. So who issues the debt than originally say, is it that the municipality?
Xiao Yuan 25:27
Yeah, that’s part of the that’s part of the granting process, right, is that they, they allow the issuance of a bond? So this, you know, what a bond is? It’s like a no, right? I mean, memorializes, the obligation. And so what we’re doing is we’re essentially buying that obligation.
J Darrin Gross 25:44
So is there any coordination between you and the municipality? I mean, what have, you know, so that they don’t over obligates the property?
Xiao Yuan 25:53
Yeah, you know, typically, what we’ll do is we’ll sort of limit that. Based on any TIF obligation, our bond is really the only obligation that can be encumbered on that, you know, on that property itself. Right. So, I mean, there’s definitely some coordination. You know, also, there’s really through throughout the throughout the deal. I mean, we’re really negotiating the terms of the bonds. You know, what we like to see what is our repayment source? How long the bond is, right, sometimes they’re statutorily, you know, you’re only allowed a certain number of years for TIF, just because the municipality needs to be able to capture the future increment at some point. So there’s, there’s definitely some there’s definitely some high level coordination between the developer and the municipality. But really, I mean, the way we see it is, you know, the developer who’s potentially getting the equity getting the capital, you know, those are the folks that I think we interact with the most.
J Darrin Gross 26:55
Yeah, now, it makes complete sense. And again, it’s, I appreciate you walking, walk me through this, because it’s, I get the concepts, but some of the way the the money moves or the obligation moves. takes little hammer and through there. So you mentioned the length of the term on these, what is an average length of a, of a term on a TIF bond?
Xiao Yuan 27:20
I vary state by state. In Indiana, it’s 25 years. In Ohio, it’s 30 years. You know, Illinois, I think
J Darrin Gross 27:27
you said about how many years in Indiana? 25 or 25. Okay. And it’s like a commercial loan, as far as the length of the of the bond payback time? What is the is it a fixed rate all the way through it, then? Or is there a,
Xiao Yuan 27:47
a Yeah, for us? It’s a fixed rate, you know, what we can’t do is, you know, we’re not buying a floating rate debt. So sort of on day one, right? You you already have, you have to have kind of the capital stack already in place. So the rate floats, right, even though your revenues don’t change, you know, you you can’t really have a situation where there’s essentially less bonds, right? So for at least for us, at least, I mean, we’re our money than there for 25 years, and it’s fixed.
J Darrin Gross 28:16
Got it? So on the commercial lending side of things, a lot of times, you know, loans get sold, or, or not so much on commercial, I guess, but, um, you know, like, residential, there’s been a lot, but is there a market for them? The bonds? Or do you guys you issue them? Or you buy them and hold them? Or do you ever sell them? Or,
Xiao Yuan 28:39
you know, historically, no, we we, you know, our intent really, is to buy and hold. And, you know, I think, I think folks kind of like that as well, just from the sense that we’re really long term money, you know, this is not a sort of, get it in, flip it out, you know, get out type of play, you know, the kind of the way that we’re structured to, you know, we’re a family office, we’re very long term money, than the way that we look at, you know, a lot of these transactions have very long time horizons. So, you know, because of the lack of liquidity and the fact that, you know, we, you know, that’s really not the investment thesis, you know, we we really have a we have full intent that we’re going to keep them.
J Darrin Gross 29:21
Yeah, that’s, that’s interesting. What’s a an average rate on a on a tiff bond?
Xiao Yuan 29:29
So, you know, I think that question really kind of comes down to a couple of factors, right? The the easy way to answer that is, you know, we’re really going to be about between what a commercial lender is going to charge on a first mortgage, versus what your preferred rate on equity is going to be. You know, the reason is, you know, what a preferred lender what a first mortgage lenders really going to get is, you know, their money is going to go in last and they kind of take the least amount of cash such a risk. But you know, we’re so so we really, you know, our rate really needs to be a little bit higher than theirs. But on the other end is, you know, we were really not getting the press upside, you know, from from an equity position. And you know, our capital is just not as risky is that is equity, right, especially kind of based on based on where we are in the tax lien. So my comment has always been really that’s the sweet spot, right? It’s between what a first mortgage is and what equity is.
J Darrin Gross 30:33
Got it. And as far as the repayment of the bond, does it have a a declining principal owed? Or is it just a length of time? Or is there a, you know, like on a on a, on a regular commercial loan, amortized over, you know, X number of years? Here’s a declining balance. Is that similar in the bond?
Xiao Yuan 30:56
Yeah, I would say, you know, bonds typically have like, six domination. So really, what we’re doing is, you know, we’re sizing to, you know, we’re sizing to the amount of revenue is available every year. So, you know, typically be looking at Bond amortization schedule the, in the earlier years, right, where if you have a set number of fixed revenue amount, you know, you’re going to pay more interest than principal. And you know, as you kind of move down the amortization schedule, is going to be more principal than interest.
J Darrin Gross 31:28
So in the type of projects that didn’t sound like you’re really limited, it’s all about the revenue side of the, the end use of the project, because I’ve pretty much what what dictates?
Xiao Yuan 31:43
Yeah, you know, we we are selective in the project that, you know, we may be interested in buying the bond for some typically, we don’t like to buy anything that is too special use. So, you know, if you want to build a building that looks like a basket, you know, maybe not right, but if, you know, if it’s just traditional, you know, commercial real estate, retail, multifamily. You know, industrial, I would say, you know, we were very interested in that. So, you know, rule of thumb is nothing too specialized, but generally sort of bread and butter, real estate, the type of stuff that people want to build. You know, those are, those are kind of the deals that we like to see on when we’re buying the tip as well.
J Darrin Gross 32:31
Got it? And is there a sweet spot as far as the size of the tip that you guys purchase?
Xiao Yuan 32:38
Yeah. So, you know, typically, the capital stack tip is anywhere from 10% or 15%, of the full project cost. So, you know, while theory we can buy a 15, or $20 million bond, there’s just not that many 150 to $200 million projects. Right. So traditionally, our thought had the sweet spot have been, you know, any anywhere north of a million a half, you know, some of the larger deals that we’ve done have been in the 12 to $15 million range. But what’s that average? It’s about five, five to $6 million, which equates to anywhere from a 40 to $60 million project.
J Darrin Gross 33:17
So on that, on that percentage basis of the total projects of the say, You guys are coming in at 15%? I’m assuming is the the lender, are they coming in at 80? Or 75? Or how much? How much is the developer willing to come in? Yeah, how much do they are they required to bring? Because I’m assuming that this, this kind of you help the project? I’m thinking?
Xiao Yuan 33:44
Sure, sure. Yeah. So you know, it really just depends on what your what the commercial lenders willing to do in terms of loan or cost. So some lenders back in the day, were maybe willing to push 80%. But, you know, I would say these days, you know, maybe we’re closer to 70. So let’s say worth 15% of the capital stack, and the lenders 70%, then, you know, the developer needs to find another 15 somewhere, and typically, it’s from them or, you know, they’re their LP investors, for example.
J Darrin Gross 34:18
That’s fascinating. The, just the, the whole, you know, kind of the nature of the capital stack and, and, you know, just the, the TIF bonds, I mean, I’ve heard of TIF bonds, but I never really paid that much attention to him. And you mentioned that, that the, at least in Indiana and kind of the state you’re working in that this has changed from more of the municipality back to the to the developer back. Is that a trend nationwide? Are you seeing that?
Xiao Yuan 34:50
You know, I would say some states or maybe even further along, just you know, just because I would say, you know, if you look at deals in Illinois, I mean, there’s traditionally always been You got the TIF, but you didn’t get the municipal backing. So it kind of just depends, you know, in cities and towns that are that are further along in their development cycle, you know, there’s just more attractive places to build, you know, they’re sort of less likely to give you really, really strong incentives. Right. And so those municipalities may have already been, you know, sort of pushing developer back bonds for years and years. So it’s, you know, it’s, I don’t want to say it’s a nationwide trend, you know, because we’re right now is we’re still pretty focused on the Midwest. But it’s, you know, if you think about it, from a policy perspective, it probably makes sense, right, that, you know, you, what you don’t want to happen is to have a failed commercial development project, and the rest of your tax base has to pick up, you know, so. So that’s been the appeal for a lot of municipalities that they don’t have to give, you know, sort of a big credit enhancement in order for deals to still happen.
J Darrin Gross 36:03
Right. And like you said, the goal, their goal is to have the project where you have a, you know, potential downstream tax benefit, as opposed to just the raw ground, and also it fills a need, and that there’s likely a need for the project. If you’re talking about multifamily, or, or, I mean, just the just the nature of demand, and, and also its jobs, jobs and housing, and whatever else. So yeah, yeah, I’m guessing there’s a lot of support from municipalities for this type of financing.
Xiao Yuan 36:41
Yeah, exactly. You know, you’re spot on in that.
J Darrin Gross 36:47
Way shall if we could, I’d like to shift gears here for a second. My day, I’m an insurance broker. And as much I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically considered, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we’ll see if there’s a way we can minimize the risk. And when those are not options, we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. risk transfer vehicle. And, as such, I like to ask my guests if they can look at their own situation, could be clients, the economy, the political market, however you want to identify and whatever you considered be the biggest risk. And, again, for clarification, while I am a insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Xiao Yuan what is the biggest risk?
Xiao Yuan 37:50
Yeah, you know, like any financial product, I mean, it truly is interest rate risk. So, you know, it’s not something that you can eliminate, you can, you know, transfer to some extent, you can minimize, to some extent, but, you know, on a day to day perspective, I mean, we do have a fee, it is, you know, anytime we buy a bond, anytime we, you know, look at look at any type of these financings day to day, you know, proceeds can essentially get diminished simply because, you know, 10 year Treasury goes up by 1520 basis points, right. And so, you know, that’s something that, at least we spent a lot of time thinking about is just how do we minimize the interest rate risk, and we do have kind of a few vehicles that we, we utilize that minimize interest rate risk, both for ourselves and also for the developers that are, you know, seeking our capital. And, you know, kind of a big way that we do that is, you know, we created a rate lock mechanism, anytime we buy a bond. So, you know, whatever the interest rate is on the bonds, what we would do is, you know, we can say, hey, we can lock in the rate for the next five to six months, and typically, the way we do that is through kind of a series of different slots, and, and then, you know, sort of other interest rate management tools, right. So, but, you know, on any given day, I mean, what I think about the most is, you know, how do we minimize interest rate risk, because that’s ultimately sort of the, you know, volatile interest rate risk is really the sort of the enemy of, you know, slow, solid, consistent return.
J Darrin Gross 39:26
Yeah, no, sounds like some challenging times right now, just based on you know, the, as the rates are changing and how it’s changing the market. I mean, that’s, that’s a real challenge. And it’s funny, because I know that historically rates have been you know, higher. But having been so low for so long, kind of that adjustment for people to to adjust to in the market to adjust to where the, you know, whatever the market is, and will be so that it functions as kind of the challenge and so I get it, I get it. Hey, shout, where can listeners go if they’d like to learn more or connect with you?
Xiao Yuan 40:13
Sure, they go on our website, HagemanCapital.com. To learn more about, you know what we’re doing in the TIF space. If they want to learn more about the family office and our operations, then go on HagemanGroup.com and I am on LinkedIn under Xi AOUYUAN.
J Darrin Gross 40:33
Awesome. Xiao, I cannot say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it. Learned a lot. And I look forward to doing it again soon.
Xiao Yuan 40:45
Darrin, thank you so much appreciate you having me on and appreciate and hopefully your listeners can get something out of this as well.
J Darrin Gross 40:53
I’m certain they can. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.
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