Help me better understand HFCs & PFCs in TX

They all have different terms. Some to pay attention to:

- The "traveling" HFC is the one that Freddie won't lend on. The reason is that the legality of it is questionable and in the hands of the AG/legislature to decide. The reason of being questionable is the language doesn't explicitly give permission for a municipality to approve an HFC in a different municipality on their own. On the other hand, it also doesn't explicitly state that they can't. Most likely outcome is legislature just changes the language to stop them going forward. The risk in owning these, which is why Freddie won't lend, is that they can be contested after the fact on a municipality by municipality basis, so it's possible over the course of the next few years that certain municipalities rule that these weren't legal and unravel them. The traveling HFC is basically a huge loophole and some folks see them as almost being unethical. They are basically a random municipality in the middle of nowhere Texas approving an HFC structure in a different metro area. The municipality that approved it collects fees and typically 10% of the annual tax bill, while the municipality where the property exists loses it's taxes and that municipality gains nothing because most of these properties are already within the workforce AMI limit meaning there are no rent adjustments for public benefit. Groups are getting comfortable doing these because the "consultants" are telling them they should be fine....the same consultants that clip a $500k fee for every deal they help out on. 

- Not much different with a PFC, just that it falls under a different statue so there are nuances. It's difficult to get new PFC's done on existing assets, and the deals cut on developments aren't nearly as good as they used to be. The PFC was abused big time (especially in Houston) so they ended up tightening it up hard. Basically what was happening was people were buying crap deals in Houston where the rent roll was mostly like 60% AMI tenants anyways, putting on a PFC, losing their tax bill while not having to make any changes to the rent roll. HFC's still give them out on existing but they are tougher to get and often need relationships. So great if you can get a new one done, and think once the traveling HFC is eventually killed, the properties that already have good PFC/HFC structures will be more valuable b/c new ones are tougher to get done

- Most new programs limit both rent and income. At the end of the day it's not a big difference because most apartments won't rent to someone above 30% of their income anyways. Original PFC's didn't have rent limits, just income limits

- Original PFC's did not have termination options / rights to crumple the structure some day and take back the title to the property. This is a very important nuance that most don't realize. That means that those original PFC's are a true ground lease where at the end of the 99 (or however many year lease), the PFC retains title of the property and you lose your interest. So you need to add additional spread on your exit cap to account for this just as any other ground lease deal. On the other hand, new PFC / HFC structures give options to eventually terminate the deal, lose the tax benefit going forward, but take back title to the property so you are now fee-simple owner once again. These vary greatly. I've seen some (such as the new traveling HFC) where this can happen any time after year 10 for a $20 fee. I've seen others where there is a certain window of time (for instance, between years 50 - 65) where there is a right to terminate but the fee is heftier (x% of appraised value at the time). I've seen others where all you have to do is default on the terms (aka just stop abiding to income restrictions) and then the lease terminates, you lose the tax abatement, and get the fee-simple title back for free

- There are other nuances. The rent roll restrictions are always different but most typical is half the rent roll can be market, 40% are 80 AMI, and 10% are 60 AMI. Reporting requirements are different. Fees are different. In some of them, the PFC / HFC takes an annual fee such as 10% of property tax savings every year, in others the PFC / HFC actually participates in the promote of a deal, etc. 

- Some have lockouts of when you can sell the property. Usually 10 years for original ownership. Others don't have any lockouts, or allow your LP equity to be recapped out but the Sponsor has to stay in for at least 10 years. This has a lot to do of why you can't find many sale comps yet for deals that already have a PFC/HFC in-place. There have been a couple and they actually didn't trade too different on cap rate basis than a market rate deal. The ones that did trade 50-75 bps higher were original PFC's that didn't have an option to terminate the lease some day so they are true ground leases, which makes sense as that is a comparable spread to where normal ground lease deals trade at

- The one's that have both income and rent restrictions qualify for the cheaper agency debt that's available for "affordable". The one's that only have income restrictions do not and only get market rate agency debt

All considered, there are great structures if you make sure you got one of the good ones with a right to take back the title some day. I'd be extremely wary of doing a traveling HFC deal. Another nuance is you usually have to incentivize your 80% AMI tenant given the fact they have to fill out paperwork. Another way to put it, if your market rents are $1,500 but the 80% AMI limit is $1,300, then you're golden b/c their incentive is a $200 discount. If your market rents are $1,300 and 80% AMI limit is $1,300, many groups will try to convince you that those rents will stay $1,300 b/c they already qualify. In reality, these tenants need incentives to go through the headache. That usually means a $50 - $100 monthly discount, or other groups sometimes get around it by offering one time incentives like gift cards.