Growth Opportunities Trends in: Affordable Multifamily Housing & Rural Business Markets

Growth Opportunities Trends in: Affordable Multifamily Housing & Rural Business Markets

Pathway Lending Mission: To provide lending solutions and educational services that result in the creation, development, and preservation of small businesses, affordable housing, and sustainable communities. Certified as a Community Development Financial Institution by the US Treasury Target markets: 1) low-income census tracts and those with high poverty and unemployment rates; 2) African American- Owned Businesses; 3) Low-income entrepreneurs (a minimum of 60% of loans required to target markets) Women, Hispanic and Veteran-owned Businesses SBA Tennessee Microlender of the Year 2008 and 2010 FFIEC National Community Reinvestment Awardee Innovative and Collaborative Approach to Economic Development Endorsed by the Tennessee Bankers Association 37 Financial Institution Investors 25 Public and other Private Stakeholders Results as of March 31, 2018 Total Assets: $125.6 MM Net Assets $29.1 MM 23.2% Loans Outstanding: $90.1MM 2017 Loan Activity - 142 loans originated totaling $40.2MM 2017 Client Impacts 4,573 hours of 1-on-1 Consulting and 3,580 hours of classroom training 2

Agenda I. Affordable Housing: 1. Discuss what it is and who needs affordable housing 2. Discuss rent burden and impact of paying too much rent 3. Discuss trends in rental market a) National b) Southeast c) Tennessee II. Economic Analysis Urban vs. Suburban vs. Rural III. Economic Growth through Business retention and unlocking local capital sources in Rural Markets 3

What is affordable housing? How much of your income should go to your housing cost? a) 20% b) 25% c) 30% d) 35% e) 50% 4

What does it mean to be rent burdened? How much of your income is going to rent? a) >30% b) >40% c) >45% d) >50% e) >55% 5

So who needs affordable housing? Teachers: $42K - $61K (median $51,751) ($1,294 per month for housing) Police Patrol Officer: $49,628 ($1,240/Mo) Fire Fighter: $41,527 ($1,038/Mo) Median Low-income: $35,000 (60% family of 4/80% family of 1) ($875/Mo) Certified Nursing assistant: $29K - $34K ($725 - $850/Mo) Waiters/waitresses: $18K - $35K ($450 - $875/Mo) Housekeeper: $23K ($575/Mo) 6

Percent of renters that are cost burdened: Urban Areas Cost Burdened Renters >30% Rural Areas Cost Burdened Renters >30% 7

How does rent burden occur? THDA Housing Needs Assessment 2012 8

National Trends - JCHS Since 2004, the number of rental households has grown by 30% - 10 million new renters. 30% of the increase comes from those earning over $100,000/year And 50% of the growth was from those over 50 years of age Since 2006 there has been 7.2 million net new units, but none of these rent for less than $850/ month (affordable to a household earning $35,000) 40% of Rural Renters are cost-burdened Low income renters now have almost 20% less income to spend on other things as they did in 2001. 2001 to 2011 rental housing cost rose 17% while median renter incomes fell 15% 9

May 2016 FRB-Atlanta Report No. 03-16 May 2016 Declines in Low-Cost Rented Housing Units in Eight Large Southeastern Cities by Immergluck, Carpenter, Luenders Median rents rose 23.4% in the South from 2012 to 2015 versus 17.4% nationally Census Bureau After great recession number of rental households increased from 34 million to 43 million (31% to 37%, respectively) Single family portion of rental stock has grown from 34% to 40% from 2005 to 2014. However many of these homes are large and low-income families cannot access A growing number of households spend over 50% of their income on rent, making them severely cost-burdened. The percentage of such severely cost-burdened households with incomes below $35,000 reached 80% in eight central cities in the Southeast. (Atlanta, Birmingham, Jacksonville, Memphis, Miami, Nashville, Orlando and Tampa The increase in cost burdened households is due in large part to the widespread losses in the supply of affordable multifamily units 10

Loss of Low-Cost Rented Units 2010-14 5,000 0-5,000-10,000-15,000-20,000-25,000-30,000-35,000-40,000-45,000 Below $500/month rent -6.7K -7.2K $500-750/month rent -23K 11

Housing Cost Burdens by Household Income Household Income % Households Burdened 2001 % Households Burdened 2016 < $15K 83% 83% $30K - $45K 37% 50% $45K - $75K 12% 23% 12

Housing Cost Burdens % of Households earning less than Total Cost Burdened Households $35,000 that are Cost-Burdened MSA 2009 2016 Change 2009 2016 Change Atlanta 316,120 366,193 50,073 79.7% 81.5% 1.8% Austin 130,798 141,985 11,187 81.5% 82.1% 0.6% Birmingham 65,196 57,057 (8,139) 68.6% 67.7% -0.9% Charlotte 104,712 131,494 26,782 71.4% 72.5% 1.1% Chattanooga 30,239 32,441 2,202 62.3% 72.0% 9.7% Jacksonville 89,216 86,493 (2,723) 77.2% 75.8% -1.5% Knoxville 40,173 43,485 3,312 65.3% 60.4% -4.8% Memphis 95,094 99,292 4,198 73.6% 73.7% 0.1% Miami 464,483 515,787 51,304 82.8% 82.6% -0.2% Nashville 88,741 104,085 15,344 69.5% 75.5% 5.9% Orlando 159,722 179,646 19,924 83.9% 81.1% -2.8% Tampa 192,184 212,621 20,437 79.1% 80.9% 1.8% 13

Changes in Rental Housing Units Below $500/Month $500-750/Month Over $1500/Month MSA 2009 2016 Change 2009 2016 Change 2009 2016 Change Atlanta 49,601 42,095 (7,506) 118,077 87,598 (30,479) 41,727 119,978 78,251 Austin 12,798 13,311 513 55,336 20,178 (35,158) 22,309 79,724 57,415 Birmingham 24,045 20,358 (3,687) 37,067 30,906 (6,161) 4,217 7,348 3,131 Charlotte 26,736 25,663 (1,073) 67,402 58,352 (9,050) 10,409 29,449 19,040 Chattanooga 18,225 10,769 (7,456) 23,025 20,374 (2,651) 1,674 3,663 1,989 Jacksonville 18,096 12,965 (5,131) 31,037 28,398 (2,639) 12,471 25,240 12,769 Knoxville 19,900 19,822 (78) 31,141 29,768 (1,373) 2,082 5,957 3,875 Memphis 26,939 20,201 (6,738) 53,672 46,349 (7,323) 7,630 15,554 7,924 Miami 54,108 56,739 2,631 74,691 50,304 (24,387) 128,293 270,789 142,496 Nashville 24,523 23,940 (583) 59,281 36,053 (23,228) 8,026 31,175 23,149 Orlando 13,102 12,473 (629) 33,433 29,601 (3,832) 25,989 59,662 33,673 Tampa 28,512 23,736 (4,776) 73,007 61,431 (11,576) 30,536 64,014 33,478 Data: ACS 2009, ACS 2016 14

2016 Rental Need Based on Population Change 35% of Nations renter households had income below $25K 62% of nation s renter households had income below $50K 22% of nation s renter households had income above $100K 33% (832K) of TN households rent 35% of (832K) of TN households had incomes below $25K 291K households 62% of (832K) of TN households had incomes below $50K 515K households TN Population Change 2005 2016 increased 10% (600K) Need: 50K new rental units 17K units for low-income 31K units for households <$50K 15

16 Changes in TN Units by Rent Amount

Where does TN Stand on Affordable Rental Units 2012 THDA Study indicated a shortage of 111K units for lowincome residents Populations Growth indicates a need for 31K affordable units TN needs 142K affordable units What happened lost 12K units of affordable housing 17

What does this mean to the TN economy? If you are paying 50% of your income on housing instead of 30% and you make $35K a year your additional rent burden is $7,000. That is money not going into personal spending and personal savings It is also causing households to not have a safety net so in an emergency they take out payday loans 18

Nashville: Change in Rental Households by Income & Unit Changes Need for Units increases by 55K Units increase by 73K in units over $850/mo and decreases 18K units under $850 for a net of 55K 19

Knoxville: Change in Rental Households by Income & Unit Changes Need for Units increases by 54K Units increase by 12K in units over $850/mo and no change in units under $850 for a net of 12K 20

Memphis: Change in Rental Households by Income & Unit Changes Need for Units increases by 50K Units increase by 42K in units over $850/mo and 5K for units under $850 for a net of 47K 21

Chattanooga: Change in Units by Rent 13K 6.5K Net Increase 6.5K 22

The Needs The table below details the trends for the state. These trends are focused on the $35,000-4 person household which is approximately 60% of median family income (MFI) in Nashville and a 1 person household at 80% MFI. Income below $35,000 Rent below $900/month Gap 2009 2016 2009 2016 2009 2016 Change Davidson County 95,908 85,550 69,812 49,926 26,096 35,624 9,528 Hamilton County 55,793 51,080 32,993 27,901 22,800 23,179 379 Knox County 73,624 63,169 41,772 38,332 31,852 24,837 (7,015) Shelby County 145,272 134,268 88,985 83,939 56,287 50,329 (5,958) Balance of State 670,311 593,056 298,358 299,896 371,953 293,160 (78,793) Tennessee 1,040,908 927,123 531,920 499,994 508,988 427,129 (81,859) The number of Low-income households has fallen across the state between 2009 and 2016. At the same time the number of units that rent for $900/month has also declined in each of the major cities in the state. The net impact of this has been a sharp increase in the affordable rental gap in Nashville, while a closing of the gap in both Knox and Shelby counties as well as on average across the rest of the state. The need is growing most in Nashville while declining in much of the rest of the state Data: ACS 2009, ACS 2016 23

Summary of Change in Units 7.2MM new rental units in US from 2006-2016 In constant dollars no increase in units renting for less than $850/Mo Units renting for more than $850 accounted for ALL the growth from 2006-2016 Units renting for less than $650 fell 475K from 2006-2016 2006 MFI $57,379 2016 MFI - $59,039 Units renting for more than $1,500 accounted for 53% of the growth from 2006-2016 Change: $1,660 3% Low-income renters have seen their residual income decline by 18 percent since 2001. 24

Why the loss of affordable housing? Economic Growth previously naturally occurring affordable housing is being acquired up-modeled and re-rented to higher income tenants Losing existing Low-income Housing Tax Credits (LIHTC) properties are coming off 20 year restriction and being sold to market-rate developers Federal Spending - funds for affordable housing in HUD Budget decreased According to the Center on Budget and Policy Priorities, federal support for housing choice vouchers fell $228 million from 2010 to 2016, meaning the loss of housing aid for tens of thousands of vulnerable families. Reduction in LIHTC more allocation going to PHAs for redevelopment 25

Federal Spending Federal Community and Regional Economic Development Outlays As a Percentage of GDP 26

How do we create and save affordable housing? 1) Primary way to create Low-income housing in the US has been developers using Low-Income Housing Tax Credits 2) Municipalities add density bonuses and Payment in Lieu of Taxes (PILOT) and Tax Increment Financing (TIF) 27

What is Low-Income Housing Tax Credit Multifamily Financing? Developers both non-profit and for-profit apply for Federal Tax Credits from Tennessee Housing Development Authority to provide equity for projects to create low rental rates. Tax Credits are sold to Syndicators for cash to invest in projects To qualify for our program developers would have to be awarded tax credits and meet the following minimum criteria: At least 51% of the project units must provide housing for low income persons, defined as: For Metropolitan Areas: households with an income of 60% or less of the area median income; or For Non-Metropolitan Areas: households with an income of 80% or less of the area median income. Rents, including utilities, cannot exceed the applicable low income rent ceiling based on 30% of the household income limit. Qualified units must remain occupied by low income tenants while financing remains in place. 28

LIHTC Competitive Allocations 2014-2017 Area Total Awards Preservation Non-Profit CNI/RAD RURAL 16 9 2 0 SUBURBAN 11 7 0 1 URBAN 54 16 12 12 Grand Total 81 32 14 13 Since 2014 there have been 81-9% tax credit allocations, 16 of these awards have gone to counties that THDA designates as rural. 32 of these awards have gone to Preservation projects, and 13 have gone to public housing redevelopment activities (RAD or CNI). The typical tax credit development receives an allocation of $10,522 of annual tax credits per unit. The typical RAD/CNI has a slightly higher typical allocation of $12,425 per unit, while the typical preservation deal sits at approximately half that amount $6,035 per unit per year. 17% of the allocations between 2014 and 2017 went to PHAs, whereas from 1987-2013 10.6% of allocations went to PHA related entities. 29

Total LIHTC Financing Needs in TN Estimated annual Tennessee Demand for Permanent (20 30 year) LIHTC Financing New - $26,495,000 Acquisition/Rehab - $18,130,000 TOTAL $44,625,000/ year 30

Multifamily Loan Participation Program Created 2013 as a collaboration between TBA and Pathway Lending Designed to bring banks access to loan participations in Low-Income Housing Tax Credit (LIHTC) Projects in Tennessee program PL sources loan applications from LIHTC developers in TN PL underwrites credit requests PL markets credits to subscribing banks PL originates and then services the loan Participating banks select amount of loan and executes participation agreement 31

Typical Financing Structure Product Conventional permanent financing and refinancing for new construction and acquisition/rehabilitation projects located in TN. Loan Term Loan-to-Value Appraisal Security Commitment Term Pricing Additional Security Reserves & Escrow Legal Fees Up to 20 years, with up to a 30 year amortization DSC Minimum of 1.15x during loan term Maximum of 75%, based on restricted income value at stabilized occupancy All projects require an appraisal prepared by an approved appraiser. The applicant is responsible for the cost of the appraisal, with payment made to Pathway Lending. First Deed of Trust / Mortgage only Application Fee: $500 Fees Commitment Fee: 1% ($3,000 minimum - non-refundable) Loan Fee: 1% ($3,000 minimum - due at closing) Up to 24 months on new construction or acquisition rehab w/ 6 mo. extension option 60 days on refinancing Rate during the loan term will be based on 10-year Treasury Note plus 150bp at time of origination Rate will reset ay year 10 to 10-year Treasury Note rate plus 150bp with a 200bp maximum adjustment All projects over 4 units will be controlled by a recorded Regulatory Agreement A tax & insurance escrow account, a 5% replacement reserve account and an operating reserve account will be established at time of permanent loan closing. The initial operating reserve amount will be determined at time of commitment (minimum of six months expenses/debt service) To be paid by Borrower at time of permanent loan closing 32

33 Affordable Housing Foreclosure Rates

What else can we do to retain and create affordable housing? Talk to developers about setting aside some units for affordability purposes Adjust underwriting standards to support naturally- occurring affordable units (add covenants) Make elected and un-elected officials aware of the economic impact of not have affordable rentals can have on a community 34

Affordable Housing Creation and Preservation Need to come up with new ideas on how to aggregate capital to attack this challenge Other parts of the country have created more public funding for affordable, Municipalities and States have provided excess real estate at low-cost for the development of affordable housing Air-rights to property for affordable housing Private public partnerships have been created to aggregate the necessary capital to support project development Must engage philanthropy and business interest along with bank and government to solve a growing problem 35

Pathway Affordable Multifamily Housing Loan Fund Created in 2015 to allow banks to gain CRA credit by lending to a Pathway Lending a U. S. Treasury Certified CDFI to expand the availability of financing for affordable housing By lending to PL banks receive CRA qualified loans or investments Bank receive 5% state of Tennessee Franchise and Excise Tax Credits to create a yield of Prime +1 Need more banks to participate to help financing affordable housing across Tennessee both targeted and naturally occurring with flexible terms 36

Economic Analysis Urban vs. Suburban vs. Rural Economic Growth through Business retention and unlocking local capital sources in Rural Markets 37

Urban vs. Suburban vs. Rural Economic Activity Three segments of TN economy 1. Major Urban Counties - 4 (Davidson, Hamilton, Knox and Shelby) 2. Suburban 38 (All other MSA Counties) 3. Rural 53 Counties 38

General Trends Per capita income is highest in the 4 urban counties Household income and net worth is highest in the suburban counties. Rural counties net worth is quite similar to those in the core counties, even with significantly lower rural incomes. 39

Comparing Urban, Suburban & Rural Counties in Tennessee Core Counties (Davidson, Hamilton, Knox, Shelby) All Other MSA Counties (38 Counties in total) Non-MSA Counties (53 Counties in total) 40

Core Counties (Davidson, Hamilton, Knox, Shelby) All Other MSA Counties (38 Counties in total) Non-MSA Counties (53 Counties in total) 41

Summary of Economic Data Core Counties (4) All other MSA Counties (38) Population 42% 46% 12% Businesses 42% 36% 22% Employees/Business 16 13 11 Non-MSA Counties (53) 42

Industry Across Tennessee Core Counties All Other MSA Counties Rural Counties Business Employees Business Employees Business Employees NAICS Code # % # % # % # % # % # % Agriculture, Forestry, Fishing & Hunting 133 0.1 817 0.1 474 0.6 2,940 0.3 634 1.3 3,946 0.7 Mining 68 0.1 591 0.0 103 0.1 1,508 0.1 98 0.2 905 0.2 Utilities 80 0.1 8,566 0.6 262 0.3 6,148 0.6 274 0.5 4,990 0.9 Construction 6,018 6.2 65,662 4.2 6,212 7.4 45,152 4.1 2,837 5.6 21,054 3.9 Manufacturing 3,300 3.4 110,567 7.1 2,890 3.4 139,572 12.7 1,932 3.8 81,604 14.9 Wholesale Trade 3,995 4.1 71,973 4.6 2,945 3.5 56,401 5.1 1,731 3.4 23,861 4.4 Retail Trade 14,641 15.0 194,279 12.5 13,543 16.1 155,524 14.2 9,103 18.1 80,194 14.7 Transportation & Warehousing 2,151 2.2 81,156 5.2 1,835 2.2 20,858 1.9 1,331 2.6 10,916 2.0 Information 2,638 2.7 42,175 2.7 1,531 1.8 16,942 1.5 860 1.7 7,607 1.4 Finance & Insurance 5,779 5.9 71,428 4.6 5,326 6.3 40,137 3.7 2,709 5.4 16,428 3.0 Real Estate, Rental & Leasing 5,967 6.1 42,571 2.7 4,510 5.4 24,791 2.3 2,427 4.8 9,620 1.8 Professional, Scientific & Tech Services 9,421 9.7 109,665 7.1 5,957 7.1 64,732 5.9 2,385 4.7 16,002 2.9 Management of Companies & Enterprises 91 0.1 1,910 0.1 65 0.1 1,164 0.1 62 0.1 1,379 0.3 Admin/Support/Waste Mgmt/Remediation 3,803 3.9 55,620 3.6 2,738 3.3 29,349 2.7 1,213 2.4 6,585 1.2 Educational Services 2,308 2.4 101,473 6.5 2,060 2.5 79,631 7.3 1,259 2.5 40,352 7.4 Health Care & Social Assistance 8,749 9.0 264,704 17.0 7,509 8.9 167,156 15.2 3,958 7.9 75,789 13.9 Arts, Entertainment & Recreation 1,698 1.7 22,262 1.4 1,367 1.6 12,619 1.1 879 1.7 9,092 1.7 Accommodation & Food Services 7,116 7.3 139,117 8.9 5,821 6.9 101,320 9.2 3,859 7.7 54,757 10.0 Other Services (except Public Administration) 12,677 13.0 83,660 5.4 11,993 14.3 63,492 5.8 7,506 14.9 25,999 4.8 Public Administration 2,610 2.7 83,595 5.4 4,160 4.9 67,335 6.1 4,070 8.1 53,915 9.9 Unclassified Establishments 4,181 4.3 3,116 0.2 2,753 3.3 1,493 0.1 1,183 2.4 1,554 0.3 Total 97,424 100 1,554,907 100 84,054 100.0 1,098,264 100 50,310 100 546,549 100 43

Industry as % of State Workforce NAICS Code Share of Employees in Industry Share of Total TNWorkforce Core MSAs Rural Core MSAs Rural Statewide Agriculture, Forestry, Fishing & Hunting 10.6% 38.2% 51.2% 0.0% 0.1% 0.1% 0.2% Mining 19.7% 50.2% 30.1% 0.0% 0.0% 0.0% 0.1% Utilities 43.5% 31.2% 25.3% 0.3% 0.2% 0.2% 0.6% Construction 49.8% 34.2% 16.0% 2.1% 1.4% 0.7% 4.1% Manufacturing 33.3% 42.1% 24.6% 3.5% 4.4% 2.6% 10.4% Wholesale Trade 47.3% 37.0% 15.7% 2.2% 1.8% 0.7% 4.8% Retail Trade 45.2% 36.2% 18.6% 6.1% 4.9% 2.5% 13.4% Transportation & Warehousing 71.9% 18.5% 9.7% 2.5% 0.7% 0.3% 3.5% Information 63.2% 25.4% 11.4% 1.3% 0.5% 0.2% 2.1% Finance & Insurance 55.8% 31.4% 12.8% 2.2% 1.3% 0.5% 4.0% Real Estate, Rental & Leasing 55.3% 32.2% 12.5% 1.3% 0.8% 0.3% 2.4% Professional, Scientific & Tech Services 57.6% 34.0% 8.4% 3.4% 2.0% 0.5% 6.0% Management of Companies & Enterprises 42.9% 26.1% 31.0% 0.1% 0.0% 0.0% 0.1% Administrative & Support & Waste Management & Remediation 60.8% 32.1% 7.2% 1.7% 0.9% 0.2% 2.9% Educational Services 45.8% 36.0% 18.2% 3.2% 2.5% 1.3% 6.9% Health Care & Social Assistance 52.1% 32.9% 14.9% 8.3% 5.2% 2.4% 15.9% Arts, Entertainment & Recreation 50.6% 28.7% 20.7% 0.7% 0.4% 0.3% 1.4% Accommodation & Food Services 47.1% 34.3% 18.5% 4.3% 3.2% 1.7% 9.2% Other Services (except Public Administration) 48.3% 36.7% 15.0% 2.6% 2.0% 0.8% 5.4% Public Administration 40.8% 32.9% 26.3% 2.6% 2.1% 1.7% 6.4% Unclassified Establishments 50.6% 24.2% 25.2% 0.1% 0.0% 0.0% 0.2% 0.0% 0.0% 0.0% Total 48.6% 34.3% 17.1% 48.6% 34.3% 17.1% 100.0% The largest sector in the state is healthcare (16%) followed by retail trade (13%) and then manufacturing (10%). Together these three industries make up approximately 40% of the total workforce. 44

Dynamism of Small Cities It is assessed by changes across four dimensions: 1) demographics, 2) economics, 3) human and social capital, 4) and infrastructure. 13 indicators that have been shown to correlate with local economic growth or development. Small cities in Tennessee equally span each of the dynamism levels from the FRB Atlanta s analysis: HIGH: Clarksville, Sevierville MEDIUM HIGH: Jackson, Cookeville, Tullahoma-Manchester MEDIUM LOW: Cleveland, Morristown, Kingsport-Bristol LOW: Greeneville, Johnson City 45

Growth Opportunities in Rural Counties Business Acquisition Look around see who is ready to retire without a defined successor (no children who want to be in the business) Whatever you do Don t let a solid business just close because there is no obvious buyer Help business owner think through exit options Help find new owners to operate and grow business Help owners understand different ways to finance the sale of the business 46

Growth Opportunities in Rural Counties Unlock the local angel investors Be a match maker with entrepreneurs and informal angel investors Learn about Opportunity Zones (Federal Tax Incentives) and where they are in TN 47

How you can help as a banker Talk to owners about owner financing and how it works Talk to owners about business brokers and how they work Talk to owners about strategic purchasers Look in surrounding counties for possible purchasers Talk to them about the Tennessee Rural Opportunity Fund which can provide flexible financing to would be purchasers of businesses in collaboration with banks, sellers, and angel investors 48

49

Clint Gwin, President and CEO clint.gwin@pathwaylending.org Hank Helton, Senior Vice President hank.helton@pathwaylending.org 615/425-7171 www.pathwaylending.org 50