Tax Increment Financing-TIF 101 with Xiao Ou Yuan

Xiao Ou Yuan is the Managing Director of Hageman Capital, and manages the day-to-day operations, as well as leading all bond structuring and negotiations for the Hageman Capital portfolio. In today’s episode, Xiao will break down what Tax Increment Financing (TIF) is, and how it can help both developers and municipalities.

Listen to the podcast here:

Tax Increment Financing-TIF 101 with Xiao Ou Yuan

Shannon Robnett  00:01

Hey, everybody, welcome to season three of the real estate rundown. You know, it’s a new year, it’s a new you. And we’re seeing a lot of things change in the landscape that we have in the apartments in in investment properties. And a lot of that has to do with, with where we’re going with interest rates, and that affects the bottom line in affordability. And you know what? The thing about affordability, that’s a tricky beast, because you’re trying to make something affordable. You’re trying to get a great return. How do you balance that you’ve got rising costs, you got rising interest rates? Well, here’s the great news, guys. I have got Xiao Yuan, on the show today, that is going to help walk us through how we’re going to be able to do that with tax increment financing, and how we can monetize that revenue, bring down our costs, make affordability more of an option, and be able to provide a better option for the community. So welcome to the show Xiao.

Xiao Ou Yuan  00:59

Shannon it’s great to be here. Thanks for having me. And, you know, hopefully your listeners, listeners can get something out of the conversation today.

Shannon Robnett  01:09

Well, you know, here’s the thing that we want to get to because one of the things that we look at in development, and for those of you that don’t know, I have been in construction in development for almost 30 years. It’s always about how do we get the most out of our projects? How can we compete with yesterday’s product that is cheaper? You know, there’s, there’s a cost differential, how can we make sure that in an inflationary environment like this, where rents are starting to get flatlined, because prices have pushed so much over the next over the last couple of years, we’re always playing catch up with cost versus rents and cost versus rents. Here we are, we’re still trying to develop we’re still trying to build but we’re stuck. Because rents, everybody’s being bled dry. Right? So how do we get these tax increment financing things that you talk about and explain what those are? And how we can get those involved in our projects to help us make better projects?

Xiao Ou Yuan  02:11

Shannon, Good question. And, you know, I think what may be good to start with is just really a kind of a quick introduction on tax increment financing, you know, how communities really used it in the past and present it to spur economic development. And really, I think what I can do maybe on the last piece of it is answer, you know, really, the root of the question is, how can developers access its capital. So, taxing or refinancing, you know, I think is a, you know, has been a fantastic tool for a lot of local communities looking to, you know, expand our tax base. So, in essence, what it is, is, it’s the incremental taxes between the project prior to its improvement, or construction, versus the taxes that’s generated after the project is built. And so the example I always like to use is, you know, take a vacant piece of land five acres, you know, what have you, the taxes generated from those five acres is pretty minimal. You know, typically, most municipalities and most, in most states don’t tax land, as much as really completed products, right? You kind of notice that in your, in your own homes, where land is really just a very small piece of the value. The improvement is ultimately where the value is. But, you know, so what tax increment financing is, you know, if you take the difference between a five acre land, the taxes on a five acre piece of land, versus the taxes on a call 300 unit apartment complex, the 300 unit apartment complex is going to generate a lot more taxes. So that difference in the taxes is what a municipality is essentially allowing you to capture year over year. So in most TIF projects, you know, there’s sort of a sunset day you know, let’s say they start the day then they call it kind of base value, where base value in this case is just the land right the unimproved product and after you improve it, that is the new new taxes, the difference between that is the incremental taxes. So a municipality may say will allow you to capture that tax stream for the next 20 to 25 years, you may essentially choose to keep it in your project as a you know as a as a reduction of taxes. Or you may monetize that income stream upfront where you would sell that income stream to an investor and they would collect those payments usually you would pay your taxes normally and they will collect those payments over the next however many years you got the tip for.

Shannon Robnett  04:53

So most often these things I hear you know these these Tax Incremental Financing talked about in like urban renewal districts and things like that. Right? So is it is it similar to urban renewal where, you know, you’re you’re coming in and you’ve got a million dollar piece of dirt, that you’re going to turn into a, you know, 100 million dollar opportunity, and the city’s going to get that at some point. But I got to offset the cost of doing business in your city. And I’ve got to offset my rents because your city can’t afford a brand new 300 unit apartment complex? 

Xiao Ou Yuan  05:29

Yeah, that’s a great way to think about it. What we really think about TIF is, you know, it’s equity to essentially buy down the cost of the project. So you know, the the project may today, depending on construction costs, depending on how much land was worth it, depending on a myriad of factors, right? You’re only able to, you know, your costs are x high. But in order to achieve sort of a return that makes sense for your investors, debt service coverage that makes sense for your commercial lender, you needed to be x minus some factor. And so really, what what TIF is, is to essentially buy down the cost of your your development.

Shannon Robnett  06:06

So I’m assuming we’ve got to go talk with the municipality, you know, we’ve got to get their buy in on it, because otherwise, everybody would just do this themselves. Right. So what’s the process? If we, if we’re looking at that, and, and, you know, I’m thinking of a couple pieces of property that I currently have under contract, that we’re going to be building multifamily on? How would I approach a city to get a TIF and what are the steps there? And how hard is it?

Xiao Ou Yuan  06:36

I would say, I mean, it’s it’s pretty difficult process. You know, ultimately, I think what a city is really thinking about is, look, I mean, you know, if you were going to do the project without TIF, why would we give you TIF you were already going to do the projects, I might as well just keep the taxes, you know, for ourselves, right? So TIF really needs to and this is sort of a true across the board that TIF needs to pass the buck for tests. So if it was not for the use of TIF, the project would not have happened, right. And so, really, you know, you think about in a lot of sort of growing urban areas or growing suburban areas that want to be more urban, there is a desire to have more multifamily, right, they find that it builds their future tax base. But on the other hand to right, a developer was not going to do the project without TIF. So so it really is sort of a go or no go situation. And so that is sort of the most basic hurdle that you have to pass right. Now, if you’re, you know, if you’re showing tremendous returns without TIF, you know, chances are that it’s probably not a project that the municipality is willing to give you TIF dollars for, right it you know, it really that’s sort of a commercial reason of, you’re going to do the project anyway, you didn’t need our money, you’re just asking for it. Because it’s, you know, it’s quote unquote, free. That’s not what it is. Right. And it really is kind of in municipalities Wait Are investment projects that would have not occurred without too?

Shannon Robnett  08:05

So in this TIF, does that only apply to multifamily? Or does that apply to other commercial structures, commercial rental properties that that a city might use? I’m sitting here thinking of, like, the parking garage, right? I mean, that’s kind of a, you know, the egg thing, right? We need more parking downtown, because we need more people to come visit the shops and everything right, but we don’t have enough parking, so nobody comes. So that’s where the but four comes in. If we didn’t have parking, we make parking really easy. People will come downtown, but we can’t make them pay for it. Because there’s no reason, you know, we’ve got to have an incentive there for people to come downtown. No.

Xiao Ou Yuan  08:48

So I would say in general, you know, TIF is used for a lot of times parking garages, right. But But ultimately, you know, if you think about, you know, there’s really like a few processes in which TIF goes through, right? You can’t, you as a developer probably can’t just use TIF to build a parking garage right? Now. Now ultimately, might be where the most of the proceeds is going to is the cost of the parking garage. But you also need an asset that essentially generates the value, right? So if you don’t have an asset that’s essentially generating that value, you really, you know, there really isn’t TIF. Right. So I would say a big part of understanding TIF is that it’s somewhat agnostic to how you use the capital in your capital stack or how you apply it to your costs. And there are some nuances that I’m happy to go into. But at the end of the day, right, you have to have an asset that essentially generates the the increment, right? So you can’t just be a construction company that essentially comes in and you know, build a build a parking garage, there really isn’t a lot of taxes. You know, coming from the parking garage, right, and especially at the municipal owned parking garage, there really isn’t much taxes at all, though. So those are those are kind of the factors where the buck forecast is, you know, let’s say you go to a municipality and say I want to do 300 unit apartment, in, you know, where we live in Carmel, Indiana, which you know, has a prolific use of TIF, right, let’s say you want to do 300 units of apartments in Carmel, Indiana, the municipality may say, look, in order for us to approve this 300 unit apartment complex, you need to build a parking garage. But because we’re asking you to build a parking garage, we’re also going to allow you to capture maybe a certain percentage of the tax increment that is generated from the project. So I would say that’s more how the conversation really happens. This sort of I mean, the buck for tests really is and they ultimately kind of that’s, that’s the hurdle, right? So if you, you know, if you were to require to be built, if you were required to build a 300 unit, apartment with parking garages, you probably can’t afford it, or, you know, in that case, right, it’s not a, it’s not a bankable project, it’s a project that investors aren’t going to be willing to invest into. So, so you know, right, from right from the start, right, that project doesn’t happen, unless, you know, there’s TIF involved.

Shannon Robnett  11:25

So how did you get involved in this? I mean, this doesn’t seem like something you just kind of fall down a rabbit hole and go, Oh, look, I can I can find this stuff. I mean, there you go. How did you end up in this field?

Xiao Ou Yuan  11:38

Yeah, great question. You know, so, I started, you know, after, after college, I started working for a large regional, middle market bank that, you know, we have a Capital Markets Group. And so my specialty within that Capital Markets Group was Municipal Finance, but especially in high yield, you know, high yield Municipal Finance, which I would say a lot of the ungraded TIF that we look at, are gonna fall into that category. And so, that’s kind of how I, how I got started in it, but you’re right. I mean, it’s not really a field that, you know, you’d think, gosh, you know, you don’t go to college to really go and learn that. It kind of, it kind of happens accidentally, more so than anything else. You know, it was sort of like, Hey, I found it interesting. I, at some point, in my early career, I went down that rabbit hole. And you know, now it’s really what I specialize in. So the company I’m currently with is, is Hageman Capital, which you know, we’re a, we are a a component company of Hageman group, Hageman group is a family office based out of Carmel, Indiana. And, you know, primarily, the way that we we got our capital was the Hageman family sold a seed company in 2013. You know, they were, they were producing corn seed and soybean, soybean seeds. And, you know, that is how we got our liquidity. And so we credit Hageman Capital, it really late 2020. And we started acquiring bonds in 2020, TIF bonds specifically in 2021. So, that’s really how I got into it. You know, I am the managing director of Hageman Capital. And so, you know, my primary day to day is to acquire, you know, unrated TIF bonds on behalf of developers

Shannon Robnett  13:40

So when you’re talking about so this is not bonds are not something that most real estate investors deal with, right? Because that’s kind of that it kind of goes a little bit against what we know. So let’s educate our listeners on what is a bond. Right? What what is an and how are you figuring that out? And then how does that play into your forward capital stack? Because it sounds like you’re purchasing the bond for your for the long term cash flow, and giving the developer the upfront money to do the project?

Xiao Ou Yuan  14:17

Correct, correct. Yeah, so yeah, so what a bond really is, is, if you think about it, it’s a secure, it’s a securitized instrument. So you know, earlier, when I alluded to all those future cash flows generated from your, from your project, that you’re allowed to capture and TIF what a what a bond does, essentially captures that securitizes that future cash flows into sort of an upfront payment, right. So in exchange for buying a bond for X dollars, I am entitled to receive payments for the next, you know, however many years right, so typically, you know, a bond is like any No, you know, I’m receiving principal and interest In a regular, regularly scheduled period, my interest does not fluctuate. You know, my principal amortization is set on day one, my interest payments are set on day one. But you know what I, in return for that, for those future payments, I am I made an upfront investment essentially to purchase the bond. So that is really kind of a fancy word for, you know, it’s really structure a lot of times, similarly to a loan, but you know, I like a commercial loan, this is fully fully amortizing fixed rate debt.

Shannon Robnett  15:33

And most lenders will understand a bond so that if you’re refinancing the property, the everybody knows the bond still stays on the property. Right?

Xiao Ou Yuan  15:45

Correct. And really, you know, I was want to take it a step removed from that, because what’s ultimately happening to the developer on the developer side is they’re just making their property tax payments. Right. So the bond, the bonds that we purchased is on the incremental taxes the project generated, which is, you know, for developer, you’re just paying your property taxes, the revenue we receive that is eligible to pay the bond is from those tax increment payments. And so to a developer, all you’re doing is you’re making tax payments, it’s no different than, then, you know, paying the taxes on your house, for example. But on our end, we’re capturing that, you know, we’re capturing those those streams over time.

Shannon Robnett  16:29

So let’s throw some let’s throw some numbers at this. Okay, we’re gonna make this all up. Guys, these are not real numbers. Okay. But we’re figuring this out. So let’s say that we have a piece of property, we’re gonna go back to that five acres, it was worth a million bucks, the tax revenue on that we’re going to call it $5,000. For the year, we’re going to we’re going to put this 300 unit apartment complex on there, that’s going to be worth $100 million. So we can obviously go that the tax revenue now would be $500,000. A year, right? The math is correct. Okay. So now I come to someone like you and I say we pass the buck for test. I’ve got the TIF. The city says yes, you guys can have a TIF where I don’t have to pay those property taxes. If I build the apartment complex, is that correct? 

Xiao Ou Yuan  17:19

Well, no, you’re still paying the taxes. But what what you’re doing is you’re paying that $500,000 instead of a to the municipality, because the municipality collects taxes, in most cases, where the county is collecting the tax in most cases, instead that $500,000 is now used to pay for TIF, right. So what what as the investor, what we’re doing is we’re going to present value that $500,000 cash flow for the next, you know, call it 25 years. Yeah, but we’re, yep.

Shannon Robnett  17:48

Don’t get so far ahead of me. So so as the as the developer, I’m going to build this and I have a $500,000 hole in my NOI, right? If I’m going to build this, and I’m going to pay the taxes, I wind up $500,000, short of my desired 12% return, right? We’re just gonna, we’re just gonna make this up, right. So I’m $5,000 short, I go to the city, the city says, Yeah, you can do a TIF and not pay us the taxes, you can collect that 500,000 For 25 years, that now makes it something you would build in our city. Most developers don’t want that 500 They want what that 500,000 monetizes into, because we got to pay for windows and doors. And we’ve got to we’ve got to make this basically, we’ve got to make this apartment complex cost less, so that it cash flows for us day one, right? So we would then take that $500,000 Net Present Value savings that we’re getting, and we would sell that savings to you and say, Hey, we’re gonna sell you this five, we’re going to now pay you the 500,000 a month or $500,000 a year. And you’re going to give us X dollars for that now, you’re going to loan us the money amortized the whole thing, and you’re going to give us what $10 million as that loan, and then we’re going to play that thing in reverse. So now my 100 million dollar apartment complex is only going to cost me 90 to build my rents work, I can now pay you the 500,000 my investors get to return everything is okay. That kind of how that works. 

Xiao Ou Yuan  19:30

Yeah, I would say yeah, I think generally, you know, instead of paying the taxes in the municipality, you’re, you know, you can kind of think of it as I can either capture the taxes like an abatement, or I can sell those taxes.

Shannon Robnett  19:44

And that’s where that’s where as the developer, we’ve got to figure this out, right? I have $100 million that I’m going to spend, and that 100 million dollars, I’ve got equity in there. Call it 30 million, right? And I’ve got to get a return from my equity. Right. And if I I can’t get that return, then I’m not going to build this apartment complex. We go through the but for test, you say, gosh, guys, I’m half a million dollars short, which is the property taxes? What if we did a TIF I go out and I sell this to, you know, XYZ TIF buying company like yours like yours. And then I capitalize my stack and I say, Okay, now I have, I have, I have $60 million in first position debt, I have a bond for $10 million, and $30 million in equity. Now I have a $500,000 net revenue that I can pay the TIF company, right, I can pay the people that bought my TIF, so I can lower my cost my expenses upfront without having Equity Partners without having a second position debt. And then at the end of that time period, once I’m done paying you, then I have then I turn around and pay the city. But hopefully I’ve had the appreciation of the value of the rents of everything else. And I’m able to pay those new property taxes when they come due.

Xiao Ou Yuan  21:10

Correct. Yeah, yeah. That’s, I would say, that’s a good way to think about it.

Shannon Robnett  21:13

I mean, you got to think about it. You know, I mean, you’re college educated, you’ve got, you know, you got really smart people in your office, you’re talking to a contractor. So we got to break it down, how the developer looks at it, that you guys are bringing me money. That lowers my total expense that I get to pay you over time, what I would have paid the city in a property tax bill. Yeah, yeah. And, you know, and, and says, hey, 20 years, Shannon is going to have an apartment complex is going to be worth $200 million. And we’re going to start collecting property taxes on that. And everybody’s going to be happier for it. 

Xiao Ou Yuan  21:55

Yeah. Yep. That’s a great way to look at it.

Shannon Robnett  21:58

And then you’re, you’re pitching that to the city, because you say, Hey, I’m coming in, I’m bringing 300 unit apartment complex, you’re gonna have 300 more workers in town, you’re gonna have 300 people that are wanting to, you know, shop in your stores and do all this stuff. So we’re going to create ancillary tax income for the city with the with the tenants themselves, which is another reason why the city would want you to provide 300 more doors because the property tax is not the only place that they receive the revenue from the residents or from their citizens. Yeah, yep. Well, I’m surprised I got it right. Either I got it right. Or you just gave up on me. I can’t figure out what’s going on. But you know, that’s the that’s the amazing thing, because it’s that public private partnership, right? Where, and we’ve seen that a lot around here in Idaho, where Amazon’s come in, and they’ve gotten a lot of tax credits, they’ve got tax abatements, they’ve gotten, you know, road widenings. They’ve got a lot of things done. Because they asked the city if we bring all these jobs. Will you do this for us? Because they have to hit their number, right? They have to be, they have to be something they have to have something that works in their model, right. So I don’t know that they were tips, but they were tax abatements of some sort. They were additional improvements of some sort where the city has provided them with upgrades and with off ramps and a lot of other things. And then there were some… Micron is a great example. It’s a chip manufacturer that just got a huge tax abatement from the city of Boise for bringing in a $13 billion plant expansion. Right. And so these are areas where the movement, skewed man, that’s hard. Municipalities are seeing that it’s a value to them, to to give some tax credits, to give some tax relief to get things that they wouldn’t get, because of the price of things. Can you can you walk us through a deal that you’ve recently done? That would be kind of a real world example?

Xiao Ou Yuan  24:16

Yeah, so, you know, I would say most of the deals that we do are multifamily deals. So you know, we have a we have a local developer that was looking to build about 160 units of apartments, and, you know, the municipality allows them to capture TIF for the next 25 years. So, you know, what we did is we essentially put a valuation on the on the TIF that they they’re allowed to receive, and that’s 25 years. And, you know, what we did was, you know, we we, like you said, brought down their capital stack, right. So, they’re, they’re essentially contributing with equity. You know, kind of turned out I think, you know, what we what we put into the deal was somewhere around 8 million dollars and cents transaction, which is probably roughly about, you know, 10 to 10 to 15% of the full capital stack. And so, you know, when we find, I mean, typically we find upfront prior to the prior to the really, at construction start onset. And so the developer was able to kind of use that capital as equity on day one, you know, take a little bit less debt, but also at the same time really contribute less equity and raise less equity from their limited partners. So I would say, you know, a lot of the deals that we do, I mean, are kind of, in that example, a lot of multifamily development where we are, and, you know, ultimately, you know, that, you know, the project made a lot of sense for them for the development team made a lot of sense for the city. And so, you know, we, right now, I actually drove by the site a couple hours ago, and I mean, I think they’re really, I mean, they’re, they’re going to be complete, really sort of late next year. And so, you know, after the after completion, I mean, really, we’re gonna be seeing their tax payments coming.

Shannon Robnett  26:06

So when you’re looking at that, you know, let’s talk about capital stack, because I think that a lot of people, you know, they get caught up in the thought process of, okay, you got debt and equity, right? And yet, you guys are a bond, right? You’re the well, not you guys. But the TIF is a bond. How does that bond work with debt? And equity? Is the bond really, does the bond really supersede the debt? Is it really the underlying first position, like if I’m, let’s just say, I did the deal, and I default, the bank has to deal with the project, but never, like, if we had second position debt, second position has to has to take out first, right to save its position. If we go into default, whereas a bond you you don’t struggle like that, do you?

Xiao Ou Yuan  26:58

No, and, you know, I think this is why I always want to make the distinction that you know, as a developer, you’re not really not paying taxes on the TIF, right? You’re just you’re paying taxes that ultimately go somewhere else. And that distinction is important. Because, you know, if you think about your house, if you don’t pay taxes on your house, it doesn’t matter, you know, how how big of a position your bank has, ultimately, the municipality needs to get their piece, right. So you know, you obviously you don’t have a TIF on your, you know, on your house, but, you know, if extrapolate that much bigger into a commercial, you know, 300 unit apartment complex if you don’t pay your taxes, and that’s assess. And let’s say you just don’t pay your taxes on 300 apartments units. What’s ultimately happening is, you know, because you didn’t make that tax payment, the municipality essentially needs to be made hold well, before sort of any other lien positions, right. So you know, you’re right, and that it is a it’s a very senior position. Because all all it is, is you know, we are getting tax payments, the bondholders entitled to tax payments as developer makes. And I think that’s the distinction that is, you know, it’s not really debt in the sense that you have an obligation, but you’ve always had that obligation. You didn’t have PTF, you still have to pay your taxes. Right?

Shannon Robnett  28:25

And that’s, and I love the way you did that. It’s that that you had an obligation. It’s, you know, I mean, in a in a normal world, if I was paying my mortgage, and not paying my taxes, my mortgage company would let me know that if I didn’t pay it, they were going to pay it and penalize me for it, because they would never let me get into a position where my property taxes went unpaid. Because they know, as the mortgage holder, that there behind the property taxes, right, so So now I understand more clearly what you were saying there Xiao and that makes a lot of sense. Because you’re you’re really, you’re creating a capital stack that instead of, you know, a pref equity or something like that. Your company is super collateralized. Everybody understands what it is, because you’re, you know, you’re just you’re changing where that tax goes. And that’s where the bond comes from. So that makes total sense to me now, and I better understand it. I thank you for taking the time to clear that up. So let’s talk about what you have seen as far as what these do long term, when you’re looking at, you know, your company has been involved in buying them. What have you seen happen in the communities that you guys are working in?

Xiao Ou Yuan  29:46

You know, I would say in general, the communities that have been pretty TIF forward or you know, I and a really good way to put that is, you know, they’re more flexible with providing TIF You know, they that they have thrived, right? They’ve really sort of a part of it is, you know, we’ve had a sort of unprecedented economic cycle in which it’s just expansion and growth, and I’m sure that has a lot to contribute to it. But I would say a lot of municipalities, especially locally, the municipalities that have, you know, utilize TIF, you know, have seen those projects really come to life and build their tax base, right. So what really a municipality wants to do with their TIF dollars is it wants to build a large tax base from their commercial properties. So that individual residents of that community is not really on the hook. Right. And the goal is really to lower, you know, everyday taxpayers obligation, you know, under tax bills, right. And so, so I would say, you know, I think some of the more TIF forward municipalities have been, you know, very successful in building these vibrant communities, vibrant downtown areas, and I’m sure you’ve seen in Idaho that, you know, the communities that are looking to sort of revitalize downtown, you know, use some some level of tax and refinancing or incentives in order to sort of spur the development right. Now, you know, I’m not a prognosticator, what’s going to happen in the next, you know, 20-25 years, but, I mean, well, we’ve also noticed that I think, you know, typically, the projects that have TIFs, you know, really do look nicer, just because there is kind of this higher level of scrutiny that, you know, you’re not going to just get TIF, you know, for any project that you want to do. A lot of it is it has to pass through a lot of city approvals, Architectural Review Boards, you know, things of that for, so that a, that a project really needs to look nice in order to sort of even be considered for TIF, right. So, you know, you see a lot of these downtown areas that, you know, have heavily utilized TIF, you know, really sort of build these very nice, you know, very unique architectural projects that, you know, frankly, make, you know, it weaves into the character of the communities.

Shannon Robnett  32:24

I think it’s a little bit of the chicken or the egg here, because looking at it from a developer’s point of view, if I look at, you know, like, like areas that are being gentrified, you know, downtown’s usually go through that downturn in the economy. And it looks kind of gross, and grungy. And then here comes the developers and they, you know, revitalize it, you’ve got that, that gentrification, in a lot of those cases, you have to build something nicer than what your rents are going to substantiate in the area, right. So you’re building something that, hey, if I spent $100 million on 300 units, I gotta be getting two grand a month. But I know that right now, Market Rents are only 1500. And nobody in this economic cycle is going to cough up an extra 300 bucks just to live downtown. Because it has to look this nice. And so you go to the city council’s and you go to the cities, and you say, Hey, guys, I can build this as this, this really plain Jane apartment building, just really, you know, look like I hired maybe, you know, a 1970s, Soviet, you know, architect, really, you know, cosmonaut ish, very, very plain, or we could dress it up like this. But in order to do that, and really create a classy space that has, you know, really a downtown vibe and all this other stuff, I gotta spend another 10 million bucks, I need some help. Right? And so, so So I’m seeing, I’m really starting to feel how you can offer things to a city that they would never get, anyway, and a way to pay for it. Right? Because I can I can do this. I can do this with Xiao and his company, if you give me this TIF, right, otherwise, I gotta build you this ugly piece of junk that doesn’t have any color or features. And nobody wants that. Right?

Xiao Ou Yuan  34:12

Yeah, yeah, that’s a great way to put it.

Shannon Robnett  34:15

So do you strictly work in in your area? Or do you work with cities? Or do you only work with developers? Or do you work with cities to help them understand, this is what you guys can do to help affordability help more products come on in your areas, if you do A, B, and C.

Xiao Ou Yuan  34:34

No, we primarily work with developers, ultimately, we work closest with the source that needs the capital. And then there are a lot of cases right, it is the developers. So, you know, most of our interactions really is with the team that’s, you know, building the project. You know, now in times, I mean, we are occasionally brought into a conversation with the municipality, I think it’s simply just to kind of get get on the same page understanding. And really, you know, there’s actually a trend in sort of TIF financing. And that, you know, back in the day a municipality was really providing, providing the TIF but they would also supportive with their general tax base. Right. So that’s kind of when we call like a city back, TIF. That’s, that’s what municipalities used to do, at least locally. And I think what folks found out was that it didn’t make a lot of sense to kind of take risk on the developers project, when the developer in some instances are really just kind of willing to take on that risk themselves. Right. So then this concept of developer backed TIF came about, which is, you know, the tax increment only from the project that you’re building is something you’re allowed to capture. And that if let’s say, there’s not enough increment, you know, you then it’s ultimately not supported by municipality. Right. So So there’s sort of this transition in which, you know, I think as municipalities are kind of looking more at developers, you know, we were brought into that conversation, because it’s sort of like, you know, in the past of the voting, how did you finance devolver TIF, right, it was always municipal back, and the municipality found, you know, found a TIF purchase or for you or found a bond purchasing for you, that is supported the debt. But now, you know, because of this trend, you know, we are we’re oftentimes brought into the conversation with a municipality.

Shannon Robnett  36:33

And I would think that that’s just because you’re a specialist in the in the area of TIF most, most municipalities are not, they can become one, once they’ve done several, but working with somebody that’s done them more often than a city might be very beneficial to sit down have a conversation ago, how do you guys like to do this? What are the you know? What are the what are the rules and regs? How do we how do we interface here? How does how does this whole thing come together?

Xiao Ou Yuan  37:01

So yeah, it’s great way to think about it. I, you know, I would say ultimately, a lot of times what we do is we work with the developers that it seems like the developers are the folks that probably need the most education.

Shannon Robnett  37:18

That’s, that’s true. I mean, I,

Xiao Ou Yuan  37:22

And, and, you know, and it’s not something that developers are constantly thinking about, right? It’s, you know, I think there’s kind of this understanding of, you know, we understand, you know, developers understand that it’s, it’s part of the capital stack, and, you know, even internally, right, you know, hey, we have a development division, and part of it is we understand development from fromthe side of, you know, cost construction costs, material costs, interest rates, things like that, rent rolls, etc, etc, etc. But, you know, if you’re not working in the tax and refinancing space on a day to day basis, right, it’s, it’s a little bit, you know, it’s a little bit daunting, right? And if you think about it, it’s, you know, I mean, a TIF could potentially be anywhere from 10 to 15%, of your capital stack. And it’s really sort of like a low cost of capital, if you think about it, right? Because it’s, it’s dollars that are treated like equity. But there’s no equity return expectation, right. So, you know, that’s kind of the side where I think, you know, if, as a developer, if you’re not looking at on a day to day basis, you know, you’re not expected to be an expert. And so I think municipalities, you know, sometimes we’ll spend time with the developers kind of educating them on on all the tools that are available. But what we spend a lot of time doing is just educating the developers and saying, Hey, this is the impact on your capital stack, you know, this is what your, you know, really your, your IRR is going to be, you know, without TIF versus with TIF. So we spent a lot of time kind of having those conversations,

Shannon Robnett  39:06

That makes a lot of sense, because how would you even know, how to proposition the city with, you know, this, this, this would be a good project? But, but because or would you say,

Xiao Ou Yuan  39:20

But for yeah.

Shannon Robnett  39:22

Yeah, you know, but for the fact that it’s too expensive, right? We’d love to do it here. But now, do you ever get into rent limiting clauses in those contracts and those TIFs that say, Hey, we can do this, you know, normal rent in the area is two grand, we’re going to do it at 1700 and provide some low income opportunities. Does that ever enter the equation?

Xiao Ou Yuan  39:49

It does, and I think it’s based on the municipality. So you know, some municipality may say look, certain number of units must be at, you know, 85% you Am I or am I and usually, you know, that may be part of the negotiation or in order for us, for the municipality to give you the TIF, they want, you know, some sort of potentially something come to this person. That’s not true everywhere. You know, in fact, I think it kind of depends on the municipality you’re working with. So, you know, every municipality has their own sort of TIF stipulations. And that’s something that, you know, if you’re a developer, you’re gonna have this sort of, if you’re developing in multiple areas, you’re gonna have to learn some of the nuances.

Shannon Robnett  40:33

And that’s what you’re gonna do, what I normally do is just walk in and go, Hey, I got a question, right? And it’s the guy that asked all the questions that is going to find out all the answers and know what the city does or doesn’t want, and be able to create that solution. But you know, as developers, that’s our biggest challenge is find what the city needs, find what the community needs, and get rewarded for putting it together. So this has been a really, really enlightening conversation. And Xiao I really appreciate you coming on the real estate rundown because this is the first conversation like this of any kind that we’ve had. I mean, we haven’t gotten into the light tech or anything like this. TIF is kind of similar to that, but where you get into tax abatements and things like that, that’s really another world and it’s really a nuanced world. And it’s really a it’s a specialized world. So in that regard, how I mean, if you guys are listening to this, and you’re wanting to know more about how to get involved with Xiao and his company and how to reach out to him, send me an email at [email protected]. I’ll get you plugged in with him. You guys can find out more about what opportunities he has, what he’s got going on, and how he might be able to help you on your next project. And once again, Xiao thanks for coming by and sharing all your knowledge on the real estate rundown.

Xiao Ou Yuan  41:52

Shannon thank you so much. Really enjoyed being on.

Shannon Robnett  41:55

Hey guys, don’t forget to like, share and subscribe to the Real Estate Rundown wherever you get your podcasts, leave a review. I’d love to hear your feedback, and we’ll see you next time on The Real Estate Rundown.

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About Gene Trowbridge:

Xiao Ou Yuan is the Managing Director of Hageman Capital, and manages the day-to-day operations, as well as leading all bond structuring and negotiations for the Hageman Capital portfolio.

Hageman Capital is a purchaser in single-site, developer-backed TIF bonds. They structure the bonds in a way that maximizes cash available to invest in the real estate project. As a result, their structure allows for better financing by decreasing the debt burden on the real estate development, enabling greater odds of success for developers, investors, and the community.

Prior to joining Hageman Capital, Xiao was a Principal at Fifth Third Securities, a regional investment banking firm, primarily focused on high-yield TIF and municipal bond transactions in the Midwest. Xiao is a graduate of Indiana University with a Bachelor of Science in Public Administration and a Master’s in Public Affairs. Xiao is civically involved in many non-profit organizations in the Central Indiana community. He is an active member of the Penrod Society, and serves on the boards of the Center for Performing Arts, University High School of Indiana, Reach for Youth, and Carmel Clay Public Library. Xiao also serves on the finance committee for Benjamin Harrison Presidential Site.