Yesterday, we saw that in his role as sponsor, former Red Sox left fielder Manny Ramirez, perceiving that his current contract had gone on ‘too long,’ was engaging in a time-honored if not time-endorsed strategy of the deniable strike, probably at the behest of his new agent, Scott Boras:

A reputation as a total flake comes in handy sometimes J

Mr. Ramirez was doing this because the Red Sox had two more option years they could exercise, and their exercise price was by now below market value, at least for first-rank free agents of the kind Mr. Boras often represents (and which Mr. Ramirez, for all his eccentricities, surely is – he is a beautiful hitter with a swing like a lash uncoiling).

As I posted throughout:

Some contracts are too long for their own good.

A contract too long for its own good becomes a liability for the beneficiary …

and ends up getting retraded.

We’ve now arrived at Part 3, where the Sox had a potential surprising move they could have made – if they thought of it, which I’ll bet they did.

3.  A contract too long for its own good ends up getting re-traded

By the last few days of July, the Red Sox knew they were facing an untenable situation, and would have to re-trade their arrangements with Mr. Ramirez.  Knowing this, they had a move different from the one they made: they could have voluntarily renounced their extension options, in the days and weeks before the trading deadline.  “Go ahead, Manny,” that move would have said.  “Show us the very best you have, and if you’re worth more because of that, so be it.”

Do this often enough and I’m worth a fortune

Such a move is really bold – it gives up a benefit previously negotiated for, and for no consideration.  Yet the Red Sox paid Mr. Ramirez’s salary on the way out of town (true enough, levering their weak cards into a very good replacement player).  But if their sole focus was this season, there is little doubt that two months of Mr. Ramirez’s hitting production would be more valuable than two months of Mr. Bay’s. 

The Red Sox management consists of very smart folks – they must have realized the renunciation was feasible.  So in realizing it, they rejected it.  Why?  They had to be thinking longer-term than just the next two months – and when we look at the longer horizon, the capital provider’s horizon as opposed to the sponsor’s, we can identify several reasons why they might have rejected the option-renunciation:

1.  ‘Acceptable losses.‘  The Red Sox might have figured they were likely to make the playoffs anyhow, so the near-term loss from swapping Mr. Ramirez for Mr. Bay was mild enough to bear. 

Happy to be in Boston: Jason Bay scores the winning run

2.  ‘Better than nothing.’  Although the Red Sox paid a large financial price to rid themselves of this troublesome beast, by acting now they levered his availability into getting a player they liked, could count on (Mr. Bay’s contract has 1½ years to run), and could very likely sign longer term.  In other words, they swapped a third of a year of Mr. Ramirez for one and a half years of Mr. Bay.  Had they waited until year-end, they could have tried again to trade Mr. Ramirez, or perhaps been forced to decline their options, losing him as a free agent.  Acting now may have been the best they thought they could get.

3.  ‘Addition by subtraction.’  Once Mr. Ramirez had proved himself a scoundrel – which, much though I have liked him during his time in Boston, I think Mr. Ramirez proved himself to be – the sooner they flushed him, the better for team unity and team prospects.

Manny did what?
 

4.  “Stand on principle; it’s easier to remember.’  Any given player negotiates a maximum of 3 or 4 contracts per career; a club negotiates twice that many per season.  Reputation matters much more to the club, therefore, than to any given player.  The Sox might have concluded that if they once truckled with passive-extortion, they would be vulnerable to every other free agent and in every other contract negotiation.
 

Players can always count on the fans

In any event, Mr. Ramirez is gone.  He traded his good image in Boston (despite numerous bilious columnists, most fans I encounter though him well worth putting up with) for almost certainly more money and a fresh start in AL East Exile, aka the Los Angeles Dodgers, who now have Nomar Garciaparra, Derek Lowe, and Mr. Ramirez, all members of the 2004 Red Sox, plus former Yankee manager Joe Torre, canned last season for not doing enough, in ownership’s eyes, with the talent he had.

You have to make the most of your assets of you’re gone

End-of-lease effects.  Here’s another useful rule highlighted by the Ramirez tale:

Anyone who ever graduated from college knows about end-of-term effects.  Once the sheepskin is secure, all else seems rather pointless.  Discipline goes by the board.  Behavior changes, whether to sloth or bacchanal according to choice.  The sooner the students get out of the college, and the sooner the college flushes this crop of seniors, the better for all concerned.

I’ve encountered this in real estate, with ground leases and long-term use restrictions, such as those arising from the military’s Wherry and Capehart programs, or its Section 801 leases, and more prosaically in the Section 2211d3 and Section 236 prepayment options.  Real estate sponsors will sign up for a twenty-year hitch with the expectation of residual value, and while this is too long – the LIHTC’s fifteen years is closer – it served well for most of the 221d3/236 portfolio.  Thirty years – the LIHTC extended use period – is definitely too long, particularly so after the LIHTC recapture has phased out in Year 15.  I wrote about this in discussing tax credit zombies, another example of a ‘too long’ contract:

Collectability works in the LIHTC’s early years because investors who consume large amounts of tax credits are by definition financially robust (or they wouldn’t have gone looking to buy credits against their annual income taxes).  Once the recapture period is over, these investors have no further interest in the property – and their typical partnership agreement will have allocated most of the cash flow and sale/ refinancing proceeds to the sponsors – so they want out.  Incoming investors, lacking tax motivations, needn’t be so financially large, and are seeking basically to get a cash-on-cash return.

In short, after Year 15, a property is very likely to be sold from a better capitalized investor group to a worse-capitalized – and probably, less professional – one.

I find myself married to a zombie

After writing that post, I found a walking zombie, the distinguished chancellor of Texas Tech University, who gives all appearances of being a slumlord:

Hance said he feels a moral obligation to maintain Cornerstone.
 

“Otherwise,” he said, “I would have walked away five years ago.”
 

Had you walked away five years ago, Mr. Hance, your investors would have suffered substantial tax recapture.  You get no moral credit for staying in the face of recapture, interest, and penalties.  […]  Mr. Hance has no inner qualms about his ownership: 

“I don’t feel I ought to make it like living in Highland Park, Dallas. That wasn’t the purpose.”

I’ve previously written about the disgusting mentality which says that ‘those people’ do not deserve quality affordable housing.  After all, we don’t need to give ‘those people’ anything too comfortable to live in, do we?

“At this festive season of the year, Mr. Scrooge,” said the gentleman, taking up a pen, “it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir.”

“Are there no prisons?” asked Scrooge.  “And the Union workhouses?  Are they still in operation?”

“Many can’t go there; and many would rather die.”

“If they would rather die,” said Scrooge, “they had better do it, and decrease the surplus population.”

Mr. Hance wishes no such ill upon his tenants:

“I don’t think you could find anyone else who would put that kind of money in a project,” Hance said during a phone interview. 

Rapes, shootings, break-ins, rats, water bugs, leaks.  They’re not your problem, Mr. Hance.  

You’re only the owner.  

`Or would you know,’ pursued the Ghost, `the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it, since. It is a ponderous chain!’

But Manny Ramirez, bless his heart, is no Kent Hance.  He has departed for Lotusland, where he probably will not even make the playoffs, but will reappear somewhere next year, most likely in the National League.  Meanwhile the Red Sox head toward their own independent future.

Housing morals to this story abound:

1.  Very long contracts with level payments are usually balanced only in the middle; at the front end, the sponsor is over-compensated, while on the back end, the capital provider or government has the better of the bargain.  See Wherry, Section 608, and Section 236.
 

2.  When a sponsor is undercompensated toward the end of a contract, the sponsor always has ways of taking the property hostage.  See Flexible Subsidy.
 

I don’t have to hit if I don’t want to
 

3.  The potential for residual optionality is a motivating factor long before a contract is over; indeed, the mere prospect of an opt-out has a salutary effect.  See Section 236, LIHPRHA, rent supplement conversions to Section 8 LMSA, and the original 15-year LIHTC lock-in.
 

4.  There is a temptation for capital providers or regulators to demand the longest possible affordability period as the price of their up-front resources.  See LIHTC 30+ years, California’s 55 years, LIHPRHA’s 50 more years, and others.
 

Newly motivated, I’ve been hitting .600 for the Dodgers
 

5.  Lock-in periods that are ‘too long’ (defined as Justice Oliver Wendell Holmes would define it J ) are self-defeating, and it is usually worthwhile for the regulator/ capital provider voluntarily to surrender some of the extra affordability bargain in exchange either for a change of sponsor or a change of sponsor behavior.
 

6.  Don’t negotiate for things you will never use.  You cannot renounce them, so you have to trade them away, and if you have nothing to trade for, the counterparty can actually hold you hostage.

7.  Very long contracts should never expire; they should be renegotiated about a quarter of the way from the end.  If not sooner.

See the value of renegotiation?

And don’t forget:

Some contracts are too long for their own good.

A contract is no thing of Aristotleian perfection: it is a thrown terra-cotta pot, serving a purpose for a while and then, one day, cracking and outliving its use.  When that happens, what’s cracked can seldom be repaired: you have to let go what you thought you bargained for, realistically appraise what you now have, and use the shards to form the new vessel.

You got two World Series and another outfielder out of me, what more do you want?

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Yesterday’s post starring Manny Ramirez, late of the Red Sox and now tearing the cover off the ball for the Los Angeles Dodgers, had brought him to the point of frustration, because a contract negotiated by Dan Duquette back in 1999 had turned from being a burden on the Sox to a straitjacket on Mr. Ramirez’s psyche. 

Even at $20 mil, I looked like a bargain to Dan Duquette

As I posted yesterday:

Some contracts are too long for their own good.

A contract too long for its own good becomes a liability for the beneficiary …

and ends up getting retraded.

Yesterday we saw that a contract whose duration is ‘too long’ can be a liability for the sponsor, and it is definitely a liability for the new player to enter the game: Mr. Ramirez’s new agent, Scott Boras. 

2.  A contract too long for its own good becomes a liability for the beneficiary …

By the way, the following possible rule of thumb occurs to me:

In any Garden of Eden there must be a snake, and Mr. Boras is perfectly willing to play the villain – the devil’s advocate, as one might say.  Mr. Ramirez as principal is seeking the maximum total contract value.  Mr. Boras as agent is seeking the maximum value from any contract he has negotiated.  Mr. Boras gets nothing from the Red Sox’ election to pick up Mr. Ramirez’s option; he gets paid only if Mr. Ramirez signs a new contract – thus in engaging Mr. Boras (as opposed to his previous agent, Jeff Moorad, whom Mr. Ramirez dumped), Mr. Ramirez was picking up some principal-agent risk.

But I’ve got my eye on the prize – and my agent does too.

In terms of his personal financial goals, Mr. Boras could make progress only by getting Mr. Ramirez ‘into play’ – that is, in upsetting the apple cart of Mr. Ramirez’s current contract.  As Iago to Mr. Ramirez’s Othello, however, Mr. Boras needed his principal to spout off.  So it was depressing, but not surprising, that in the weeks coming up to the trading deadline, Mr. Ramirez misbehaved in increasingly insupportable ways, including:

* Acting out petty frustrations (shoving the clubhouse attendant who couldn’t get his entourage tickets)

* Loafing at work (not running out ground balls)

* Calling in sick (sitting out crucial games with an unexamined knee problem)

* Complaining behind management’s back

* Generally acting abused and underpaid. 

Hitting means … value for money, value from Manny

Mr. Ramirez was engaging in a time-honored tradition: the deniable strike.  Each individual action could be explained; none was disciplinary; all diminished his value; all diminished the team’s value even more.  Mr. Ramirez basically said as much:

In an interview earlier Wednesday with ESPNdeportes.com, Ramirez said “The Red Sox don’t deserve a player like me.” He also said he’s seen how the Red Sox “have mistreated other great players.” He wasn’t available for comment before or after last night’s game.

Logically speaking, Mr. Ramirez’s statements were nonsense – any dispassionate observer (granted, a rarity in baseball!) would have said that Mr. Ramirez hadn’t deserved an employer as good as the Sox – but that matters not a whit.  Mr. Ramirez had become convinced, probably with the active encouragement of his agent Mr. Boras, that here he was being abused – and if I’m right about the club options, the Sox were sitting on an economic bargain.  Whatever else one may think of Mr. Boras, his track record in levering his clients into higher salaries is impressive, and I have little doubt he will do it again for Mr. Ramirez.  It’s easy enough to write the dialog as Mr. Boras might have said it:

What do I want Manny to be quoted as saying?

“Manny, there’s no doubt that with Alex Rodriguez [another Boras client] commanding $25+ mil a year, you’re in that league, so the Sox are underpaying you already this year, and they’ll underpay you even more in the next two years.  They don’t deserve the kind of production you’ve been giving them.”  [Of course they do, that was part of the upside optionality the Sox negotiated for when they signed Mr. Ramirez to his enormous contract … but that was then, and this is now.]

The deniable-strike strategy works because the capital provider – the team – has a larger objective in mind: in this case, making the playoffs and pursuing a World Series.  Aside from being a nuisance and a distraction, Mr. Ramirez was sabotaging the team’s chances. 

What, me sabotage?

Many people – I’m one of them – find such behavior reprehensible and infuriating.  It’s breach of contract.  But it works.

The same thing works in housing.  Time and again, I’ve seen sponsors start behaving badly when their contract is no longer favorable.  In the short term, they start protracted pointless fights with the regulators, submit reports late, and become unresponsive to resident complaints.  In the intermediate term, an owner who cannot realize residual value stops reinvesting in the property; starts using it as the training ground for junior staff and sending the better staff to other properties; becomes unresponsive to investors; doesn’t bother to investigate transaction possibilities; and starts refusing consent for small courtesies or trying to extract a concession for others (e.g. investor transfer).  In the longer term, I’ve had owners tell me, “They can’t do anything to me, so I’m going to tell them that if they don’t do what I want, I’ll default on the mortgage and they can have the keys – after they foreclose.”

There can come a point where the sponsor is a liability to everyone else, where it is in everyone else’s interest to hold their collective noses and pay the sponsor to disappear. 

You want me to disappear?

I’ve done this multiple times.  We always dress it up.  We call it reimbursement of previously undocumented expenses, purchase of outstanding general partner loans, purchase of a general partner position, a non-compete, or any other fee in creation.  It’s go-away-baksheesh and the awful thing is, the sooner you pay it, the better.

That was where the Red Sox were during the last week of July.  The trading deadline was less than a week away (July 31), and Mr. Ramirez’s non-disciplinary misbehavior was heating up.  By this time, it had to have become clear that the Red Sox’s two club options had:

Substantial negative value to Mr. Ramirez

Conclusive negative value to Mr. Boras, and finally

Escalating negative value to the Red Sox

Given Mr. Ramirez’s behavior, the current contract was lose-lose.

Now I’ve got you!

That Mr. Ramirez achieved this state of mutual suffering through behavior many would consider immoral, sacrilegious, an insult to the game of baseball, et cetera, et cetera, is largely irrelevant.  Sponsors who are on the wrong end of a ‘too long’ contract can always compel renegotiation through ’sit-down strikes’ or taking the collateral hostage.

Let’s talk about my value to you when I’m hitting well

Every contract always needs future upside.  It should always be possible to make more by doing more.  Any contract that involves merely ’serving time’ independent of performance is by definition ‘too long.’

The Sox had a Gordian-knot-cutting strategy available to them that they didn’t use:

A strategy?  What’s a strategy?

[Continued tomorrow in Part 3.]

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Business ain’t so hard when you have a 0.900 OPS

He was so valuable we had to trade him away for pennies on the dollar

At the end of July, to the surprise of many and the amazement of some [Like you – Ed.], the Red Sox traded Manny Ramirez, their awesomely talented, mercurial man-child left-fielder, to the Los Angeles Dodgers.  Indeed, measured in strict two-player terms, they gave him away (they’re paying the rest of his 2007 salary) to the Los Angeles Dodgers – as far away from the Red Sox as possible, on the other coast and in the other league.  Boston will not see Mr. Ramirez again unless both teams make the World Series.

Hel-lo, LA, bye-bye Boston!

To be sure, the Red Sox did gain consideration: the Pittsburgh Pirates traded to them Jason Bay, a highly regarded left fielder (Mr. Ramirez’s position) who, though not in Mr. Ramirez’s caliber as a hitter, is represented as a solid citizen, indubitably six years younger, and under contract for 2009, and the Pirates received in return a clutch of young players who are both talented and cheap.

The Sox held all the cards: they had Mr. Ramirez under contract, and they had two more ‘club option’ years – that is, they could have extended Mr. Ramirez’s contract twice, at the same salary, if they chose.  Despite this, they lost a fearsome hitter and gained a less fearsome one.  Why?  The Sox management are very shrewd; how could shrewd businessmen like that get hornswoggled by what most of us think of as a goofy space cadet?

Because I used my head!

What does this have to do with affordable housing?

Easy – one of the core truths about housing affordability – and for that matter, about any long-term business arrangement, is this:

Some contracts are too long for their own good.

A contract too long for its own good becomes a liability for the beneficiary …

and ends up getting retraded.

Indeed, the more I work through how this went down, and why it went down, the more inevitable it all seems [In retrospect! – Ed.  Well, yes, that's why we write analytical blog posts – Auth.].

1.  Some contracts are too long for their own good

In December, 2000, Red Sox general manager Dan Duquette signed free agent Manny Ramirez to an unprecedented contract: ten years, 8 guaranteed and 2 at the club option, at $20,000,000 a year.  (This is just like a long-term lease with options to renew, but unusually, they are the landlord’s option, not the tenant’s.)

For this signing, Mr. Duquette was widely derided.  Who was this Ramirez guy?  As a left fielder, he was a train wreck.  As a person, he was of questionable character and consistency.  As a teammate, he was incomprehensible. 

Incomprehensible?  Moi?

Stories were written suggested Mr. Duquette had grossly overpaid and that Mr. Ramirez would be an enormous bust.  And since he arrived in Boston, Mr. Ramirez has been a target of many of our fine local sportswriters, who have spewed column after column (for evidence, Google “Ramirez Shaughnessy”) criticizing Mr. Ramirez’s hair, his bat flip, his alleged speed on the base paths, his work habits, his pranks, his seeming nonchalance about all things baseball. 

Yet the vilified Duquette – he was fired not long thereafter – understood the effects of inflation, particularly in baseball where salaries have continued to rise faster than inflation.  As the contract wore on, and Mr. Ramirez year after year put up immense numbers, each succeeding year looked more of a bargain. 

And when, in 2007, the Red Sox won their second World Series in only four years, only one player remained from the Duquette years, a player everyone agreed had been integral to their victories – indeed, having been voted MVP of the 2004 World Series – one Manny Ramirez.

Wasn’t I worth the money in 2004?

After 2004, several of Boston’s stars plumped for free agency.  Pedro Martinez, the staff ace, went to the Mets for a kajillion dollars; Series-clinching pitcher Derek Lowe departed for the Dodgers, shortstop Orlando Cabrera back to the National League.  Mr. Ramirez watched each of them go, each of them getting big new contracts off the Red Sox’ and their personal success.

By itself, that’s not grounds for a sulk.  Athletes do sometimes ‘take a discount’ to play with a winning team, or to stay in a favorable situation.  As I previously posted in Less is more? Risk and optionality, Boston’s Mike Lowell did that after the 2007 World Series, where having used the Red Sox to build a great personal brand, tremendous Bostonian celebrity, and a terrific 2007 season into a sublime bargaining position, he then traded that away for less than he could theoretically have got this time around, but much more than he could possibly have achieved without his Red Sox stint.  Mr. Lowell, as I wrote, was playing the longer, multi-contract game.

Mike Lowell: some guys really like the winning-team part of sports

In a similar vein, Mr. Lowell’s teammate Curt Schilling responded to a punctuation-challenged commenter on Mr. Schilling’s blog:

Leaving money on the table????? 37.5 for three years thats great! But C’mon Curt you guys play baseball for a living. 37.5 million is a crap load of money for a 33 year old in his descending prime …  Give me a break …

If someone offers you 45 million or more, and someone else offers you 37.5 million, and you take the latter offer, doesn’t simple math mean you are leaving money on the table?

His pitching is way better than his financial expertise

To his credit, Mr. Lowell made his decision on factors beyond simply the pay check:

“I enjoy Boston,” he said. “My family enjoys Boston. Secondly, the Red Sox organization does everything it can to win a World Series – for my career, that’s a big factor. Thirdly, before this contract I had financial security, so I like to believe that I’m not all about money.  I feel like I’m more of a baseball player than a businessman.”

“I really don’t believe everything should be about money. I’ve had teammates in the past who have gone to other places. Sometimes they have second thoughts that they took more money elsewhere. I didn’t think my happiness should be judged just by dollars.”

Personal.  Mr. Lowell is spectacularly popular in Boston, and his family is happy here.  Any other situation could be less pleasant.

What do you mean, I’ve just signed with the Seattle Mariners?

“I kind of weighed where I felt comfortable and where I’d have the best chance to win a world championship.  Plus, we just won and I played with a set of teammates that are unparalleled and the fan base is unbelievable.”

“I always expressed how much I enjoyed playing here in Boston with my teammates, my manager, and all the fans, and that hasn’t changed a bit, so I’m actually looking forward to working hard this off-season and getting myself ready for spring training.”

“There were definitely things that were considered.  Not everything about the whole process was easy.”

“The analysis I did with my family is, you look at the cities and you look at the teams, you see where they fit, and you compare that with the way you feel and the way you fit with the Red Sox. So ultimately my fit and my comfort level, family, and my team in Boston outweighed those other options.”

Mr. Lowell placed a continuing value on being surrounded by strong teammates and strong management – and he is 33, so when this contract is over, he will be 36.  Mr. Ramirez, however, is not Mr. Lowell; he’s already 36, and perhaps slowing down a bit (his stats were declining although not precipitously), and he wanted to cash another big payday.  Yet those two Red Sox options stood in his way; if the club exercised both, by the time Mr. Ramirez was next in free agency, he would be 38, and not even a young Steinbrenner would give such a head case a bank-breaking four- or five-year contract.  Mr. Ramirez probably felt – with economic justification – that he had better force the action now, if he could, and get those options voided.

Time for me to take some action!

Athletes have more value if they are perceived as winners, so they have an economic incentive (as well as an emotional won) to play for teams that can win championships.  Athletes will move to teams they think can get ‘over the hump,’ as Curt Schilling did when he came to Boston, personally negotiating a contract that gave him a $10,000,000 bonus if the Red Sox did what they had not done for 86 years: win the World Series.  In 2004 they did, with Mr. Schilling pitching a myth-making Game 6 against the Yankees despite a torn ankle tendon.

A sock that is now in the Hall of Fame: the ultimate Red Sox

Most Red Sox fans will tell you that Mr. Schilling’s $10 million payday was the best money the club ever spent.  Management of the Red Sox, who used that epic 2004 comeback and Series win to transform the franchise’s national image (and to jack up ticket prices to levels that would be breathtaking if I didn’t have so many business friends who now and then offer me a spare ticket to join them for a game), would certainly agree.

In Mr. Ramirez’s case, that motivation was spent – he’d already bit the mechanical bunny, twice.  Mr. Ramirez had already won the World Series – in fact, won it twice with the Red Sox.  As against the Sox getting another ring and himself getting a huge payday, Mr. Ramirez pretty clearly was looking out for Number One.

We’re teammates … for now

Enter the agent: Scott Boras. 

Boras has plenty of balls

 [Continued tomorrow in Part 2.]

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So far our exploration of Cornerstone Apartments in Haltom City, Texas, has covered rapes, shootings, backed-up sewers, dead rats, no heat over a weekend, enormous water bugs, and an astonishing flyer from the management agent demanding that residents repair defects that are the owner’s responsibility and tacitly threatening them with the loss of their children (since disavowed).

What standard of performance should we expect?  Should we make allowances for Mr. Hance’s busy schedule?  After all, he is sponsor of fourteen properties and has a full-time job three hundred miles away.

Kent Hance, a former congressman and ex-state senator who is chancellor of Texas Tech University, says he has poured more money into the complex than he ever got out of it –

A man who has “poured money into the property”

Perhaps so.  If we had the complex’s financial statements, we could see what if anything Mr. Hance has lent into the property versus what he and his partners have taken out.

The property is not Mr. Hance’s sole, or even principal, source of revenue from Cornerstone Apartments.  Sale of the LIHTC to tax-motivated investors will have generated a substantial developer’s fee to Mr. Hance’s company.  So I suspect his company is well ahead, on balance – and even if it were not, where is it written that the amount one must or should put into a property is limited by what one has previously taken out of it? 

“I wish to be left alone,” said Scrooge. “Since you ask me what I wish, gentlemen, that is my answer.  I don’t make merry myself at Christmas and I can’t afford to make idle people merry. I help to support the establishments I have mentioned–they cost enough; and those who are badly off must go there.”

What business are you in, Mr. Hance?

“It’s enough for a man to understand his own business, and not to interfere with other people’s.  Mine occupies me constantly. Good afternoon, gentlemen!” 

I wear the chain I forged in life.  I made it link by link, and yard by yard.

– and [Mr. Hance says he has] always fixed any problems the state pointed out.

That’s not the standard, Mr. Hance.  It’s not the state’s job to point out problems in your property.  It’s your job to spot them and fix them whether or not the state or anybody else is pointing them out.

Hance said he feels a moral obligation to maintain Cornerstone.

“Otherwise,” he said, “I would have walked away five years ago.”

Had you walked away five years ago, Mr. Hance, your investors would have suffered substantial tax recapture.  You get no moral credit for staying in the face of recapture, interest, and penalties.

He also says he has done his best.

“I tell you, people renting there get a bargain compared to what they get at any other place.”

That is no defense, Mr. Hance.

Forget moral obligations, you are legally obligated to give them a bargain rent, and to provide quality affordable housing at that rent. 

Mr. Hance has no inner qualms about his ownership:

“I don’t feel I ought to make it like living in Highland Park, Dallas. That wasn’t the purpose.”

I’ve previously written about the disgusting mentality which says that ‘those people’ do not deserve quality affordable housing:

Ever since I started in affordable housing thirty-plus years ago, knowing nothing about it but what I observed and deduced, I’ve been confronted with prejudice against ‘those’ people:

·         Those people aren’t like us.

·         Those people are lazy and just don’t want to work.

·         Those people are just out to beat the system.

·         Those people have too many children.

Pots for sale, Kibera, Nairobi, Kenya

After all, we don’t need to give ‘those people’ anything too comfortable to live in, do we?

“At this festive season of the year, Mr. Scrooge,” said the gentleman, taking up a pen, “it is more than usually desirable that we should make some slight provision for the Poor and destitute, who suffer greatly at the present time. Many thousands are in want of common necessaries; hundreds of thousands are in want of common comforts, sir.”

“Are there no prisons?” asked Scrooge.  “And the Union workhouses?  Are they still in operation?”

“Many can’t go there; and many would rather die.”

“If they would rather die,” said Scrooge, “they had better do it, and decrease the surplus population.”

Mr. Hance wishes no such ill upon his tenants:

“I don’t think you could find anyone else who would put that kind of money in a project,” Hance said during a phone interview.

Actually, Mr. Hance, you could find a great many owners who would do that.  Some of them are non-profits.  An extremely good one has its headquarters in Austin.  A national non-profit with a long and successful track record has its Texas office in Fort Worth.  Some are large for-profits who value their reputation as high-quality owners and managers.  Allow me to call them to your attention.

What then must we do?  

We must shave our beard, that’s what

Tolstoy asked it a hundred and twenty years ago.  In Mr. Hance’s mind, he has done what the owner should; he has used the residents’ rents to pay such expenses as he could.  The flow of tax credits – well, that’s just a sideline. 

Rapes, shootings, break-ins, rats, water bugs, leaks.  They’re not your problem, Mr. Hance. 

You’re only the owner. 

`Or would you know,’ pursued the Ghost, `the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it, since. It is a ponderous chain!’

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Yesterday we saw that Cornerstone Apartments in Haltom City, TX, a mature and nearly post-mature LIHTC property rehabbed in 1994, is in deplorable condition, despite being owned by a partnership controlled by the esteemed Chancellor of Texas Tech University, Kent Hance. 

The maintenance staff is fully committed

[Editor's note: each LIHTC property will be owned by a special-purpose entity, usually a partnership, with one or more managing general partners.  Presumably Mr. Hance has investors, but since he is the controlling person, we will simply call him the 'owner.']

Evidently the property was being managerially neglected until the Fort Worth Star Telegram came calling:

Over the years, the state failed to keep tabs as conditions deteriorated.  Today’s visit came about only after the Star-Telegram started asking questions about the complex.

The owner said he has nothing to fear.

Fearless Mr. Hance

In financial terms, there are three things that an LIHTC owner could potentially fear.  Since Mr. Hance professes no worries, let us worry for him.

What, me get recaptured?

First is tax credit recapture.  As I described it in why tax credits work:

Recapture is collectible because enforcement is against an investor, not against the property, and hence there is no economic hostage problem.   

Appropriated programs (where the government pays cash up front) can simulate these three features — risk transfer, post-audit compliance, and recapture collectibility — but cannot duplicate them.  For governments whose financial ecosystem is sufficiently complex, soft equity is a better kind of money to spend than either soft debt or hard debt. 

For Mr. Hance’s investors, however, whose property started taking credits in 1996, the recapture is declining rapidly:

But not entirely gone, as the state’s actions showed:

For the Cornerstone he and his partners received $300,000 in development fees and were awarded $2 million in tax write-offs, in return for their pledge to convert the complex into decent, affordable housing.

Back in 1996, $1 of LIHTC sold for about $0.65, so we can presume the investors contributed $1,300,000 or so, leaving plenty of room to put $1,000,000 into rehab and give Mr. Hance’s development company a $300,000 cash development fee.

That’s not what state inspectors found 18 months ago during their last visit. They found such dismal conditions that they reported Hance to the Internal Revenue Service, which had the power to pull the tax breaks.

The report, an IRS Form 8823, is a notice of non-compliance leading to tax credit recapture – but like most administrative findings, it can be appealed or cured. 

But after Hance submitted records showing that rotting wood and crumbling asphalt had been repaired and that the exterior had been painted, the state backed off without paying a [return – Ed.] visit.

The state housing department says it typically clears properties that provide receipts of work performed and hadn’t planned to reinspect until next year.

Second, fines that can be levied against owners with material building code violations.  But these depend on the city coming out to enforce.

A place to call home?

Some cities have stepped in, through code-compliance efforts, to force improvements at other tax-credit properties in Texas. But Haltom City doesn’t perform routine inspections for code violations. The city only follows up after complaints from the public.

Cornerstone residents say they are reluctant to make formal complaints for fear of being evicted. They can’t afford to live anywhere else.

Retaliation is illegal.  That doesn’t make it impossible, nor readily detectable.  And threats of retaliation are well-nigh unobservable.

It’s not impossible to retaliate

Rent is $415 for a one-bedroom unit and no more than $640 for a three-bedroom unit.

Since we have limited information, let’s figure $600 average for a 3-BR, and $510 for a 2-BR.  That works out to a GPT of $36,000 monthly, which at 96% occupancy (stated elsewhere in the Star-Telegram article) gives the complex about $415,000 in annual effective gross income (EGI), not counting ancillary income.  There’s money to work with.

In public-private partnership, there is a three-way bargain among owner, resident, and government.  Any such three-way creates opportunities for tacit bilateral bargains.  A slumlord who rents to illegal tenants, for instance, has a nice symbiosis: you don’t report my code violations, and I won’t report your nocturnal activities.

“We don’t want any problems,” said K. Deann Garrison, who did not want to give her married name.

Third, Texas DHCA can levy fines:

Texas only recently gained the power to take action itself. Last year, the Legislature authorized the Department of Housing and Community Affairs to fine owners $1,000 a day per violation.

Good if they’re collectible and motivated.  Bad if they’re uncollectible.  Also bad if the effect is simply to divert their money into legal defense rather than property improvements.

Around the same time, Michael Gerber, executive director for the state housing department, sent a wake-up call to owners of nine of Tarrant County’s 80 tax-credit complexes.

His message: Clean up or you’re gone.

“We want these bad actors out,” Gerber said.

And I know a lot about bad actors 

Penalties on the books require enforcement by actual inspectors, and that costs money:

The housing department is trying to beef up inspections but struggles with a limited budget. It has a staff of 17 to monitor 1,500 tax-credit properties.  Property owners are supposed to pay fees to defray monitoring costs, but the department let Cornerstone go nine years without paying. Hance now is chipping away at the $10,000 debt.

There’s my ten grand buried somewhere around here

Let me get this straight — a complex that’s received $2,000,000 in LIHTC, that generates an annual EGI of $415,000 or so, managed to be unable to pay $1,000 a year of required monitoring fees, and the state let this pass unenforced?  Whichever way you look at it, that’s awful.

I just cannot find the money to pay those niggling fees

Perhaps the reason Mr. Hance believes he has nothing to fear from inspections is his own dereliction in paying his legally obligated share of the cost of those inspections. 

Blackwell and Fowler say Hance didn’t deliver on promises, especially a pledge that the complex would house only seniors.

In Hance’s opinion, he has fulfilled state requirements.

Except for paying his mandatory fees for nine years.

In 2002, he spent more than $90,000 at the complex [$1,250 per apartment -- Ed.]  to pay for improvements including some new refrigerators, air-conditioning systems, water heaters and carpets. Some water and sewer lines have also been replaced in recent years.

Please, no need to canonize me for replacing sewer lines

After the dismal state inspection in July 2006, Hance put $176,000 into capital improvements.  [$2,200 per apartment, or about four months' EGI -- Ed.].  Today, occupancy is at 96%.

This level of occupancy tells us two things: (1) current rents are indeed below market, and (2) there is clearly a need for the affordable housing. 

It doesn’t tell us the apartments are in tip-top condition — in fact, the residents have much less leverage to demand quality housing than if they were at market.  If they are evicted, they will have difficulty finding anything else as affordable.  So they could be afraid of retaliation, and reluctant to claim their rights.

Only now, after years of vacant units and red ink, is the complex making a small profit.

“It was a bad investment,” Hance said.

Including the $300,000 development fee?

“A friend of mine told me, ‘If you ever get your money back on this project, they should have made you secretary of the Treasury of the United States.’”

What are friends for?

He never made a profit on an LIHTC property

There’s one way a landlord can recover money from a bad investment; stop maintaining the property.  That’s why slums are economically rational.  An owner who values cash return above all else can achieve it, by creating a slum.

This week, officials of UAH Property Management, the Dallas company that oversees the complex, inspected Cornerstone ahead of the state’s visit.

This is common practice – perhaps more common when one knows the newspapers are coming!

UAH President Mike Clark also took the local property manager to task for the tone of the flier and her reference to the Child Protection Service.

He could hardly do otherwise, especially with the media publicity.

We’ll have no more flyers like that … if there’s anybody watching

She then sent a new flier to quell fears, saying that she had mentioned CPS “only to warn you that we have had to contact them, in the past, when minor children were left unattended, and we believed they were in a dangerous situation.”

I’m sure that worked.

Clark also told her that it is against company policy to allow anyone to go without heat.

Not to mention a violation of applicable building codes.

Mr. Clark, resident-sensitive though he may be, is not in fact the owner.  What does Mr. Hance think of this property?

[Concluded tomorrow in Part 3.]

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