Hageman Capital entered the TIF bond investing business in 2020 following several ongoing trends in the real estate market. These trends included:
- The greater use of tax increment financing to incentive desirable projects.
- Municipalities started requiring developers to monetize the bonds associated with their projects (as compared to when municipalities would issue and back TIF bonds with municipal credit to monetize the bonds for developers).
- A noticeable lack of investors interested in buying single-site TIF bonds.
In our most recent blog, the professionals at Hageman Capital discuss why they’re uniquely qualified to provide real value for real estate investors and local communities through the purchase of TIF bonds. By working with companies such as Hageman Capital, developers have the resources available to spark development in areas where it might never occur without the use of developer-backed TIF bonds.
Why Aren’t Traditional Bond Investors Buying TIF Bonds
One reason is that many bond buyers are looking to place large amounts of capital, and, therefore, only want to pursue bond investments exceeding the single project TIF bonds that Hageman Capital typically pursues.
Also, developer-backed TIF bonds generally lack liquidity and cannot be purchased “off the shelf” in simple transactions. But, perhaps, the largest reason why traditional bond buyers haven’t been active TIF investors is the need to combine bond structuring expertise with real estate investment expertise, two skill sets that don’t often coexist.
Compounding the reasons why traditional bond investors haven’t been active in single-site TIF bonds is the fact that most of these bonds are not rated, a significant liquidity feature. Bond ratings from firms like Moody’s, Fitch, and Standard & Poor’s carry significant weight with investors because of the implied “stamp of approval” from the rating agencies.
Also, single-site TIF bonds are difficult to obtain an investment grade rating for various reasons, including the lack of asset diversification (property type, location, etc.) and the history of the TIF area. While the lack of an investment grade rating doesn’t always mean single-site TIF bonds lack strong credit metrics, it does make it difficult for most traditional bond investors to get comfortable.
Notably, one strong credit quality single-site TIF bonds do have is the fact that the bonds Hageman Capital acquires are senior to the first mortgage.
Hageman Capital Is Uniquely Qualified to Invest in TIF Bonds
Hageman Capital is uniquely qualified to invest in TIF bonds primarily because of our combined real estate and bond expertise. Typically, our team is comfortable investing between $2 to $15 million on most single-site TIF bonds.
The owners and executives of Hageman Capital have spent decades in the commercial real estate investing industry with a strong focus on development across multiple property types. This experience even includes multiple properties where we invested as an owner that had an associated TIF bond. Our team has extensive experience working with municipal stakeholders, and truly understands the nuances of working with local governments.
Additionally, our real estate track record spans from being an equity partner on development projects, to being real estate developers ourselves. Since Hageman’s inception in 2013, our team has been involved in over $500 million worth of real estate transactions, many as owners and equity investors. Our team has decades of traditional real estate underwriting and deal-making experience. Aside from the experience we built organically, many of our leadership team members come from senior positions with other major REITs and development firms prior to joining Hageman.
Because of this, when Hageman Capital buys the bonds on a project, we can empathize with the developers and the equity partners because we have been (or are) in similar positions ourselves. This unique perspective gives us an advantage over other bond investors, especially because we’re able to create unique TIF financing structures that can align the goals of the real estate financing and bond financing to generate maximum proceeds for the developers.
Why Work With Hageman Capital?
In addition to our real estate expertise, Hageman executives have also structured TIF bonds from the position of the developer/property owner, municipality, and bond investors. Many of our leaders have spent time working for (and with) municipalities. Xiao Yuan, Hageman Capital’s Managing Director, has a public finance investment banking background that emphasizes TIF and high-yield transactions, and he has worked extensively with local governments. Tom Dickey, Managing Director of Real Estate, has structured TIF bonds as both a developer and also during his time as an economic development director for a growing Indianapolis suburb. This allows our team to see the transaction in different lenses, which is extremely beneficial to a developer looking to monetize their TIF bonds.
Hageman Capital’s real estate, development and public finance experience is directly applicable to investing in TIF bonds for newly developed properties. This is the preponderance of Hageman Capital’s business.
Mitigating Construction Risk with a TIF Bond
Perhaps the largest risk associated with a TIF bond on a new project is construction risk. This is because if a project isn’t built, the property tax increment that provides revenues to repay the bonds will not be generated. But construction risk is not unique to TIF bond investing. It’s also a risk that is common to real estate investing in general and is something Hageman Capital’s leadership team has managed for decades.
In fact, construction risk is more acute for a typical equity investment in a project where the investor is closer to the so-called “first-loss position.” In contrast, construction risk is lower for a TIF bond investor because of the senior position of TIF compared to the remainder of the capital invested in a project. Nonetheless, at Hageman Capital, we use our knowledge of real estate expertise to mitigate construction risk via a combination of some or all of the following:
- Only purchasing the TIF bond when all the capital to complete the project is in place and requiring developer equity payments to be funded before the TIF bond proceeds can be utilized for construction funding.
- Agreements that specify the amounts and timing of when bond payments are due regardless of the construction status of the project.
- Construction completion guarantees or bonds.
- Using internal and external resources to confirm the adequacy of the construction budget.
Contact Hageman Capital to Schedule an Appointment
By having ready access to capital, together with our combination of real estate and bond buying experience, Hageman Capital is uniquely qualified to grow our TIF bond acquisition volumes both in the Midwest and beyond so we can further professionalize the TIF bond space and meet the needs of developers who have quality projects that earn TIF support. Contact Hageman Capital today to schedule an appointment.
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