Talking Heads Milton Pratt Jr., The Michaels Development Co.
By Darryl Hicks
11 min read
Founded in 1973 by Michael J. Levitt, The Michaels Organization, Marlton, NJ, ranks among the nation’s largest private-sector developers and owners of affordable housing. The organization’s footprint extends into 35 states, the District of Columbia and the U.S. Virgin Islands, with 370 communities, comprising more than 50,000 units, 32,000 of which are affordable.
Milton Pratt, who is senior vice president of The Michaels Development Co., is a key figure behind the company’s development efforts. Prior to joining the Michaels’ team in 2005, Pratt served as the Region III regional director for the U.S. Department of Housing and Urban Development, where he was the principal liaison to Congressional members, mayors, city managers, state and local elected officials and a wide cross section of HUD clients in the Mid-Atlantic region.
Pratt has nearly 20 years of experience in real estate development and investment banking, with an emphasis in multifamily housing and asset management. Prior to joining HUD, he served as vice president for Apollo Housing Capital, an investment banking firm dedicated to buying and selling Historic and Low Income Housing Tax Credits.
Pratt sat down with TCA to discuss tax reform, his recent trip to the hurricane-ravaged U.S. Virgin Islands, his organization’s successful foray into student housing and other market trends.
Tax Credit Advisor: How is the imminent passage of tax reform legislation impacting your pipeline for projects in 2018 and beyond?
Milton Pratt: There will be some impact, but we are hopeful that it won’t be with tax credit pricing. Most investors have already priced credits at some reduced tax rate and many of them have been underwriting deals at a 25, 22, 20 percent corporate tax bracket depending on the market. We hope that when, or if, tax legislation passes, there won’t be another major reprice just a smaller adjustment to conform to whatever the final rate is. But, we need to continue being more creative and innovative in attracting capital to our projects, managing costs, and locating soft sources of financing. All that being said, we are cautiously optimistic that our pipeline will continue growing in 2018 but the industry must continue to inform Congress of the importance of the LIHTC program and private activity bonds.
TCA: You visited the U.S. Virgin Islands shortly after hurricanes Irma and Maria devastated the Caribbean. How are those relief efforts progressing? What has been your biggest challenge helping residents?
MP: I traveled to St. Thomas for one day, but the staff from our property management company, Interstate Realty Management, have lived and breathed everything that’s been going on there. They worked tremendously hard preparing for both storms and worked equally as hard after the storms. The cleanup has been going slower than expected. The Virgin Islands has not received as much media attention as other parts of the Caribbean. I don’t know why that is. The residents there have suffered as much as the families in Puerto Rico. That said, our employees have done a great job. One of our site managers lives on the property that she manages so she was impacted like everybody else. She had to stabilize her family and then go out and find ways to help the residents she serves. None of our four developments were completely destroyed, but they all suffered substantial damage in the millions of dollars. We have one recently constructed property on St. Thomas that was built to more recent hurricane standards and fared better. Some of the older properties lost roofs, windows and doors, and had flood damage. We are moving as quickly as we can to process insurance claims, but there will be challenges for years to come. Among the biggest challenges has been securing technical professionals to help with redesigning and rebuilding properties, but most importantly we need building materials. Every piece of plywood that comes here travels from Miami through Puerto Rico. Unfortunately, the hurricane that hit Texas created an acute shortage of construction supplies throughout the Southeast, which has only exacerbated our problems.
TCA: Michaels has been an active user of HUD’s Rental Assistance Demonstration (RAD) program. How many projects have you done? Are there challenges that developers should be aware of? What changes would you like to see HUD implement to make the program better?
MP: We have done close to 15 RAD deals, both conversions/rehabs and new construction. We are generally excited about the RAD program. We wish more of our housing authority partners would get equally excited. Some are committed to converting their portfolios, some are hesitant and some are flat out saying it’s not the right program for them based on the way they manage their assets. Before I discuss challenges, let me touch on the positives. The HUD staff who run the RAD program in Washington, DC are very accessible. They run a good ship. They have a good set of policies and procedures and they communicate with the industry. They have kindly met with NH&RA’s RAD user group to discuss policies and upcoming priorities. In terms of challenges, we have to continue working on timelines and advancing projects through the RAD pipeline and we hope that Congress further expands the program. HUD needs sufficient staff resources to properly administer the RAD program. The department has used outside contractors to help process applications, but it would be better if HUD had additional staff to help drive the engine and get RAD deals done faster. Generally speaking, I think the RAD program is moving in the right direction.
TCA: How has your prior role as a public servant influenced the way you approach your job today?
MP: I enjoyed my time at HUD from 2000 to 2005. It was a great opportunity to serve my country. I came out of the affordable housing world before I accepted a post at HUD, so I already knew the programs and many of the people who worked there. I saw myself as someone who could help move things along within the massive HUD organization. Today, when I encounter an issue with one of our projects, I put my HUD hat on and try to understand their way of thinking so that when I go to them, I can say, ‘hey, I’ve got this problem, I am looking for a solution, here are a couple of things that I think are realistic solutions.’ What I try to get out of my HUD folks, or any public agency that I work with, if you give me a quick ‘no,’ a lot of times I appreciate that more than a ‘yes’ that takes two years to get to. If someone at HUD says, ‘I can’t do this, I can’t change this,’ we are smart business people. We will find another way to do it. That’s what developers do. We are problem solvers. When problems occur on a project, we figure out ways to get around them, get over them, get under them or get through them. But sometimes, the reality is that we can’t do anything more and we move on to our next deal. Our new president, Gary Buechler, has asked us all to focus on moving our pipeline as quickly as possible and diversifying. Ten years ago, our affordable business was focused mostly on public housing, HOPE VI-type deals. We are still interested in those kinds of projects, but we recognize the need for diversity. Today, we are attempting to do more nine percent suburban/urban deals and preservation rehabs within our own portfolio. And we are talking with cities more and more about unique partnerships to create mixed-income housing, which they see as a real need in their communities.
TCA: In addition to developing affordable housing, The Michaels Organization operates an independent operating company called University Student Living (USL), that builds student housing. How strong is that market?
MP: Very strong and there are multiple factors contributing to the growth in student housing. Colleges and universities are in a very competitive market to attract students. Many campuses are already challenged with a lack of housing inventory and/or have old housing that is not suitable for the needs and expectations of today’s diverse student population. Higher education is also faced with limited funding that needs to be dedicated to academic programming, salaries, class rooms and other capital improvements. Due to many successful partnerships within the past few years, higher education is becoming very receptive to public-private partnerships as the optimal solution. For off-campus development, the situation is similar due to growing enrollments.
TCA: What regions of the country do you build student housing?
MP: We are a national company and have the ability to develop anywhere in the U.S., including Hawaii. USL’s current portfolio represents 11 states.
TCA: What funding sources do you use to develop student housing?
MP: Off campus development are private equity, joint venture partnerships. For on-campus development, the current and most prevalent approaches are tax exempt bonds, 100 percent equity or a traditional mix of debt and equity.
TCA: How do you identify new student housing deals? What lessons have you learned working with universities that you can share with our readers?
MP: Most opportunities are presented to us for consideration. We have a team that does a thorough financial and market evaluation. Whether it is an on-campus or off-campus opportunity, a critical part of the assessment is determining that the partnership will be the right fit in terms of standards for quality, having a shared vision and goal and the potential for a long-term relationship (we like repeat business). Once we are confident the financial approach is sound, the determining factor is how we can lift the lives of the residents and be an asset to the campus community. That is what drives us all to succeed.
TCA: What lessons have you learned working with universities?
MP: It takes time: be patient, be a good listener and be flexible.
TCA: How has The Michaels Organization positioned itself for the future and distinguished itself from other developers?
MP: Michaels is a family-owned business, which is reflected in our corporate culture. We recruit the most talented people and let them flourish, which has led to some incredible amounts of longevity. I’ve been here for 12 years. The senior managers who run our organization have been here for 30 or more years. We employ property managers who are still running the same developments from the time they were built in the 1990s. I mentioned earlier that we have really tried to diversify our housing portfolio. We used to be a one-trick pony, solely affordable.
Now we develop student housing, military housing and market-rate. We’re one organization doing many different things. It’s also worth noting that we not only work in low-income communities, we are moving into one. We will soon be moving our corporate offices from suburban Marlton, NJ, into downtown Camden. We have been doing a lot of work on our own and with the Camden Housing Authority for several years. As we saw Camden improve, our leadership said that’s where we need to be. We should be walking the walk and talking the talk. So we’ll soon be moving several hundred employees into Camden, in the shadow of the Ben Franklin Bridge. But most importantly, we are bringing jobs and income to Camden where we will be next door to a lot of the properties we’ve worked on for 15 years.
TCA: We’re now one year into the current administration. Has utilizing HUD programs and dealing with support staff gotten easier, harder or is it about the same? Are there policy changes that you would like to see HUD focus on in 2018?
MP: It has taken the administration longer to get its team fully assembled. But, I think they have some strong people in place, including the Deputy Secretary Pamela Patenaude. I worked with Pam when she was at HUD during the Bush Administration. She is a true professional. The Secretary is in charge of HUD, but the Deputy is the person who keeps the wheels on the bus and the ship sailing forward. I am sure over the next year that her footprint, and Secretary Carson’s footprint, will be more evident to us in the industry. I do wish they were out talking more to developers, and learning about the challenges that we have working with HUD programs. It would be remiss of me not to mention that the proposed HUD budget zeroes out several important programs used by affordable housing developers. We’d like to see more money put into the RAD program, public housing, CDBG, HOME and fair housing initiatives. Ultimately, Congress decides how much to invest in these programs, but we’d like to see a continued push for more funds.
Story Contact:
Milton Pratt
mpratt@tmo.com, 856-596-0500
