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Chicago – The federal low-income housing tax credit (LIHTC) program may be a victim of its own success, according to speakers at AHF Live: The 2004 Tax Credit Developers’ Summit.

More than 400 people attended the conference here in November. Sponsored by Affordable Housing Finance magazine, the event brought together the nation’s most active developers, financiers and housing finance agency executives in a unique, high-level summit.

AHF Live! got under way with a roundtable discussion by the magazine’s Editorial Advisory Board. With remarkable candor, the panel and guests debated the challenges facing the program. They agreed that cuts in federal spending on Sec. 8 and other subsidies would make tax credit deals difficult to do, and that the possibility of tax reform was a serious threat.

But the sharpest debate centered on the financial feasibility of tax credit deals being done today. Several speakers said that there is too much capital and not enough discipline in the market, resulting in construction of projects that eventually might fail. Several predicted that the steady run-up in prices that investors will pay for tax credit deals may end in a sudden correction.

An edited transcript of the roundtable discussion appeared in the January 2005 issue of Affordable Housing Finance magazine. Here is the complete transcript.

Andre Shashaty, Affordable Housing Finance Magazine: I wanted to welcome you to the first live meeting of the Editorial Advisory Board of Affordable Housing Finance magazine. We’re very excited to have you all here and, on behalf of our staff and our readers, I want to thank everyone at the table for serving on the board and participating at this event. We made it a priority to get your input on what we’re doing with the magazine and give us feedback on how we do as a publication, but also how we do as an industry and what topics need to be covered.

We also have a few guests, and we will try to get them involved as time allows. It is an impressive group, and we are very pleased and honored to have you here. It’s not just the first meeting of the Editorial Advisory Board, it’s the first live conference sponsored by Affordable Housing Finance magazine.

There are several purposes for this meeting. Number one, we want to have a candid discussion on how the tax credit program is working, what challenges it faces, and how to proactively address those challenges. The more specific and honest we can be, the more useful this discussion will be.

It’s beyond our scope to come up with new policy proposals, but we can and should try to come up with a list of challenges facing the program. One of the focuses of many other conferences has been on what happens now to deals done 15 years ago; we do have a panel on that coming up in the main conference. But I want to focus this group’s attention on how we do deals over the next 15 years. I’m hoping we can come up with the start of what we might call the “tax credit development agenda” for the next 15 years.

This agenda, like this conference, is meant for developers, whether they are for-profit, nonprofit, or government agency spin-offs. It may be a bit ambitious, but I think we can try to find some commonality of interests. We will take that agenda and publish it in our magazine and try to generate some dialog, using that document as a beginning.

To start out, I asked two people to make brief opening statements just to get things rolling. I also sent you a couple of articles that I thought were rather stimulating about these discussions. Two gentleman are going to talk to us initially for a few minutes: Kim Griffith from Freddie Mac and J. David Heller who is with NRP Group and runs the housing credit group at the National Association of Home Builders [NAHB].

W. Kimball Griffith, Freddie Mac: I’m just going to give you an overview of Freddie Mac and some current economic factors. Finally, we have a good job report that just came out. More people are entering the job market. We don’t see much upward pressure on wages for the next year. Real GDP growth in 2004 is expected to be 3-1/2%, which is down slightly from what we, and others, expected it to be, due to oil prices going up. We expect the unemployment rate to come down gradually during 2005 to about 5%.

One interesting thing is that over the last four years we had a “refi” boom. Only about one in seven fixed-rate borrowers now have a fixed rate of 7% or higher so almost no one is in the money for a refi for that purpose. They may be in the money for a refi to take money out but not to decrease their debt service. On the multifamily front, we saw modest net absorption of apartments in the third quarter of this year, so vacancy rates have gone down slightly. Rent growth is still in the low single-digit area, and we don’t see any significant improvement in that in the near term. The national average seller cap rate is about 7%, and we expect that to go up a little bit as long-term rates go up. We also see a balancing between short-term supply and demand. The short-term supply growth will continue, we think, annually at about a 1% figure, which is about the same as demand growth. This balance seems to indicate that we’re past the downturn, but we don’t really expect market stabilization to occur until 2005 and 2006. Based on our own watch list performance data, occupancy is improving in many markets, and we don’t see any sweeping market deterioration, but it’s just steady. Thank you.

J. David Heller, The NRP Group, LLC: Thanks, Andre. I think when you talked about a tax credit group for developers, that was sort of a segue to allow me to talk about the NAHB. NAHB has a housing credit group, which was started by the gentleman on my right, Larry Swank. This is the premier industry group for developers. It’s had some significant accomplishments since it started. Most important, the housing credit group, along with many others in the industry, played a key role in raising the credit from $1.25 to $1.75. In that time, what the housing credit group was able to do was not only use their lobbyists on Capitol Hill but, more important, take their congressmen and senators back to their districts and show them product.

That is so critically important: You have to get your congresspersons back to your district to see these beautiful projects, meet the residents, and see the social services – the supportive services – that you folks are doing such a great job of carrying out.

You know, our industry is always in a state of crisis. It’s just a matter of how small or how large that crisis is. The housing credit group has tackled issues related to property taxes, NIMBYism, and Year 15 most recently.

Andre also asked me to talk a little bit about the political climate, and I presume that my comments are going to be a little different from what you would have heard from Andrew Cuomo and that you are going to hear from our fill-in speaker tomorrow. That’s because I happen to be a huge supporter of our president, and I think he’s a strong leader, a man of conviction.

It’s critically important that the people around this table understand that we have him for the next four years and, if we’re going to change policy, we need a lot of friends on that side of the aisle. We do have friends and we just need to find solutions. There are people at this table that know a lot more about Sec. 8 housing than I do because I don’t deal in that. In the low-income housing tax credit business, there are opportunities with this administration. There’s the homeownership tax credit and its impact on the low-income tax credit. We have to look at overbuilding in certain markets. As Kim mentioned, it’s not the brightest outlook in the world. The numbers are good, they’re on the positive side, but we don’t have the boom years. We have to be realistic about overbuilding in certain markets and make changes. We need to talk about serving families from 60% of median income to 100% of median income; there could be some opportunities for that. We need to tackle the property tax issue. While it is a local issue, maybe there are some fixes on a federal basis that we could insert into this program or into a new program that comes about. Insurance premiums, prevailing wages, utility allowances, and including land in eligible basis – these are all things that should be on the agenda and could work in our favor as the administration tries to change the tax environment.

So rather than saying we need to save it exactly as it is, we need to stay focused and fight for the end-game and not just the battle of saying that we want low-income housing tax credits, and we want them to stay exactly the same. We have a tremendous number of friends on the Republican side of the aisle. In Ohio, for instance, which is my home state, we have Congressmen Ney, Oxley, Portman, and Tiberi. All are Republicans with leadership positions in either housing or finance. They are all familiar with the LIHTC program and when we went through a battle a couple of years ago on the dividend exclusion, it was those congressmen that played a key role in working with the administration to make sure that it [dividend exclusion] didn’t harm our program.

We all need to go to Washington with a picture book in hand. We have beautiful projects and wonderful residents. Go there, tell our story, talk to your congresspersons; it’s critically important. Use NAHB: Call them in advance, and let them know you’ll be there. They’ll set up meetings and even accompany you if you are not comfortable speaking and all you have are the pretty pictures. Then go there with the lobbyists, they’ll help you out. We’ve had some discussions with high-level people in the administration, some at the cabinet-level, who have said we have reason to be concerned. The folks at the NAHB housing credit group are not just sitting back and saying, “We’ll see what they put out and then we’ll fight it.” We’re having a meeting in early December, we’ll bring people in from different industry groups, and we’ll create a strategy. I’m sure Tony [Freedman] will be at that meeting, and we’re going to come out with a proactive approach to this. We’re going to set aside a large portion of our national meeting in January in Orlando to lay out this platform and work with the administration so that when the budget comes out in February, hopefully a lot of the things we’ve already talked about will be included in there, and for those that aren’t, we will be able to hit Congress running and lobby for the things we want.

Shashaty: To get right into the discussion and avoid the preliminaries, I’d like to ask each of you to briefly introduce yourselves and then tell us what you think the top challenges are in getting tax credit deals done in today’s regulatory, political, and economic environment.

Howard Sereda, Citigroup Community Development: Hello everybody, I’m Howard Sereda. I’m with Citigroup’s community development group in the investments area. We’re responsible for investing equity dollars for the corporation pursuant to our responsibilities under the investment test for the Community Reinvestment Act. We invest in the housing tax credit area exclusively through funds. We have a small group of syndicators with whom we deal.

The biggest challenge to getting deals done pertains to soft real estate markets – frankly, markets which seem to us not to require any additional housing, particularly if underwritten to 60% of AMI [area median income]. Of equal importance since the election is the future of the Sec. 8 program and how to properly underwrite operating subsidy, with the retenanting and reappropriation risks. This issue looks quite different today than it did a few weeks ago.

Ronne Thielen, Related Capital: I’m Ronne Thielen with Related Capital Co. I’ve been there for 10 years. We’re a syndicator of low-income housing tax credits and a financier of bonds for 4% credits. My concern is that the allocating agencies are doing things that are not right for the program or the investors, such as limiting or eliminating contractor profit if the developer is also the contractor, and limiting the amount of credits or the basis you can get credits on. You are weakening a project if you can’t get credits on all the basis that you have. What’s the sense of going to Congress and allowing basis on land if the state agencies individually aren’t allowing it? I know it’s something we have to deal with from both ends because we want to do as many units as possible. but more important, the ones we do have to be done right. The other targeting thing that concerns me is this special-needs targeting. They’re trying to mix populations that simply won’t mix. State agencies in California have $2.1 billion in taxable financing and they’re targeting it now to seniors with half the units being special needs for homeless with chronic illnesses, and it just doesn’t work. It’s a huge resource we have, and it’s going into projects that we just won’t be able to do.

Elizabeth Moreland, Elizabeth Moreland Consulting: Hi, I’m Elizabeth Moreland from Elizabeth Moreland Consulting. I’m at the other end of the business where I work more with those of you in this room after you get your credits, maintaining the compliance and management. So my comments are pretty limited. The biggest thing I see is the soft market and how it’s affecting the deals that are already out there.

Daniel Cunningham, Wachovia: My name is Daniel Cunningham. I’m the head of affordable housing at Wachovia on the debt side. I joined this summer after nearly seven years of running Fannie Mae’s affordable housing debt group.

I see four key issues as they relate to continued viability of affordable housing development. The first is preservation and whether part of that yields exit tax relief, but also just looking at immediately declining assets; trying to preserve those and trying to make sure that there is a long-term, viable, sustainable strategy. The second issue is Sec. 8 and all the accompanying challenges related to its devolution, but with a subset of that, which is how do you as a debt provider get 30-year debt and underwrite it with a one-year subsidy? The third issue is a global issue of finite resources as they relate to tax credits and allocations. At this point in time, there is such a plethora of financing opportunities that they appear to approach an infinite series of possibilities. That puts downward pressure on underwriting and the challenges related to that. Fourth is the changing nature of the overall strategies of Fannie Mae, Freddie Mac, FHA, and private debt providers and financial institutions. The challenge is trying to figure out the most efficient way, from a debt and equity perspective, to make these deals work and provoke sufficient cash flow to have debt paid back and equity returns in an appropriate manner.

Wesley Finch, The Finch Group: My name is Wes Finch and I am chairman of The Finch Group. My first transaction with HUD was in 1971. I’m still doing them. With regard to Sec. 8 contracts, as Daniel just said, how do you underwrite 30-year mortgages with one-year HAP contracts? How do the equity funds do it? I would have said a few weeks ago that it is not possible for Sec. 8 to get cut back in any large measure. Now I’m not so sure.

The next issue is low-income housing tax credit compliance. Those of us who participate in a lot of tax credit transactions are dealing with this craziness. Small mundane inconsequential matters can create an 8823. The limited partner goes nuts. An experienced general partner knows that this craziness is going to happen, so how do you, as a general partner, give guarantees (or whatever you need to do) to the limited partner relative to delivering tax credits? We need to get the Feds to do something that makes sense.

I disagree a little bit with David. I’m more concerned with HUD’s short-term future, over the next four years. In my 33 years of experience, there have been highs and lows, but we always seem to come through. I think there will be a lot of opportunities for the people in this room, but I’m not so sure that the residents, the ones who need the housing, will be protected.

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