Tax Credit Equity

Developers see prices holding, other trends

By Donna Kimura

(Affordable Housing Finance, July 2005) — There’s been talk for months that the price of low-income housing tax credits (LIHTCs) will drop, but several leading developers haven’t seen that happen, yet.

“The market is good,” said J. David Heller, principal of The NRP Group. “It’s a good time to be a developer.”

Heller sees tax credit prices averaging about 94 cents per dollar of credit for more experienced developers. Industrywide, he estimates that the average is closer to 90 cents.

He doesn’t rule out the possibility of prices inching up even a little further. “Any time we think it’s not going to go up, it goes up,” he said.

NRP will start 20 projects this year in Ohio, Michigan, North Carolina, Virginia, Texas, New Mexico and Arizona.

Heller said he would like credits to be used by the most qualified developers. He is concerned about projects being done in overbuilt markets by less stable developers.

Larry Swank, president and CEO of the Sterling Group, Inc., agreed that pricing remains in the 90-cents ballpark, depending on the location and size of the deal.

The 2005 allocation rounds, he noted in late May, are just starting to take place in several states. That will lead to a new round of deals for the industry.

Swank said he is monitoring rising interest rates, which may make bond deals more difficult to pencil out. “Would they work with the cost increases in building materials and land coupled with interest rates?” he asked.

There’s been about a 30% increase in building material costs in the last two years, according to Swank.

The Sterling Group hopes to start about six tax credit deals in 2005 and may build a few more for third-party owners.

Wallace Scruggs, president of the Housing Trust of America, said the most significant trend he is seeing lately has to do with product type. This trend goes in tandem with the fierce competition from homebuilders for land for new construction. “The result is that we have moved toward acquisition/rehab opportunities due to the scarcity of land at prices where new construction tax credit projects are financially feasible,” he said. “The rise in construction costs has also contributed to the movement away from new construction.”

Scruggs, whose firm develops in the mid-Atlantic region, said several states are aware of the issues and are emphasizing preservation. “We believe that as a result, you will see more rehab projects in the tight real estate markets,” he said.

When asked about LIHTC prices, he stressed that equity proposals cannot be evaluated solely on price. Instead you have to review the entire proposal, with price being just one factor. Consideration must be given to conditions on release of payments, length and amount of guarantees, and other factors. That said, Scruggs reported hearing of a bid of 96 cents for a new-construction bond project.

Overall, he expects pricing to stabilize at current levels. “Corporate profitability is improving and, therefore, the need for tax-advantaged investments will continue,” he said. “As Congress continues its pressure on questionable tax shelters, the LIHTC will remain popular with investors as a legitimate tax-incentive investment.” ••

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