Affordable Housing Finance

TAX CREDITS

Bracing for 2009

AFFORDABLE HOUSING FINANCE • December 2008

Turmoil in the LIHTC market expected to continue into the new year

BY DONNA KIMURA

The affordable housing industry can’t undo the train wreck that was 2008. It can only hope to take the first steps toward recovery in 2009.

Going into the new year, the central issue looming over the industry will be the same as it was in 2008, only infinitely bigger—the financial feasibility of developments in the midst of a housing crisis and an economy in the pits.

By all accounts, 2009 will be even harder for the low-income housing tax credit (LIHTC) industry.

“It will probably be 2010 before we come out of these uncertain times,” says Robert Greer, president of The Michaels Development Co., the nation’s largest owner of affordable housing and one of the industry’s biggest developers.

The retreat of several housing tax credit investors and a dramatic drop in equity prices during the past year have left many projects without an equity investor or with significant gaps in their budgets. Some states will see about 40 percent or more of their recent tax credits returned, estimate frustrated developers.

While some in the industry complain that housing finance agencies (HFAs) have yet to grasp the full extent of the problems, many agencies are making moves to adapt to the turbulent market conditions, according to an exclusive survey of HFAs by AFFORDABLE HOUSING FINANCE.

For example, the Pennsylvania Housing Finance Agency has established a 5 percent set-aside for projects seeking additional credits. The Nevada Housing Division was also looking at increasing its “additional credit” set-aside to 10 percent to address the equity market downturn, and the Washington State Housing Finance Commission has proposed increasing the maximum allowed creditper- unit limit by 12 percent.

Several states report that they will give struggling projects an opportunity to apply for a 30 percent basis boost as provided by the recent Housing and Economic Recovery Act.

“It was encouraging to see that most states were implementing the 30 percent basis boost provision of the act to make projects more economically feasible, as long as the project otherwise qualified under the qualified allocation plan,” says Jonette Hahn, a principal of the Reznick Group, who analyzed the surveys. “A few said that the state would make the decision on which areas would be eligible for the basis boost.”

The legislation is the other big news in the LIHTC industry, the one silver lining in a stormy year. The bill updates the LIHTC program, including giving states a 10 percent increase in LIHTCs in 2008 and 2009. In Ohio, the increase means the Ohio Housing Finance Agency will receive about $4.6 million in additional credits in the next two years. Roughly $1.6 million is expected to be awarded to proposals that receive allocations in 2008 in order to fill potential financing gaps due to the falling equity prices. The Kentucky Housing Corp. and the Alaska Housing Finance Corp. also report that their increased credit authority is being used to help projects to cope with the drop in equity.

The housing legislation also establishes a flat 9 percent credit floor for new construction and substantial rehabs placed in service between July 31, 2008, and Dec. 31, 2013, which could increase credits for developments to potentially offset all or most of the recent drop in tax credit prices.

HFAs will implement many of the measures included in the housing bill, which developers and advocates hope will help jump-start the program.

Several agencies also are tightening their underwriting requirements. Alaska increased its debt-service coverage ratio from 1.3x to 1.4x. Several states are increasing the minimum operating expenses per unit. For example, the Idaho Housing and Finance Association plans to boost its minimum operating expenses per unit from $3,500 to $3,800 (including replacement reserves) for family units, and from $3,200 to $3,500 for seniors units.

Declining prices

All states are projecting significantly lower equity prices for 2009, ranging from $0.70 to $0.85, says Hahn. This compares to $0.73 to $0.93 in 2008.

The projected 2009 median equity price of $0.78 was 9 percent lower than 2008’s reported median price of $0.85, according to Hahn.

HFAs overwhelmingly cited the drop in LIHTC prices and the difficulty in finding investors as the most notable trend of 2008.

A huge concern is that developers will have to return their tax credits if they cannot find a LIHTC investor or overcome the drop in equity prices.

Deborah VanAmerongen, commissioner of the New York State Division of Housing and Community Renewal, said in early November that four deals had recently fallen out and were forced to return their credits. The agency is focusing on managing its pipeline of deals and getting the credits back out to other projects as soon as they are returned, she said.

In general, states had yet to see a rush of returned credits in 2008, but several are anticipating credits coming back, according to the survey. Hahn agrees that more credits are likely to be returned in 2009 “as missing placed-in-service deadlines become a problem for deals that delayed closing while developers searched for equity and gap financing.”

It also will be interesting to see what kind of drop there may be in the number of tax credit units being produced in the year ahead. The number has been falling in recent years, with higher construction costs often blamed for the slipping numbers.

A rough and early look at the 2008 numbers indicates that there will likely be another a drop in production from the year before. Some states, however, had yet to finish making their reservations for the year when the survey was taken.

Demand for credits remained strong in 2008. Overall, requests for LIHTCs outpaced the supply by roughly 2.6 to 1. Some states, including Colorado, Florida, Kansas, Ohio, New Hampshire, and Rhode Island, saw even higher demand with developers requesting more than three credits for every one that was available.