SPECIAL FOCUS >> TOP 25 AFFORDABLE HOUSING LENDERS

Citi Leads the Pack

BY JERRY ASCIERTO

AFFORDABLE HOUSING FINANCE • FEBRUARY 2008

Citi Community Capital tops AFFORDABLE HOUSING FINANCE’s list of affordable housing lenders and is poised to pull away from the pack even further in next year’s rankings.

That’s because at the end of December 2006, Citigroup Corporate and Investment Banking purchased the No. 3 lender on the list, the Affordable Housing Debt business of Capmark Financial Group, Inc. (CAHD).

The newly combined Citi Community Capital realized a boom in business after the acquisition closed in February 2007. Citi projects its final 2007 tally to be about $2.8 billion in affordable housing volume, twice its chart-topping $1.4 billion in 2006.

The acquisition expands Citi’s affordable housing capabilities in two ways. First, CAHD bolstered Citi’s debt origination toolkit by providing Fannie Mae and Freddie Mac multifamily licenses to Citi.

The acquisition also provided Citi with the multifamily tax-exempt bond expertise that CAHD—formerly Newman & Associates—had concentrated on for 28 years. At the time of the sale, CAHD led the industry in the number of tax-exempt multifamily deals financed in 15 of the last 16 years, and closed more than $973 million in such deals in 2006. The acquisition also brought CAHD’s more than $1 billion bond portfolio to Citi.

The agency lending expertise was especially useful in 2007, giving the company another arrow in its quiver as the conduit lending market experienced problems mid-year. “We are bullish on doing tax-exempt conduit deals, but there are times when the agencies are more competitive than conduits,” said Hal Kuykendall, former president of CAHD and now a managing director at Citi. “So, we have all the products a developer needs; whatever it is, we’ve got it.”

Citi plans to further integrate CAHD’s product lines in 2008. Citi now offers financing options from bridge, pre-development, construction, and permanent loans to publicly offered tax-exempt and taxable bonds, with a variety of credit-enhancement structures. The company also offers fixed- and variable-rate private-placement bonds, as well as a “synthetic fixed-rate” bond execution using swaps as the interest-rate hedge.

The company’s geographic reach has broadened through the acquisition as well. Citi Community Capital has focused on Western markets as well as the South, but not as much on the Northeast, where the Pennsylvania-based CAHD was focused.

2008 outlook

The company expects debt to be readily available to affordable housing developers in 2008, albeit at a slightly higher price than was available the first half of 2007. The cost of both permanent and construction debt went up, on average, from about 25 to 50 basis points in the all-in mortgage rate from August to December 2007, the company said.

But those cost increases pale in comparison to the consequences of plummeting low-income housing tax credit (LIHTC) equity prices. Citi is increasingly pessimistic about the LIHTC equity market in 2008. The company expects LIHTC pricing to continue to drop in the first quarter of 2008, translating to fewer affordable housing deals getting done this year.

Citi’s own stable of LIHTC properties grew substantially in the first half of 2007 when it acquired a $676 million LIHTC portfolio from Fannie Mae in March, representing 382 properties and 31,050 rental units. At the time, the transaction sparked fears in the industry that Fannie Mae, the nation’s largest tax credit investor, was lessening its involvement in the market.

The downward trend of LIHTC prices “really became evident in the fourth quarter [of 2007], and that trend just appears to us to keep accelerating,” said Andrew Ditton, a managing director at Citi Community Capital. “I would expect the first and second quarters of 2008 to be very volatile and difficult from a planning perspective for developers.”

The company expects the lack of LIHTC equity available to developers in 2008 to have a trickle-down effect on other areas, such as a corresponding decrease in tax-exempt bond deals in 2008. Therefore, the company will take a conservative approach to 2008 and focus on its core business.

But the company feels that the integration of CAHD’s four business units—government-sponsored enterprise lending, conduit bond finance, bond remarketing, and investment banking/originations—as well as the intellectual capital that CAHD brings, positions it well for 2008.

“The former CAHD has a tremendous history with allocating agencies and others in the industry, and that’s extremely helpful to developers as they are facing what I suspect will be a very choppy year, at least the first half of it,” Ditton said.