Affordable Housing Finance

FINANCE

Tax Credit Equity

Hopes Ride on Strong Second Half

AFFORDABLE HOUSING FINANCE • September 2009

Syndicators see some signs of market improvement

BY DONNA KIMURA

Low-income housing tax credit (LIHTC) syndicators are counting on a strong finish after a slow first half to open the year. Eleven syndicators say they are anticipating more investor capital flowing into the market in the year’s home stretch, largely because of improving economic conditions. The second half of the year is also typically a busier time for the industry.

“As economic conditions improve, we expect that more investors will feel comfortable with tax credits again and return to the market, or, if they have not invested in the LIHTC program before, invest as the economy shows signs of recovery,” says Andrew Weil, executive managing director of Centerline Capital Group’s Affordable Housing Group.

Two syndicators say they do not expect a material change in the market in the year’s closing months, with several predicting that the market will stabilize in 2010.

AFFORDABLE HOUSING FINANCE surveyed national syndicators and state and local equity funds about their firsthalf activities and their prospects for the full year.

The surveyed firms raised a cumulative $1.07 billion in LIHTC capital in the first six months. Three companies— Enterprise Community Investment, Inc., Great Lakes Capital Fund, and St. Louis Equity Fund, Inc.—declined to reveal how much they raised or said they did not raise any capital during that period. St. Louis officials noted that they typically do not close funds in the first six months of the year.

Overall, the weak first half turned out to be what most syndicators expected. The economic downturn signifi- cantly reduced corporate investing in tax credits. LIHTC authorities report that housing tax credit investing hit a high of about $9 billion three years ago but fell to about $5.5 billion in 2008, with some expecting it to be even lower this year. The upshot is that some projects may not get funded and built.

The average price per dollar of credit was about $0.76 for deals in the second quarter while yields to investors averaged about 9 percent. This compares to about $0.85 and 6.7 percent a year ago, the averages from last year’s mid-year survey.

Stimulus effects

Opinion was mixed on how far and how fast projects were moving forward as a result of the recent stimulus bill.

Created under the American Recovery and Reinvestment Act (ARRA), the Tax Credit Assistance Program (TCAP) and the exchange program are helping deals, albeit slowly, according to officials at Enterprise. “Now that the states have received guidance with respect to administration, we expect the pace to pick up in the last two quarters of 2009,” Enterprise officials say.

In August, projects were still in the works but beginning to push forward, according to Stephen M. Daley, executive vice president of The Richman Group Affordable Housing Corp., which raised about $300 million in capital in the first half. “The use of TCAP and the exchange will allow projects to get funded at lower credit prices, which will result in higher yields to attract capital,” he explains.

Others are less convinced of the overall effect. “The programs will help at the margins but not enough to overcome market investment issues in volume,” says Joseph E. Resende, president of Franklin Capital Group.

Some states are finalizing program rules, and key deadlines are still to come.

“We are seeing movement in the programs but no projects breaking ground yet,” says Jim Rieker, president of the Midwest Housing Equity Group, Inc. “In most of our states, projects have until the fourth quarter to close on their TCAP and exchange agreements. We expect most of these projects to break ground in the spring of 2010 once the weather allows for site work.”

Overall, some new investors may come into the market this year, adds Rieker. “However, many of these investors are attracted to the record level of returns made possible by TCAP and exchange money,” he says. “So, we don’t believe it’s an indication of a long-term recovery of the program.”

Developers will have to work with their state housing agencies to use these programs and must understand that these funds will be critical as investors continue to demand higher yields, says Mark McDaniel, president of Great Lakes Capital Fund.

Issues to watch

Developers have other issues to watch as well.

“Trends in debt underwriting from agencies are becoming increasingly conservative,” says Todd J. Crow, executive vice president at PNC MultiFamily Capital, which raised more than $189 million in the first half. “Cap rates have spiked in recent months. For both reasons, obtaining permanent debt is becoming more of an issue.”

With capital starting to come back into the market, developers need to stay in contact with their equity partners to understand their options, according to Joe Hagan, president and CEO of the National Equity Fund, Inc. “The reality is that pricing will continue to be challenging for many developers,” he says, adding that strong deals and strong relationships remain key in moving forward.

There will continue to be some confusion around the ARRA resources, adds Hal Keller, president of the Ohio Capital Corporation for Housing (OCCH). “I think developers should focus on getting deals closed even if it means leaving some dollars on the table,” he says.

Keller says the Ohio Housing Finance Agency has been moving quickly to get ARRA funds out the door, so he expects to see a significant amount of closings in September and October.

Overall, his group plans to continue financing a number of preservation deals as well as permanent supportive housing, single-family lease purchase, and elderly projects this year. After raising $42 million in the first half, OCCH hopes to end the year with about $170 million in capital, up from $150 million last year.

New funds, moves

Boston Capital reported raising $150 million in the first half of the year—$75 million in each of the first two quarters. The firm acquired 25 projects in the first six months of 2009. In July, Boston Capital announced the launch of a $150 million fund.

Raymond James Tax Credit Funds raised $200 million in the first half and acquired 25 projects. Its focus will be on 9 percent LIHTC deals that are new construction and in good markets with good partners, says Steve Kropf, executive vice president and director of investments.

PNC, which acquired 14 projects in the first half, plans to focus on larger investments in metro areas this year.

Ralph Nodine, president and CEO of the Virginia Community Development Corp., says his firm is looking at producing smaller funds more often. It is also seeking smaller investors with a state or sub-state focus.

While he says the prospects for his regional funds are better than initially expected, he remains guarded about the overall national market and doesn’t see it improving over last year. “Hope for some recovery in 2010,” he says.

The St. Louis Equity Fund expects its 2009 investment level to be comparable with its prior year fund, says John Kennedy, senior vice president and CFO. He is also looking toward next year for a market recovery.

Homestead Capital, which raised $7 million in the first half, will concentrate on 9 percent credit deals involving new construction, says President Toby Washington. It may consider a substantial rehab deal in a strong Community Reinvestment Act market. Homestead does not anticipate acquiring any 4 percent LIHTC and bond deals this year.

Centerline will concentrate on acquiring projects in the stronger real estate markets. “Projects we consider need to satisfy our criteria: low capture rates, low concessions, low vacancies, increasing market rents at a premium to LIHTC rents,” says Weil, adding that the firm will also focus on transactions that have strong debt-service coverage ratios and involve partners they know and trust.

Other syndicators also emphasized the importance of a developer’s track record in this market.

2009 Mid-Year Tax Credit Activity Update

* Noted that this was approximate

Source: AFFORDABLE HOUSING FINANCE survey, August 2009