Affordable Housing Finance

FINANCE

Tax Credit Equity

Google Jumps into the LIHTC Market

AFFORDABLE HOUSING FINANCE • June 2010

BY DONNA KIMURA

Google is investing in low-income housing tax credits that will help Mid-Peninsula Housing develop Fair Oaks Plaza, a seniors housing project just eight miles from Google’s Mountain View, Calif., headquarters.

Google has stepped into the low-income housing tax credit (LIHTC) market by investing in a pair of California developments.

The well-known Web company is teaming with Union Bank to provide $25 million in tax credit investments to two seniors housing deals, including one that will be just eight miles from Google’s Mountain View headquarters.

More than that, the deal marks the arrival of a new player at a time when the affordable housing industry has been seeking nontraditional investors to bolster the tax credit market.

“Google recognizes the challenges associated with developing affordable housing in California and is proud to help meet this need by providing LIHTC financing for some of the region’s developers,” said Brent Callinicos, Google vice president and treasurer, in a statement. “Union Bank has a track record of identifying and securing strong affordable housing investments.”

In addition to helping identify the two projects, the bank is serving as a guarantor and providing ongoing asset management for Google, according to Senior Vice President Judy Kong, who leads the finance and tax credit syndication teams within the bank’s Community Development Finance division.

The lead bank representative in the deal, Kong estimates that Union Bank and Google worked for about six months on the transaction.

Google is investing $19 million in LIHTC equity in Fair Oaks Plaza, a development that will serve 123 low-income seniors in the San Francisco Bay Area community of Sunnyvale, near its headquarters. Union Bank is also contributing $21.8 million in debt financing for the project, which is being developed by Mid-Peninsula Housing.

“Mid-Pen is proud to be the recipient of Google’s first investment in affordable housing,” says Matthew O. Franklin, president of Mid-Peninsula Housing. “We applaud Google’s vision to invest in their region by supporting the development of affordable, highquality housing, and we hope that their leadership will pave the way for other nontraditional investors to enter the LIHTC market.”

A $6 million LIHTC investment in the Regency Towers Senior Housing will round out Google’s portfolio. Thomas Safran & Associates has purchased and will rehabilitate this 104-unit property in the Los Angeles County community of Inglewood.

Preserving the property as affordable for low-income seniors, the rehabilitation of Regency Towers will include the renovation of building interiors, the expansion and upgrade of community areas, and the replacement of the property’s roofs, windows, elevators, and HVAC system.

The big picture

A federal program, LIHTCs are the major source of funding for affordable housing in the nation. Developers who receive an allocation of LIHTCs sell the credits to investors to raise equity for their affordable housing projects. The investors, which have largely been banks and other financial institutions, earn a return on their investment and use the credits to offset their tax liability.

The industry has been searching for new investors to replace several companies that have dropped out of the market or reduced their investing levels in the past two years.

Google’s participation is significant for a number of reasons, according to market experts.

“To invest in LIHTCs now, a corporation has to believe that a) the corporation will have a meaningful tax credit appetite for many years to come, and b) the LIHTC program is a proven and reliable vehicle, recent real estate troubles notwithstanding,” says David Smith, CEO of Recap Real Estate Advisors. “Many corporations feel good about their potential future earnings. To find new entrants who are confident in the underlying real estate assets is heartening. It means that the LIHTC is real real estate, not a paper shuffling exercise without public policy substance.”

Smith says the firm’s entry also “signals the beginnings of meaningful price support.” Google is no different from other corporations moving into LIHTCs in that it has no Community Reinvestment Act (CRA) mandate, so it is looking at risk-adjusted yield and entering the market.

“New entrants will be yield-conscious, so although the pricing support is most welcome, we can presume that if yields fall much, say more than 100 basis points, they’ll dial back their investing,” says Smith.

He adds that the industry likely won’t be seeing $0.95 per dollar of credit prices outside of the hot CRA zones any time soon.

Although it’s good news that new investors are coming into the market, Smith wonders how geographically diverse their investments will be. “I suspect the no-sea, no-sun, no-CRA markets may still struggle to find investors,” he says.

“The LIHTC program needs investor diversity to be a sustainable program so we welcome new investors from diverse industry sectors,” adds Sindy Spivak, president of the Affordable Housing Investors Council (AHIC) and senior vice president at Bank of America Merrill Lynch.

While it’s promising to hear about new investors, there are still several uncertainties, she says.

Spivak says it appears that new investors “are drawn to LIHTCs given current market returns relative to alternative investments.” A concern is how deep and broad the new investor market is and if interest will remain in the event that credit prices rise and yields decline.

“Knowledge and discipline are key to the long-term success of the LIHTC program,” she says. “Our hope is that new investors leverage existing expertise and educate themselves as to the LIHTC program, underwriting, structure, and asset management. AHIC, along with other industry participants, continues to focus on industry education and best practices in an effort to maintain high underwriting standards and deal quality as strong portfolio performance is essential to continued success and support of the LIHTC program.”