As the tax credit allocation season gets under way,
developers will find a much friendlier market for
construction debt than this time last year.
Increased competition in the banking sector has sent
all-in interest rates down across pretty much every market.
But in high-barrier major markets, Community Reinvestment
Act (CRA)-motivated banks are growing particularly
aggressive again trying to win deals.
“As more banks return to profitability, so too
have they returned to lending,” said Kyle Hansen,
an executive vice president in the commercial real estate
group at Minneapolis-based U.S. Bank.
“We’ve seen significant competition in
the coastal markets as well as the major metros in the rest
of the country. Pricing has probably come down at least 50
basis points (bps) over the last year.”
Unlike the 10-year Treasury, the London Interbank
Offered Rate (LIBOR), which is used as a benchmark in
pricing construction loans, has stayed consistently low for
a couple of years. But a LIBOR rate of 30 bps
didn’t do tax credit developers much good last
year—most lenders were instituting interest rate
floors of 1 percent or 2 percent.
On top of that, spreads as high as 400 bps
weren’t uncommon, leading to all-in rates that
could push 6 percent. But today, interest rate floors have
disappeared, especially in primary markets, and spreads
over LIBOR are ranging from 250 to 325 bps, leading to
all-in rates in the 3 percent to mid-3 percent range.
Interest rate floors are still being instituted in many
secondary and tertiary markets, but most industry veterans
expect those to fall away as competition increases.
Tertiary markets and rural areas—anyplace outside
of the big CRA footprints—continue to have a
challenging time finding well-priced construction debt. But
the bottom line is, developers are in a stronger position
to negotiate construction debt than they were this time
“You’ve seen a gradual
erosion of spreads,” said Steven Fayne, managing
director for New York-based Citi Community Capital.
“Last year, lenders had the upper hand for the
first time in awhile, and now the competition is beating it
4 percent deals
The New Issue Bond Program (NIBP) has helped many deals
get off the ground last year and this year, but the program
is ending in December and the pipeline is slowing down.
It’s now up to the private sector to pick up the
slack, and there are some early positive indications that
investors are starting to gain interest in 4 percent
low-income housing tax credit (LIHTC) deals.
“A lot more equity is being raised in 2010 and
2011 than in the couple years prior. All of that equity is
having a hard time finding a home in 9 percent
deals,” said Hansen. “So naturally some
of that demand is spilling over into 4 percent
Tax-exempt bond deals are slowly starting to get more
viable, though the new construction side remains
challenging. In-place acquisition-rehabs using 4 percent
LIHTCs are more preferable for many lenders and investors,
especially since there’s no lease-up risk
“The new construction side is still tough,
unless you’re doing NIBP, but acquisition-rehab is
becoming much more in vogue,” said Phil Melton,
senior vice president of Charlotte, N.C.-based Grandbridge
Real Estate Capital. “I’m seeing a number
of Sec. 8 transactions mixing with 4 percent deals, where
you’re getting new 20-year HAP
Note: For an expanded version of this article, see the
upcoming June edition of Affordable Housing