This past winter, three national companies—affordable housing nonprofit Enterprise Community Partners, developer/property manager Richman Group, and investment bank RBC Capital Markets—bid against each other to invest in 50 planned apartments for low-income seniors in Leakesville, Miss., a rural town with a population of about 1,000. At press time, RBC was planning to close the deal to pay 95 cents per dollar for the low-income housing tax credits (LIHTCs) from the project, called McIntosh Homes.
“I'm blown away by the pricing we're getting,” says Milton Pratt, senior vice president of development for The Michaels Organization, based in Marlton, N.J., which plans to start construction on McIntosh Homes this year.
Just a few years ago, it was almost impossible to get investors like RBC interested in places like Leakesville. So what attracted the company and its fellow large firms?
For one thing, it's not just Mississippi that's suddenly become a magnet for affordable housing money; the market for LIHTCs has recovered across the country, although analysts predict that average prices for the credits may drop back a few cents on the dollar this year, driven down by competition from other investments and the looming expiration date for a federal law governing the credits (see sidebar).
Even if prices do slip, it's hard to overstate the scale of the recovery. In 2009, many solid affordable projects were unable to find investors. Most such projects were finding investors a year later, but the average pricing for LIHTCs in rural areas was in the range of 60 cents per dollar of tax credit. But now, “pricing is similar to [what it was] before the downturn,” says Raoul Moore, senior vice president of tax credit syndication for Columbia, Md.–based Enterprise Community Partners. LIHTC prices currently range from $0.85 to $1.10 for a dollar of tax credit, largely depending on project location and builder.
Projects in prime markets where growing banks have their branches earn the highest prices. These banks are obligated to invest in underserved communities under the federal Community Reinvestment Act (CRA). In the hottest CRA markets, such as New York City and the California coast, banks often pay more than a dollar for a dollar of tax credit, plus associated tax benefits, experts say.
In the Northern Virginia suburbs, CRA investors pay an average of about 98 cents for tax credits from new construction projects and more than a dollar for tax credits from rehab projects, in which tax credits flow more quickly to investors.
In quieter parts of the country, where fewer banks jostle to open new branches and merge with each other, “economic” investors buy LIHTCs based on the yield on their investment, often paying in the 80-cent range. Companies ranging from insurance companies to Google have filled in the gap left by large investors, such as Fannie Mae and Freddie Mac, that left the tax-credit market during the crash.
LIHTC investors often pay as much as 10 cents on the dollar extra for projects from developers with strong balance sheets. “We haven't priced a deal below 90 cents in 18 months,” says Michael Moses, VP of structured finance for Cleveland-based NRP Group, which is not active in the major CRA markets.
Investors May Stray
This year, the economic investors have begun to grumble about high tax-credit prices. “They're asking for a higher yield, and that's driving prices down,” says Adam Stockmaster, assistant vice president for property manager T.M. Associates, based in Rockville, Md.
Also, as the economy eventually strengthens, the yield on other investments will rise, giving economic investors more choices. “They're finding other things on the financial markets that offer the same or higher yield,” says Stockmaster. Pressure from such investors may drive LIHTC prices down by 2 cents to 5 cents over the next year, experts predict.
Bendix Anderson is a freelance writer based in Brooklyn, N.Y.