The low-income housing tax credit (LIHTC) market is in flux, looking for the right balance between prices and yields in early 2007, according to several leading tax credit syndicators.
“The market will have to find an equilibrium,” said Andrew Weil, executive managing director of CharterMac’s Affordable Housing Group. “Going into 2007, there is uncertainty about where yields will stabilize. Developers and state agencies will have to adjust to already reduced pricing and must be prepared in case pricing continues to drop.”
Others agreed. “The market is still correcting,” said David Robbins, senior vice president at MMA Financial. “It will be sometime into 2007 until we have a better sense of demand and where yields will be.”
Although there was uncertainty about when and where the market would stabilize, a few LIHTC syndicators are hopeful that much of the correction has taken place.
“Credit prices have already dropped considerably,” said Todd Crow, executive vice president and director of institutional sales and portfolio management at PNC MultiFamily Capital. “We are projecting internal rates of return for large national syndicated funds of 5.25 percent to 5.5 percent for the first half of 2007. It’s possible that yields could go higher in the second half of the year, but I doubt they go up much more. In my opinion, absent an external shock (interest rates, etc.), most of the correction is behind us, and I wouldn’t expect any dramatic change between now and the end of the year.”
Steve Kropf, senior vice president and director of investments at Raymond James Tax Credit Funds, Inc., agreed. “[Prices have] stabilized for now, with the potential for further declines later in the year depending on investor activity and interest rates,” he said.
Stephen B. Smith, executive vice president of The Richman Group Affordable Housing Corp., said in late January that he thought prices would still decline modestly. He noted that, overall, the market is healthier than it was in 2006 because prices to developers and yields to investors are more in sync.
One syndicator estimated that yields to investors were slightly more than 5 percent.
The first quarter is typically a slow time for the LIHTC market, with activity picking up throughout the year as states make their tax credit reservations.
This year may also find the market to be even slower at the start because of investor uncertainty about the direction of yields and some “holdover” product in the market from 2006, said Carl Wise, senior vice president of Alliant Capital, Ltd.
There have been rumors about unsold, low-yielding inventory. “It is unclear what impact, if any, it will have on 2007 fund pricing and pricing for new deals,” said Crow, noting that PNC had almost no unsold product from last year.
It might not be a new concern, but tight deals remain a big worry for syndicators this year.
“These are tough times for developers, a perfect storm of sorts,” Crow said. “Construction costs are up. In some regions, they are up considerably. Operating expenses are up, and in coastal communities, up considerably due to increased insurance costs.”
In addition, tax credit prices have declined, reducing equity while short-term interest rates have increased.
“All of these have placed additional stress on development budgets for new deals,” Crow said. “We are seeing deals that are very tight from a budget perspective.”
After a year of margin compression, it’s going to be important to see increased margins in 2007, added Weil. “Strong margins and funds with strong reserves have always been helpful in deals with troubled assets and have helped to provide consistent returns to investors,” he said. “If the syndicators or funds are not sufficiently capitalized to deal with problems, this may not be the case in the future.”
Michael Costa, president of Simpson Housing Solutions, LLC, an affordable housing developer that also does LIHTC syndication, said he is concerned that developers will continue to base decisions on 2006 credit prices. “This is going to cause a rude awakening when they realize they are going to have significant gaps between their projected sources and uses.”
2006 results, lessons
Alliant Capital raised $434 million and acquired 64 properties in 2006, according to Wise. In January, The Alliant Co., the parent of Alliant Capital, announced the acquisition of EF&A Funding, LLC, which provides debt financing to owners and operators of multifamily properties and is a Fannie Mae Delegated Underwriting and Servicing lender. EF&A has originated more than $5.9 billion of multifamily mortgages since 1992 and services a portfolio in excess of $2.8 billion.
Apollo Equity Partners closed $300 million in equity in 2006, with commitments for more. The firm, a part of RBC Capital Markets, acquired 57 projects during the year, including 22 in the fourth quarter.
Boston Capital reported raising a total of $545 million in 2006, including $170 million in the fourth quarter. It acquired 113 properties during the year.
CharterMac raised more than $1.18 billion in tax credit equity in 2006. “Investors are likely to behave similarly to the way they behaved in 2006,” Weil said. “They will continue to require adequate yields and will still want to maintain their underwriting standards.”
Asked what lessons the industry should have learned in 2006, Weil replied that banks and other Community Reinvestment Act-motivated investors will not buy at any price.
“Many investors reached their minimum yield threshold and either pulled out of the market or reduced their investment for 2006,” he said.
Enterprise Community Investment, Inc., reported raising $576 million and acquiring 134 projects in 2006.
The possibility of scarcer capital this year may mean some changes in fund sizes. Enterprise may create slightly smaller funds with strong emphasis on efficient execution in 2007, according to Paul Cummings, senior vice president of syndication.
The firm also expects to improve the deal review process for its investors and expand its work around green building, preservation, supportive housing, and Gulf Coast rebuilding.
Asked about pricing trends in the first quarter, Cummings said, “We see investor yields continuing to rise, which in turn should be reflected in average credit prices continuing to drop. In some markets, this drop has been mitigated because of overall real estate quality, timing considerations, scale of investments, competition, and geographic investor demand.”
However, it appears that the market is having to adjust to overall increasing yields, he continued. “We don’t expect any significant change in this trend until average yields hit a high enough number to bring new investors in or encourage some of the existing major investors to take larger positions.”
MMA Financial raised about $1.2 billion in capital, including $670 million in the fourth quarter, according to Robbins. The company acquired 150 projects in 2006.
PNC MultiFamily Capital raised $452 million in capital, including $128.2 million in the fourth quarter, and acquired 67 projects in 2006.
Raymond James Tax Credit Funds raised $375 million, including $50 million in the fourth quarter. It acquired a total of 78 projects.
The Richman Group raised $868 million and acquired 121 properties in 2006. The firm raised $154 million in the fourth quarter.
Like other syndicators, The Richman Group’s Smith said the industry should have learned a couple of things in 2006: one, that prices can decrease as well as increase; and two, investors will not accept uneconomical yields.
Simpson Housing raised $140 million and acquired 12 properties. Much of the activity was in the fourth quarter when it raised $128 million and acquired 10 properties. The firm has shifted its focus to development and will continue to develop more of its own product in selected Western states, according to Costa.