Increased activity in the low-income housing tax credit (LIHTC) market looks to carry over into guaranteed funds this year.

Guaranteed products will make up roughly 10 to 15 percent of the LIHTC market this year, estimates John Faulkner and Christine Flynn, managing directors at Carreden Group, Inc., a firm that advises guarantors.

Several years ago, the guaranteed market was about 20 percent of the LIHTC business, but several guarantors exited during the economic downturn.

There are only about three active guarantors at this time. However, several firms are looking at entering the market, says Flynn.

Carreden has closed $350 million in guaranteed funds so far this year and about $1.3 billion in the last 18 months.

Rick Floreani, a partner at Carlisle Tax Credit Advisors in Boston, also reports receiving inquiries about guaranteed products. Some investors are drawn to a guaranteed fund because of an accounting treatment known as the “eff ective yield” method that may be favorable for them.

In a guaranteed fund, a guarantor— often a bank or an insurance company—assures a minimum negotiated after-tax yield to investors. If funds fail to deliver the promised yield, the guarantor will compensate investors to make up the diff erence and/or will support the property to avoid foreclosure so that investors will continue to realize the tax benefits.

For developers, pricing should be comparable with that of unguaranteed funds.

For investors, guaranteed yields tend to run lower than unguaranteed by a spread ranging from less than 200 basis points (bps) to more than 300, depending on the structure of the guarantee, the guarantor’s credit rating, and other factors, says Floreani.

Guaranteed yields were in the 4.5 percent to 5.5 percent range in June.

Faulkner says his clients like a minimum 200-bp spread over unguaranteed yields.

“The guaranteed market has always been a spread business,” he says. “As yields continue to decline, it puts pressure on the spread, but it also creates opportunities because certain unguaranteed investors will exit the market because yields decline too low. Their product becomes available and of possible interest to guarantors."

There will be investors who accept a 4 percent yield because at 4 percent the pre-tax equivalent is 6.15 percent, says Faulkner.

The key is how it compares with alternative investments. The 10-year Treasury was about 3 percent in June, resulting in a spread of more than 300 bps for strong A/AA credits, he says.

New Syndication Firm Enters the Field  

Marc Schnitzer, who led Centerline Capital Group and Related Capital, has formed a new low-income housing tax credit (LIHTC) syndication and asset management company.

He is president and one of the forces behind R4 Capital, Inc., which is preparing its first institutional tax credit fund this year.

Schnitzer brings name recognition and 25 years of LIHTC experience to the firm, including serving as CEO and president of Centerline Capital. “I have a passion for the business,” he told AFFORDABLE HOUSING FINANCE. “I’ve formed relationships with developers and investors."

Schnitzer was part of Centerline and its predecessor companies, Related Capital and CharterMac, since 1986, leading a team that raised and deployed $10 billion in equity in a portfolio of more than 1,400 LIHTC properties. He left Centerline to join an affiliate of Island Capital Group last year.

The move to launch R4 comes at a time when the LIHTC market has shown significant improvement from 2008 and 2009 when the recession forced many companies to stop or reduce their investing activities. “The market has shown incredible strength in bouncing back," says Schnitzer.

R4 is one of at least four new or restructured syndication companies to emerge in the past year or so. The others are Churchill Stateside Group, Hunt Capital Partners, and IFG Capital.

Schnitzer has assembled an experienced team to join him at R4, including Peter Dion, who started and grew the LIHTC practice at KeyBank; Rich Coomber, who has spent 11 years as a LIHTC originator at Red Capital and John Hancock Realty Advisors; and Paul Connolly, who has 10 years of LIHTC origination experience at PNC and National Equity Fund, Inc.

Brothers Nick and Peter Gould are the controlling members. The firm is part of their group of companies that include Riverstone Residential, the nation’s second-largest multifamily property manager; Recap Real Estate Advisors, a leading multifamily advisory and asset management firm; and Regis Group, a privately owned U.K.-based residential property investment firm. The latest addition gets its name because it is the fourth company that starts with the letter R.

R4 is headquartered in New York City and will also have people based in Boston. The firm also expects to open a West Coast office in the future. —Donna Kimura