CHICAGO—Joe Hagan is feeling better about the low-income housing tax credit (LIHTC) market these days. He is beginning to see evidence of activity picking up.

“It's been a tough time, but I can't help but be optimistic,” says the president and CEO of the National Equity Fund, Inc. (NEF).

The Chicago-based company has continued to raise LIHTC equity this year and, in a new move, began off ering advisory services to help housing fi- nance agencies implement and maximize the new Tax Credit Assistance Program (TCAP) and tax credit exchange.

AFFORDABLE HOUSING FINANCE recently caught up with Hagan.

Q: First of all, what's NEF planning this year?

A: We started with a goal of raising $400 million to $500 million of equity this year, and I'm confident that we'll hit that goal. We're in the midst of closing a multi-investor fund for about $70 million and have several proprietary funds teed up as well. We still have a ways to go yet, but we're on track to hit that number. We're also seeing more interest from investors who have been out of the market for a while than potential new investors, though we are making progress with some new players as well. It's my sense we are hitting the IRR [internal rate of return] target that piques their interest.

Q: How are funds different from a year or two ago?

A: From a traditional investor perspective, the level of due diligence keeps getting more significant. It's taking longer to close a fund because everybody's looking not only at track records but at each specific deal. It's understandable given that every bit of every bank is being scrutinized. It's not a surprise, but it makes it more difficult. Also, national multiinvestor funds have been decreasing for the past few years. This year, we might only do one, maybe two. We've moved over to doing more proprietary funds.

Q: The big news has been the TCAP and tax credit exchange program. Have you seen any effects on the market from these programs?

A: Those are making deals work. You can't make deals work in the 60s [cents per dollar of credit] without TCAP and/or the exchange. We have a lot of deals lined up that we hope to do that will have a lot of TCAP money involved in them. The big question is can this all get done. States are working hard at doing it. We have a lot of cooperation. It's just that everybody is not quite sure how to do everything.

The big question for me is on the exchange dollars. Most states have decided to do a 100 percent exchange for projects struggling with equity right now. I think that may be a mistake. Given that exchange dollars have to be spent by December 2010, I think a better idea would be to figure out a way to do the exchange with equity partners, meaning that the exchange dollars can go in first and then the equity dollars can come in later, in 2011, if it has to. That's the big issue. Unless they start doing exchange deals now, hitting that 2010 deadline is going to be really, really tough. We were looking at a couple of deals that didn't need a lot to make them work well. In cases like that, if you exchange 40 percent of the tax credits and do the other 60 percent with equity, they would work. I think that may be the next level of activity.

Q: What's making you feel better about the market today than six months ago?

A: First, the economy is changing. Companies are starting to make money. Everybody has gone through their existing portfolios, and I'm talking about potential investors, and they're saying, “We have money. We're going to have to start making investments.” The good news is that when you look at a LIHTC investment, we've always been able to hit our target of return. From a perspective of looking at a new investment class, LIHTC investments do very well. People are starting to say, “Let's put this cash to work,” and they're finally looking at investments. You can just feel it.