The price for low-income housing tax credits continued to drop in the first quarter of 2007, according to several state and local equity funds.
“They (prices) have not stabilized,” said Bernard T. Deasy, president of Oakland, Calif.-based Merritt Community Capital Corp. “The price per tax credit dollar continued to decrease.”
Two national syndicators reported that prices were settling down, with yields to investors holding at about 5.25 percent, but most state and local fund leaders agreed with Deasy’s assessment in March that prices are still in flux.
“They seem to be dropping some more into the low 90s [cents per dollar of credit],” said Mark McDaniel, president and CEO of the Great Lakes Capital Fund, headquartered in Lansing, Mich. “For deals being priced for fall closings, we see pricing going below 90.”
Prices “are dropping slightly, and we believe they will stabilize by the end of the year around 93 or 94 cents,” added Deborah Saweuyer-Parks, president and CEO of Portland, Ore.-based Homestead Capital.
The price decline continues a major trend from 2006 that started when a few major tax credit investors began demanding higher yields and cut back on their investing. The market responded with yields inching up and tax credit prices dropping. State and local equity funds reported fourth-quarter 2006 yields to investors ranging from 5 percent to 8 percent, with most around the 5.5 percent mark.
“It has not been seen yet if the market has stabilized in 2007 or if that trend will continue or even reverse,” said Hal Keller, president of the Ohio Capital Corporation for Housing (OCCH). “I do think raising equity will be more difficult in 2007 as investors will continue to slice and dice existing portfolios as part of their due diligence.”
Two nonprofit syndicators, OCCH and Homestead, reported raising more money in 2006 than the year before, and the Northern New England Housing Investment Fund said it raised about the same amount. Six regional funds, however, said they raised slightly less than the year before because investors, including Fannie Mae and Freddie Mac, pulled back. One fund attributed its lower amount to just the timing of its own fund-raising cycle.
Fund leaders fully expect tax credit investors to remain cautious in 2007 and increase their due diligence.
“Some investors have already started their due diligence process for a closing in the second half of 2007,” Keller said. “These investors are looking much more closely at every detail of the transaction. Investors are continuing to ask for more information. A common theme is you answer all of their questions then they come back with a whole new set of questions. We have not yet seen investors willing to take a lower return than [was offered] in 2006.”
On the other side, developers are seeing how hard investors are pushing. “Developers are agreeing to increase their long-term obligations to the project,” Keller said. “In Ohio, we have seen developers allowing market demand to carry more weight in the process of choosing a development location. Developers are also increasing the amenities to projects to make them more attractive in the marketplace for a longer period of time.”
Investors are going to be more demanding when it comes to earthquake insurance coverage, reserve requirements, and asset-management reporting, said Merritt’s Deasy.
John J. Wuest, president and CEO of the St. Louis Equity Fund, added that he thinks that prices will eventually level off this year, and that the market will see “more projects applying for, although not necessarily getting, 4 percent credits.”
Several of the fund leaders plan to use their service offerings as a way to hold on to their market share in 2007. For example, the Midwest Housing Equity Group, Inc. (MHEG), which operates funds in Iowa, Kansas, Nebraska, and Oklahoma, said it will stress the technical assistance and support services that it provides to developers and property managers.
MHEG leaders said they are off to a good start in 2007, but they are aware of the competition from national syndicators and will continue to be proactive in maintaining relationships and promoting their advantages as a local equity provider.
Looking ahead to the rest of the year, syndicators cited several concerns for the industry at large. One continues to be how much the government-sponsored enterprises will invest and the possible reduction in capital in the tax credit market, but other issues exist.
Ralph Nodine, president of the Virginia Community Development Corp., cited the filing requirements of the Department of Housing and Urban Development previous participation program (Form 2530) as a concern for its corporate partners.
“Syndicators are still strongly competing for certain projects. As a result, some syndicators are requiring less money in reserves and charging little to no money for asset management, while also allowing the developer to value-engineer the materials in the project to save costs,” said Homestead’s Saweuyer-Parks. “This could translate into problem properties well before the 15-year period is up.”
“What is most concerning about the market is a combination of many factors at once,” said OCCH’s Keller. “Continued pressure on operating expenses, project income not increasing at the same rate, a drop in pricing potentially creating shortfalls with no increase in soft funding from state and local governments. This could cause projects to be underfunded in the reserve area and then use those reserves much quicker than anticipated, thereby threatening the long-term viability of the project.”
Deasy said another concern is that nonprofit developers are not getting their full fee as localities keep reducing the amount of developer fee allowed even as other costs continue to rise.
Homestead Faces Audit
Portland, ORE.—Homestead Capital, a nonprofit low-income housing tax credit (LIHTC) syndicator headquartered here, is being audited by the Oregon Department of Justice.
Homestead President and CEO Deborah Saweuyer-Parks is under scrutiny for her annual pay and for the hiring of her husband as a consultant to the organization.
Established in 1993, Homestead has grown over the years to operate throughout the West. It has raised more than $440 million in investor capital and invested in more than 80 LIHTC properties.
The investigation was triggered by a complaint from an individual with inside knowledge about the organization.
The initial focus of the audit will be to determine if Saweuyer-Parks’ compensation is excessive and to determine if the hiring of her husband’s firm, Sawhorse Construction Management, LLC, was appropriate. The review could expand into other areas.
A Homestead board member told the Portland Business Journal that the board supports Saweuyer-Parks and that it had reviewed the salary structure and contract.
Saweuyer-Parks made $468,716 in the fiscal period of 2004-2005. That included a base salary of $260,000, benefits and retirement contributions of $33,716, and a bonus of $175,000, confirmed a Homestead representative.
Her compensation for the following year, fiscal 2005-2006, was $306,830, which included a base salary of $270,000 and $36,830 in benefits and retirement contributions. No bonus was paid.