The return of investor capital has meant a swift and dramatic rise in the price of low-income housing tax credits (LIHTCs) going into 2011. The jump in pricing is good news for developers raising equity for their deals.
On the other side, the rapid market changes are creating new challenges for investors trying to determine where yields and prices will be on a given project.
Heading into 2011, LIHTC leaders are also deeply worried that the program will face major challenges as the 112th Congress takes office with approximately 100 freshman members. Elected with a mandate to slash the federal budget, a large number of the new leaders are unfamiliar with the LIHTC program, which puts it under threat for changes or even elimination.
The most notable change in the LIHTC market has been the rapid rise in pricing and the corresponding drop in yields this year, says Pat Nash, managing director of JPMorgan Capital Corp., one of the nation's largest LIHTC investors.
It's been one of the biggest swings that Nash and other industry veterans have ever seen. One syndicator notes that pricing has moved up about $0.08 in a very compressed time.
“There is a pent-up level of capital that is coming into the marketplace with a lot of exuberance,” says Beth Stohr, LIHTC director at U.S. Bancorp Community Development Corp., explaining there has been a big effort to attract new investors as well as federal stimulus funds arriving on the scene.
The market volatility has made it diffi cult to know where pricing and yields should be on a given deal, according to the investors.
Stohr and Nash were among the top investors and syndicators discussing the equity outlook at AHF Live: The 2010 Affordable Housing Developers' Summit in Chicago. Approximately 500 people attended the conference in early November.
In a sign of the changing market conditions, there's competition for rural deals in Oklahoma this year, which wasn't happening in 2009, says Corine Sheridan, director of LIHTC business development at Boston Capital, adding that the level of due diligence and underwriting has also increased dramatically.
The National Association of Home Builders (NAHB) expects 2011 to be a turnaround year. It estimates LIHTC production, which is expected to be about 47,000 units this year, to increase to 55,000 units next year and then to 79,000 in 2012.
A greater focus on development sponsorship was JPMorgan's approach to 2010 and will continue to be next year, says Nash.
Others agree that the experience and track record of a developer is taking on increased importance as investors and syndicators look at deals.
“Sponsor stability and the ability of the sponsor to be a developer and a manager of a property long term is a common theme,” says Charles Werhane, president and CEO of Enterprise Community Investment, Inc. “You are going to have your geographic differences and economies go up and down, but you want to deal with a developer that can get you out of a problem when one develops.”
Moderator Todd Sears, CFO at Herman & Kittle Properties, an affordable housing developer based in Indianapolis, asked investors to describe their most recent deals.
Nash is investing in the second phase of a transit-oriented development on the West Coast that's being built by a longtime developer. The rents are capped at about 50 percent of the area median income, with a good capital structure.
The Ohio Capital Corporation for Housing (OCCH) has a number of deals with public housing authorities. “We're doing a deal in Akron that has 100 percent operating subsidy,” says OCCH President Hal Keller. “It has high-quality design, tons of reserves, no debt. We would love to do these all day long.”
Despite the recent market turnaround, it's a good bet that investors and syndicators will remain cautious next year.
Nash notes a national unemployment rate that was still a high 9.6 percent in October. “Clearly, we're not out of the woods, and that informs our underwriting as we look at investments across the country,” he says.
For Keller, a concern remains flat rents in the Midwest and the ability to raise income.
Another issue to watch in 2011 is whether new investors, which have included insurance companies, will leave the market as yields drop from double digits. The yields on recent funds have been in the 8 percent to 9 percent range.
At this point, the credits remain a good value, says Todd Crow, executive vice president at PNC Real Estate, Tax Credit Capital.
“Now that we've seen yields come down significantly, does that mean [investors] are going to go away? So far, I think the answer to that is ”˜no,'” he says. “They seem like they are sticking around.”
Another new issue is long-term rental assistance.
“There's much greater [investor] scrutiny over rental-assisted projects than we have experienced before,” says Crow. This is happening even though these projects have been among the strongest in his firm's portfolio.
“I believe it's coming from expectations that there's going to be budget pressures at the federal level and the knowledge that there is discussion going on about rental assistance,” he says.
A dangerous Congress
The shift in power in Washington, D.C., was one of the big topics at AHF Live.
“At a very grassroots level, we need to bring our representatives to our developments, to every groundbreaking, to every open house,” says Sheridan. “This is the effort now.”
The industry had been very fragmented but was able to unite on common policies in 2009, says Enterprise's Werhane. Now, it faces an education process with so many new faces in Congress.
“The risk of this program either being altered significantly or eliminated is real,” he says.
Several strong affordable housing supporters, including Sen. Chris Dodd (D-Conn.), Sen. Blanche Lincoln (D-Ark.), and Sen. Kit Bond (R-Mo.), are retiring or lost re-election. In the House, there's going to be an approximately 60-seat swing to Republicans, says David Gasson, vice president at Boston Capital and executive director of the Housing Advisory Group, who outlined the sweeping changes during the conference.
“The theme of this Congress will be austerity,” he says.
On a positive note, Rep. Dave Camp of Michigan, who is in line to take over the House Ways and Means Committee, has been a LIHTC supporter.
Gasson and others say highlighting the importance of the program is critical next year, not only informing officials about the value of the housing but also the economic impact and job creation that comes from the LIHTC industry.
NAHB economists estimate that the construction of 100 multifamily units creates 116 jobs.