The outlook for the low-income housing tax credit (LIHTC) market is better in 2010 than last year, according to syndicators.
About 76 percent reported feeling more optimistic about the 9 percent tax credit market, while 24 percent predicted the market will remain the same or get worse.
“We believe the prospects for the 9 percent market to be much better in 2010,” says Jeffrey Goldstein, executive vice president and COO at Boston Capital. “Higher yields have led to higher levels of interest from both new and returning investors.”
Others agreed in Affordable Housing Finance's survey of leading syndicators. The participating firms closed or raised more than $3.2 billion in LIHTC equity and acquired 360 affordable housing developments in 2009.
“Our estimate is that 2010 will be a year of recovery,” says Tobias Washington, president of Homestead Capital. “The LIHTC market will exceed $4 billion, and more regional investors will participate as balance sheets improve. The 9 percent credit will continue to be the product of choice in our industry.”
Others remain more cautious.
“I think we're still going to see difficulty in raising capital in certain markets,” says Jim Rieker, president and CEO of Midwest Housing Equity Group, Inc. (MHEG). “I also see investor demands for yields to stay constant or rise a bit more, putting more pressure on deals, creating larger gaps. If pricing gets much lower, the effectiveness of the program is in real jeopardy. Our overall estimation is that 2010 will be a little better than 2009.”
After a sluggish first half, business picked up in the last several months of 2009, but most, if not all, syndicators saw their volumes for the year drop from prior years. Several syndicators reported that various delays pushed many closing into this year.
Trouble for 4 percent deals
There is strong consensus that the 4 percent LIHTC market will continue to struggle this year, with investor demand remaining low for tax-exempt bond deals. A few syndicators even used the same word to describe the 4 percent market: grim.
Several syndicators also emphasized the role that the Community Reinvestment Act (CRA) will have on the location and the type of deals that get done. Banks, which are the program's top investors, are largely driven by the need to meet CRA obligations.
“The 4 percent deals that do manage to find LIHTC equity in 2010 will likely possess one of the following three attributes: projects located in hot CRA markets, which also exhibit strong real estate fundamentals where affordable rents provide a strong discount to market rents; projects that benefit from long-term, project-based rent subsidies such as Sec. 8; or projects that use tax-exempt bonds only as a construction financing tool but have little to no permanent debt,” explains Andrew Weil, executive managing director at Centerline Capital Group.
Investors view 4 percent transactions as overleveraged from a real estate view and delivering too many losses per dollar of credit from a benefit view, adds Greg Judge, COO at Boston Financial Investment Management. “CRA investors will pursue 4 percent transactions in certain very high-profile CRA locations when they can't get 9 percent deals.”
The majority of syndicators believe that tax credit prices will remain stable this year, with some possible price increases in the hot CRA markets.
“We anticipate credit pricing to remain fairly stable in most areas of the country,” says Raoul Moore, senior vice president, tax credit syndication, at Enterprise Community Investment, Inc. “The exceptions to this are the three or four highly desirable CRA markets in which there may be increased competition for deals and potentially resulting in higher credit pricing. These areas are New York City, Los Angeles, San Francisco, and possibly the Mid-Atlantic.”
Investors continue to demand more safeguards and stringent underwriting, with a trend toward larger reserves, strong markets, and financially stable sponsors, says Douglas M. Able, senior vice president, capital markets, at Enterprise.
The average price paid per dollar of credit was about $0.69 in the fourth quarter of 2009, according to the survey. The average yield to investors was 10.4 percent.
“More than ever investors are demanding clean deals with experienced and well-capitalized developers,” says Joe Hagan, president and CEO of the National Equity Fund, Inc (NEF). “Many have shifted away from multi-investor funds and toward proprietary funds.”
Hagan says he thinks pricing will vary dramatically by market this year. “Areas with concentrations of major financial institutions are likely to see prices tick up somewhat for top-flight deals as investors go after CRA credit,” he says. “But generally, with limited equity in the market, pricing will overall remain well below where it was 18 months ago.”
While deals in major metros may benefit from investors trying to meet their CRA obligations, rural projects and others will have to compete for the limited amount of capital in the market.
For many syndicators, their biggest concerns center around the Tax Credit Assistance Program (TCAP) and the exchange program, which were created last year under the American Recovery and Reinvestment Act to help stalled LIHTC deals.
They will be closely watching how these temporary programs work as well as how deals fare without their assistance.
“Will deals work at the yields required by investors without TCAP and exchange dollars?” asks Stephen M. Daley, executive vice president at The Richman Group Affordable Housing Corp.
The stimulus programs have provided investors the opportunity to earn higher returns on their investments and attracted capital to the marketplace. However, the concern becomes whether deals still work at the investors' required returns without the additional funding, he says.
The programs are designed and operated on a state-by-state basis, notes Todd J. Crow, executive vice president at PNC Real Estate, Tax Credit Capital. This raises concerns about how some states are administering their programs, he says.
There are also concerns that the exchange program is pushing out private equity.
“Right now, states are using exchange dollars to fully exchange deals rather than do a partial exchange to keep an investor on board,” says NEF's Hagan. “That needs to change. Pricing is still going to be very challenging in most markets. They need a way to fill the gaps. If states use exchange dollars to complement equity invested at $0.65, for instance, it will help deals work and preserve the private-sector oversight that has helped make the LIHTC program so successful.”
In Ohio, the biggest concern will be structuring deals applying for credits this year without Recovery Act subsidies for projects that will be closing in 2011, says Hal Keller, president of the Ohio Capital Corporation for Housing (OCCH). “Early to mid-2011 is an eternity in this investing environment,” he says.
Keller also cited concerns about rising operating costs, especially water and sewer rates, with rents and incomes increasing fast enough to keep up with the expenses.
Others will be waiting to see what happens with the stimulus programs.
“We believe the financial markets will continue to be unstable during 2010, and concerns about the program in 2010 will be the congressional implications as it is still unknown if new economic stimulus packages will be issued or old ones renewed,” says Mark McDaniel, president and CEO of Great Lakes Capital Fund.
The concern is not necessarily about the stimulus plans but more about the inconsistent treatment by state housing finance agencies.
Uncertainty in the market is a key concern as well as the effects of potential legislative changes that could affect investor needs and expectations, says Boston Capital's Goldstein. His firm raised $307 million in capital last year and acquired 52 projects.
Another syndicator, Boston Financial, formerly MMA Financial, is scheduled to offer its first fund under the new organization this year after being out of the market last year.
Centerline reported raising $77.1 million through the first nine months of 2009.
“At the asset level, LIHTC investors are focusing heavily on the underlying real estate underwriting and sponsorship of the LIHTC developments targeted for acquisition,” says Weil. “Investors are requiring stronger guarantors, larger funded reserves that secure longer-term guarantees, lower leverage characteristics, and project underwriting that demonstrates a discount to market rents in the property's primary market area.”
At the fund level, investors are focusing heavily on the long-term financial sustainability of the fund sponsor because LIHTC investors require a 15-year holding period, he says.
Enterprise raised $347 million in capital and acquired 35 projects in 2009.
“We are mildly optimistic that there will be more available capital in 2010 than in 2009,” says Able. “There were indications in late 2009 that some economic investors were willing to come back into the market, albeit at higher yields than in the more highly competitive CRA markets. We anticipate there will continue to be a pricing and yield disparity between the few highly desirable CRA markets and the rest of the country. The re-entry of economic investors remains highly dependent on the performance of the economy in general.”
Great Lakes Capital Fund raised $70.3 million and acquired 13 projects last year.
Homestead Capital raised $41 million and acquired three projects in 2009. Going into 2010, identifying investors will still be the industry's main challenge, says Washington.
Massachusetts Housing Investment Corp. raised $64.2 million and acquired three deals in 2009. TCAP and the exchange program have helped clear stalled projects from the pipeline, says Peter Sargent, director of capital development. However, the concerns are that Congress will re-evaluate the need for private-sector syndicators and/or housing finance agencies will try to take over many of the functions like asset management from syndicators, who have the expertise in these areas, he says.
“Pricing will slow down a bit for 2010, but it will still decline due to the lack of investors in the market,” says Rieker of MHEG. “The investors in the market will continue to demand higher yields to stay in the market. I think you may see a plateau in later 2010 and maybe some minor upticks toward the end of the year as companies start to show profits and a need for credits.”
MHEG raised $40 million in capital and acquired 16 developments last year.
NEF raised $600 million and closed 42 deals in 2009.
Northern New England Housing Investment Fund raised $18 million and acquired six projects last year. The firm closed on its first proprietary fund.
TCAP and the exchange program were positive as a short-term fix, according to President John Anton. “Pricing stabilized because the supply of credits shrank with the implementation of the exchange,” he says. “TCAP helped fill gaps that the market free fall created. They are not long-term fixes. We probably need another year of exchange to help us get program changes passed that will help banks expand their appetite.”
OCCH wrapped up last year having raised $173 million and acquiring 38 projects.
“In the first 10 months of the year, OCCH closed eight deals and then made up the rest in the last two months,” says Keller. “The second half of the year was much better than expected.”
He expects more overall improvements in 2010. “We believe the economy will pick up but at different paces in different parts of the country, with the Midwest slightly lagging behind other parts of the country,” Keller says.
PNC Real Estate raised nearly $384 million and acquired 44 projects last year. The second half of the year saw strong interest in new investments, according to Crow.
Raymond James Tax Credit Funds, Inc., raised $400 million and acquired 36 projects in 2009. “Investors are demanding strong experienced partners and guarantors with real net worth and sufficient liquidity to cover guarantees,” says Steve Kropf, executive vice president and director of investments.
Like other syndicators, Kropf says CRA obligations will be the key motivator for investors. “It means there will continue to be a huge differential in pricing in major CRA markets compared to rural markets,” he says. “Potentially the difference in internal rate of return to attract capital to rural markets will need to be 400 to 500 basis points more than in the hottest CRA markets.”
Red Stone Equity Partners closed last year by raising $165 million in capital and acquiring 17 projects.
“Initial interest from investors for the first half of 2010 seems as robust as it's been in the last year,” says Chris Grim, director of investor equity. “Early allocations have already come from several of our existing investors. Additionally, several new investors are showing strong interest in the asset class, and we expect new market entrants in the first half of the year.”
The Richman Group raised $527 million and closed on 42 projects last year. “We see a fair amount of non-CRA motivated investors being in the market in 2010,” says Daley. “Provided yields remain attractive for such investors they could be a source of equity for the rural and non-metro areas.”
The St. Louis Equity Fund, Inc., raised 12 million and acquired four projects last year. The prospects for the 9 percent market are better this year than in 2009, but full recovery is unlikely until 2011 at best, according to President John Wuest.
The stimulus programs have helped fill investment needs and funding gaps, but they did push many deals into 2010, he says.
At Stratford Capital Group, officials raised $70 million in capital and acquired nine projects.
“I expect LIHTC pricing to developers to remain stable during 2010 as compared to 2009,” says President Benjamin D. Mottola. “On a macro level, there have not been any significant changes in the overall economy to warrant an increase in pricing. The industry will have a difficult time attracting new investors if yields begin to trend downward during 2010. That said, as CRA-driven bank investing increases from 2009 levels, the large metro areas may see some increases in pricing, but any increases will be localized.”