Low-income housing tax credit (LIHTC) prices will hold steady for the rest of the year, predict nearly two out of three housing credit syndicators.
Sixty-three percent of the firms surveyed by affordable housing finance say prices will hold firm in the second half, while 37 percent say prices may still increase as demand for credits continues to be strong. With buyers battling for LIHTC deals, no one expects prices to drop.
In the recent second quarter, prices averaged a healthy 92 cents per dollar of credit. That’s a few pennies more than at the end of last year.
The LIHTC market should move like a seesaw: When prices go up, yields should fall, and vice versa. However, as prices have gone up, syndicators have worked hard to keep yields high for investors. But those yields are starting to dip.
Yields in the second quarter averaged about 6.7 percent, according to the poll of national and regional syndicators. The change is notable because there has been much speculation that returns need to be at least 7 percent to keep economic investors in the market.
That floor is about to be tested. A strong majority of syndicators, about 75 percent, expect new fund offerings in the second half of the year to drop below that mark, with yields in the mid– to high–6 percent range.
“We are already seeing national funds launched [recently] below 7 percent, and we expect the majority of national funds will be below 7 percent for the remainder of this year,” says Steve Kropf, president and CEO of Raymond James Tax Credit Funds (RJTCF).
Others agree this is where investor yields are headed.
“Given the competitive landscape on the buy side, the economics of a primary market fund simply don’t make sense otherwise,” says Sarah Laubinger, executive vice president at Boston Financial Investment Management.
On the other side, a few syndicators think most funds will still stay at or near the 7 percent level through the end of the year, with a drop in yields waiting until 2015. For developers, meanwhile, prices will likely hold firm for now.
“With talk of yields decreasing below 7 percent, there doesn’t seem to be anything on the horizon that would lead me to believe that pricing to developers would be decreasing any time soon,” says Ben Mottola, president of Stratford Capital Group. “At best, pricing should hold steady as syndicators try to recapture some of the compressed fees that were necessary to keep investor yields above 7 percent.”
The 20 syndicators surveyed closed a combined $3.2 billion in LIHTC capital in the first half of the year and acquired 381 affordable housing developments.
What’s Heating the Market
The LIHTC market has been ultra-competitive for several reasons this year.
It’s been driven largely “by continued strong demand from Community Reinvestment Act [CRA] investors coupled with the relative shortage of new deals in the first half of the year prior to the 2014 allocations,” says Kropf. RJTCF led the surveyed firms by closing $405 million in capital in the first half.
“Market competition for deals is as hot and high as I have ever seen it,” adds Ryan Sfreddo, managing director, investor relations, at Red Stone Equity Partners. He points to a few key factors, including strong demand on the part of banks for LIHTCs and the construction-lending business derived from it; heavy competition among syndicators to grow their businesses; and developers holding “auctions” where multiple deals are bid on via requests for proposals.
The heated competition is one of the biggest differences in the market compared with a year ago, according to Stacie Nekus, senior vice president, investor relations, at Alliant Capital.
In 2013, there were a number of secondary deals that drove volume for several investors. This year, the secondary market has dropped, yet many of the financial institutions want to remain at their 2013 investing levels or higher, pushing demand, she says.
There are also more economic investors in the market than a year ago, adds Raoul Moore, senior vice president, syndication, at Enterprise Community Investment.
The housing credit industry wants to see a good mix of CRA-motivated and economic investors in the market. Moore and others are concerned that some economic investors may drop out as yields decline.
With high investor demand and strong competition, the market may see more syndicators looking at “CRA tiering in multi-investor funds to enable a higher price to developers to win deals,” says Tony Alfieri, managing director at RBC Capital Markets. Funds with CRA tiering have tiered pricing for certain property locations, depending on the level of demand for CRA in particular markets.
Overall, there’s a general mismatch between supply and demand, with not enough product (available housing credits) to satisfy investors’ appetites.
“A key driver continues to be strong demand from CRA investors—via direct, single-investor, and multi-investor funds,” says Mark McDaniel, president and CEO of Great Lakes Capital Fund. Along with some investors increasing their levels of demand, “CRA seems to be taking on a more high-profile role within a number of banks that were not as focused on CRA in past years—for some, due to the increase in asset size resulting from mergers and acquisitions with other banks,” he says.
Big CRA investors have historically accounted for the lion’s share of the market. “However, we are seeing increased competition from regional banks in secondary and tertiary markets, making it more difficult for economic investors to achieve their yield target,” says Thomas A. Panasci, director of finance and investments at First Sterling Financial.
Alliant CapitalBoston CapitalBoston Financial Investment ManagementCity Real Estate AdvisorsCommunity Affordable Housing Equity Corp.Enterprise Community InvestmentFirst Sterling FinancialGreat Lakes Capital FundMassachusetts Housing Investment Corp.Midwest Housing Equity GroupNational Equity FundOhio Capital Corporation for HousingPNC Real EstateRBC Capital MarketsRaymond James Tax Credit FundsRed Stone Equity PartnersThe Richman Group Affordable Housing Corp.Stratford Capital GroupWNC
|Midyear Tax Credit Activity|
|Company||$ Closed in First Half (in millions)||Projects Acquired in First Half|
|42 Equity Partners||$52.0||10|
|Boston Financial Investment Management||229.7||13|
|City Real Estate Advisors||186.0||33|
|Community Affordable Housing Equity Corp.||48.0||12|
|Enterprise Community Investment||311.0||31|
|First Sterling Financial||98.0||10|
|Great Lakes Capital Fund||10.3||7|
|Massachusetts Housing Investment Corp.||21.8||6|
|Midwest Housing Equity Group||7.0||3|
|National Equity Fund||313.0||33|
|Ohio Capital Corporation for Housing||211.1||14|
|PNC Real Estate||192.0||18|
|RBC Capital Markets||213.5||18|
|Raymond James Tax Credit Funds||405.0||62|
|Red Stone Equity Partners||158.8||12|
|The Richman Group Affordable Housing Corp.||180.0||21|
|Stratford Capital Group||51.0||10|
|Source: affordable housing finance survey, July 2014|
He points out that while the market is competitive, it’s also fragile. “Any shock to the system could cause investors to pull back,” he says, noting that developers can’t assume prices will continue to rise unabated to fill gaps in funding.
Pricing Spreads Narrow
As overall demand has increased, the price spread between hot CRA markets and non-CRA areas has narrowed.
“A year ago, we were able to secure some transactions in rural markets around 82 to 84 cents at the low end of the spectrum,” says Tony Bertoldi, senior vice president of syndication and investor relations at City Real Estate Advisors. “Those deals are now pricing 6 to 8 cents higher.”
At the high end of the market, prices haven’t moved as dramatically, maybe 3 to 5 cents, on average, he says.
“The spread has narrowed considerably this year,” Boston Financial’s Laubinger says. “The hot CRA markets are likely at a ceiling with no place to go, which is increasing competition and placing more pricing pressure on non-CRA markets.”
Issues to Watch
Despite the strong activity, there are plenty of issues worrying syndicators.
“I am most concerned about the lack of a fixed 9 percent and the rising cost of debt,” says Jeffrey Goldstein, executive vice president and COO at Boston Capital. The loss of a minimum 9 percent rate this year has meant that developers have had to go back to using a “current” rate, which has been closer to 7.5 percent.
Most worrisome is the continuation of higher pricing trends as well as the potential erosion of deal terms, specifically on reserves and debt-coverage ratios, adds Joe Hagan, president and CEO of National Equity Fund.
Developers should “be mindful of markets and income-growth rates—both past and projected,” says Stephen Daley, executive vice president at The Richman Group Affordable Housing Corp. “Finally, keep an eye on costs and delays. Subcontractors are busy and have alternatives to waiting around or working cheaply.”
They should also “focus on predevelopment, to better understand whether a closing is possible in 2014 or needs to move into 2015,” says Todd Crow, executive vice president and manager of tax credit capital at PNC Real Estate. “This timing can be critical for investors and may affect pricing.”