Robert Thal didn't receive a single bid when he put his low-income housing tax credit (LIHTC) deals on the market at the beginning of 2008. The news was better in September when he had two solid offers, giving him confidence that his deals would close in the fall. Executive director of the Jamaica Plain Neighborhood Development Corp. in Boston, Thal hoped it was a sign the chill he and other affordable housing developers felt in 2008 was starting to lift, but expectations are that 2009 will be just as tough.

There's no question that the LIHTC business has become an investors' market. Several major investors, including Fannie Mae and Freddie Mac, significantly cut back on buying new tax credits, which meant there was less capital in the market in 2008. That resulted in a drop in tax credit prices to developers and an increase in yields for remaining investors.

It also meant that some affordable housing deals like Thal's plans to build 65 tax credit apartments and 16 homeownership units on the campus of the former Blessed Sacrament Church were delayed or, even worse, might not get done at all.

As such, developers will have to adopt new strategies. The Michaels Development Co., one of the nation's most active affordable housing developers, continues to work with LIHTC syndicators. But in a new move, the firm began approaching banks directly to sell its tax credits, according to President Robert Greer.

Greer said his firm, which is involved in 19 HOPE VI projects, among other deals, will become more active in acquisition and rehabilitation deals that use 4 percent tax credits and tax-exempt bonds.

Another question centers on what effect the recently passed Housing and Economic Recovery Act will have on the industry. The legislation makes several significant changes that are expected to benefit the LIHTC industry, including fixing the credit rate at 9 percent.

What investors say

Several investors expect the turbulence to continue in 2009. The LIHTC market is in a volatile state, given the broader capital market situation, according to Patrick Nash, managing director of JPMorgan Capital Corp. “Even if there is investor interest, prices are at a point that it creates a capital gap in the developer's budget, and some housing that would get done in a different environment is not going to get done,” he says.

Two years ago, LIHTC prices averaged about $0.94 or $0.95 per dollar of credit. Today, the average is closer to $0.85. On the flip side, investor yields have increased from 5 percent to more than 7 percent.

“[The market] really depends on how you make your living in the LIHTC space,” said Christoph Gabler, senior vice president of AEGON USA Realty Advisors, Inc., in San Francisco. “If you are like me, a direct investor who has money to invest, then the market is doing great because the lack of available equity has shifted the market from developer to investor. If you are a developer who doesn't have a project with one or more compelling characteristics, the market is probably not doing well for you. If you are syndicator, the middle man between developers and investors, then the market is defined by your investor base.”

Although many in the industry hope that the rise in yields will attract new investors, Gabler says new participants will have to overcome the mental barriers that come with entering an unfamiliar field. He estimates that it takes four to eight quarters to educate a new investor.

It is more likely that former investors who understand the LIHTC business will re-enter the field after sitting out recently.

“If I were them, I would want to see some staying power with yields,” Gabler says, explaining that an investor isn't going to want to come back for just a year to buy a small number of projects.

Beth Stohr, president of U.S. Bank Community Development Corp. and president of the Affordable Housing Investors Council, hopes the market won't be as volatile in 2009. “But, should it be, I think the difference will be in expectations and reaction time,” she says. “This year has shown us that we should be steeled for just about anything. My sense is that all parties will be leaving some ”˜wiggle room' for market swings.”

Investor funds will continue to be tight in 2009, Stohr says. Developers should leave room to account for market changes and stick to the markets and products they know best. “Soundly underwritten, well-structured transactions in good markets should continue to be attractive to investors,” Stohr notes.