Low-income housing tax credit (LIHTC) prices, buoyed by a fast and steep rise in the first half of the year, will likely continue to inch up in the remaining months of 2011, according to the majority of syndicators surveyed by AFFORDABLE HOUSING FINANCE.
Eleven syndicators expect further increases while six anticipate prices to either hold steady or drop during the homestretch.
“We are beginning to see some investors resist further yield reductions,” says Todd Crow, executive vice president and manager of tax credit capital at PNC Real Estate. “However, we see no signs that price and term competition at the project level is abating, particularly in strong markets."
Crow is among those predicting further price increases this year. Most note that any additional hikes will occur at a much more measured rate as the market cools.
Although the rise in LIHTC prices is good news for developers selling their credits, the trend has many people nervous. That's because when prices increase, yields to investors fall.
“We are concerned that we may be reaching a critical point where further declines in yields will drive some investors from the market,” says Andrew Warren, senior vice president at Centerline Capital Group. “Developers are optimistically requesting higher and higher prices, and market discipline will be critical to maintaining the balance needed to sustain the program long term."
Tax credit prices averaged about $0.80 per dollar of credit in the second quarter, revealed the survey. That's a nearly 13 percent hike from the $0.71 average a year ago. Some recent deals in top markets like California have received bids of more than a dollar.
Investor yields averaged about 8.4 percent in the second quarter, down 20 percent from 10.5 percent in the same period a year ago. The average percentage of equity funds paid on closing of the partnerships varied from about 7 percent to 30 percent.
Just about every syndicator cited the rapid shift in prices and yields as the most significant trend this year.
A few actions may ease some of the pricing pressure in the coming months. First, several of the large states will be allocating their LIHTCs, which would increase the supply in the market, says Tony Bertoldi, senior vice president of syndications at City Real Estate Advisors, Inc.
“Secondly, I am hearing that many investors, particularly the insurance companies, may not have interest at yields below 6 percent, which may decrease demand significantly,” he says. However, this will take time to play out. Others agree yield erosion cannot last.
“There will be a correction,” says Christoph Gabler, senior vice president of AEGON USA Realty Advisors, LLC. “The question being how severe and when. Second half? That would not surprise me." The reaction of investors isn't the only concern. Another uncertainty is how state housing finance agencies will deal with the increased pricing, says Joe Hagan, president and CEO of National Equity Fund, Inc.
“When they awarded credits, many states assumed pricing that is much lower than the current market,” he says. “Will they adjust the credit award to the original underwriting? If so, when will they reduce the credit award? Those unanswered questions create a lot of uncertainty."
Indications at a recent National Council of State Housing Agencies conference were that many states would take some sort of action, according to Hagan. “We think it's important that syndicators be involved in the negotiations. In some cases, the increased pricing can be used to lower debt or increase operating reserves, both of which improve the deal."
Finding the right balance
There's no question that the LIHTC market has been a roller coaster. Two years ago, there wasn't enough investor equity, causing concerns that deals wouldn't get done. Today, there's a strong supply of capital, raising worries that every deal will get done and deal terms or underwriting standards will be relaxed.
So what does a balanced market look like, and can it be achieved?
“The point in time where there is a balance is a fleeting moment,” says Jeffrey Goldstein, executive vice president and COO of Boston Capital. “Any true market experiences cycles and corrections. The right balance is a similar number of buyers and sellers with yields properly riskadjusted for the environment."
Others paint a similar picture of market equilibrium and its elusiveness.
“The right balance would be a level of pricing that allows deals to fill their funding gaps and results in yields that remain attractive to investors,” says Raoul Moore, senior vice president of syndication at Enterprise Community Investment, Inc. “We're skeptical that a healthy balance can be achieved given the recent heated marketplace."
The rest of the year should continue to be competitive, but as yields fall, some investors may leave the market in 2012, Moore says.
A key difference between today's market and the pre-recession market is the absence of Fannie Mae and Freddie Mac, mission-based investors who were not merely motivated by yields, according to Russell Ginise, managing director of tax credit investments at RBC Capital Markets—Tax Credit Equity Group.
“They have been replaced by non- Community Reinvestment Act yield buyers, who will have a higher propensity to exit the market should the quality of the deals and the yields not meet their liking,” he says.
Several syndicators stressed the importance of maintaining solid underwriting at this time.
“As new investors have come to the market, and some of these are economic investors, underwriting standards have to be followed,” says Hal Keller, president of the Ohio Capital Corporation for Housing. “If new investors see deals sour and there are no reserves to fix the issues, those economic investors will leave the market as quickly as they entered."
Although opinion is split on whether underwriting or deal terms have actually slipped as competition has intensified, it's clear that syndicators are getting push back from developers on several terms, particularly the length and limit on guarantees.
In another finding, nine LIHTC syndicators expect the overall market volume level in 2011 to approach pre-recession levels, which were estimated to have been as high as $8 billion to $9 billion. Five predict that the overall volume will still be below those high marks this year.
The firms taking part in the survey reported closing nearly $2.8 billion in the first half of the year, led by Boston Capital's $331 million and Raymond James Tax Credit Funds, Inc.'s $309 million.
The syndicators reported acquiring 324 deals during the first two quarters.
What to watch for
There's plenty to watch for in the coming months. The second half is usually busier than the first as several of the larger states make their LIHTC reservations and syndicators push to close deals before the year's end.
Despite the recent rebound, several syndicators stressed there is still a lot of uncertainty in the overall economy and LIHTC market.
With budget cuts looming in many states, the availability of state financing will likely be impacted, says Centerline's Warren.
“Developers should be careful to underwrite their transactions cautiously and include enough cushion and internal liquidity to ensure that they can still pencil out even if the projects aren't awarded the full amount of requested soft loans or tax credits they request from the state agencies,” he says.
Pricing and terms are usually the top priorities for developers, says Ryan Sfreddo, director of investor relations at Red Stone Equity Partners, LLC.
“Another priority that receives significantly less attention but is no less deserving is that of execution,” he says.
According to Sfreddo, developers should consider several key questions when considering a capital partner. The questions they should ask themselves include: What is my syndicator/investor's strategy and process to execute my deal? How long will it take? If something doesn't go 100 percent according to plan, who can I call and who makes the decision?
“I believe developers should continue to understand where the capital for their transaction is coming from, if it needs to be raised or is part of an existing fund, and when ultimate investor approval occurs," says Greg Judge, COO of Boston Financial Investment Management. “I believe there are commitments being made that will be hard to execute on due to weak deal terms. As always, I strongly urge developers to remember how difficult the world was two years ago and keep that in mind when the ask for aggressive deal terms."
INDUSTRY FIGHTS PLAN TO KILL LIHTCS
More than 550 national, regional, and local organizations and companies have signed a rebuttal to Sen. Tom Coburn's (R-Okla.) proposal to eliminate the low-income housing tax credit (LIHTC) program.
“The senator's call for repeal of the LIHTC would eliminate the most important and successful program for critically needed affordable rental housing, thus depriving millions of low-income families and seniors of a decent place to live and killing thousands of well paying jobs at a time of severe unemployment,” says the rebuttal.
The response comes after Coburn unveiled a sweeping deficitcutting plan that calls for the elimination of the LIHTC program as well as the New Markets, renewable energy, and historic tax credits.
Ending the LIHTC would save at least $57 billion over the next 10 years, according to his “Back in Black” report.
The affordable housing industry rebuttal charges that the report's discussion for ending the LIHTC “is based on faulty reasoning, largely relying on criticisms from a Missouri state audit of a state-based affordable housing program that Sen. Coburn mistakenly believes is the federal LIHTC program.” It also says that Coburn is using a nearly 20-year-old study of the program that is no longer relevant.
The response states that the LIHTC has successfully provided high-quality affordable housing for millions of Americans. It also notes that a typical 100-unit LIHTC development results in 122 jobs construction jobs. Coburn's proposal would kill about 152,000 jobs annually.
For more information, visit the Affordable Housing Tax Credit Coalition's Web site at www.taxcreditcoalition.org.