The waves caused by a downturn in investor interest last fall may still be felt in the low-income housing tax credit (LIHTC) market going into the next year.
“For deal feasibility in 2008, the deals are going to be indirectly influenced by the investors,” said Hal Keller, president of the Ohio Capital Corporation for Housing (OCCH). “We are seeing investors through their due diligence asking more questions and wanting more safeguards and higher standards in the deals at the lower tiers. I think for syndicators to continue to receive funds from investors to invest at current levels, syndicators have to show that the lower-tier deals are becoming safer deals to invest in.”
The drop in investor interest last year has not fully turned around, with some investors still on the sidelines or investing smaller amounts, according to Joe Henefield, director of capital development at the Massachusetts Housing Investment Corp.
“Deal feasibility probably won’t be enhanced by the prices being paid for credits except in the case of the most desirable properties,” he said. “Perhaps the housing downturn will provide some relief on the construction-cost side of the equation.”
The reduced interest of major LIHTC investors like Fannie Mae and Freddie Mac has been a big concern, added James K. Rieker, president of the Midwest Housing Equity Group, Inc.
“The gaps were big, and that meant hitting the road and talking to new and existing relationships,” he said. “We had some success in securing new investors, and we had some existing ones step up their investments. For the future, it will be important to build new relationships so if and when one or two investors decline, the impact will be less significant.”
So far, changes in investor interest have not hurt the group’s ability to close deals and provide equity for the ones it wants, Rieker said.
John J. Wuest, president of the St. Louis Equity Fund, said he is beginning to see some national investor interest returning. Their interest level has been greater than it was last year but still not at the same levels as in 2005 and earlier.
He and other state and local equity fund leaders took part in a recent AFFORDABLE HOUSING FINANCE survey about the LIHTC market and their activities in the first half of the year. Their funds specialize in investing in LIHTC developments in specific regional markets.
Trends to watch
These syndicators reported that the average price paid per dollar of tax credit in the second quarter of 2007 was 92.4 cents. Yields to investors averaged 5.64 percent.
A few said they felt prices would inch down further this year.
Mark McDaniel, president of the Great Lakes Capital Fund, said in August that pricing had not stabilized, and it could still drop in the second half of the year. Great Lakes raised $40 million in capital and acquired 14 projects in the first six months of 2007.
Rieker said he anticipates pricing being “all over the board” in the coming months. “We hear of some deals being in the 80 cents [range] but just heard of a new deal yesterday getting 95 cents,” he said. “It seems like we are seeing more pricing average around 90 cents.”
Significant competition continues for projects that are in high demand because of their location or development team, according to Rieker. “However, we have seen a few projects that are high risk not be able to find a syndicator,” he said. “We have seen a couple of instances where guaranty requirements seem to be increasing.”
For developers, rising costs are increasing the cost of projects and making for a larger gap in some cases, Rieker said. That’s a trend they are going to have to keep an eye on. “We have heard a lot of complaints from our investors on the per-unit costs for affordable housing,” he said. “We are concerned the cost per square foot and per unit will become a measurement of discussion and potentially a conflict between the deals developers are putting together and the deals our investors want to invest in.”
Midwest Housing Equity Group reported raising $39.7 million and acquiring 11 projects in the first half of 2007.
“While prices have come down noticeably from 2006, there is a broad band of pricing we see between 94 cents and $1 in Massachusetts,” said Henefield.
Developers should watch for the possibility of more uncertainty in the market in the months ahead. “Be prepared for increased scrutiny by investors wanting to look inside every deal,” Henefield said. “Be careful on pricing—investors’ appetites may shrink as the year wears on.”
His fund raised $20 million and acquired six developments in the first half of the year.
In Ohio, the biggest surprise in the first half of 2007 was that yields to investors settled down instead of increasing, said Keller. “It seemed that at the end of 2006 investors were saying that the yields had become too low and they wanted them higher, but yields seem to have leveled in the 5.25 percent to 5.5 percent range on a cash pay basis.”
Prices appear to have stabilized in the state, he added.
Looking ahead, developers should watch for increasing operating expenses and the availability of soft financing, Keller said.
OCCH reported acquiring 11 projects in the first six months of the year.
In Virginia, Ralph Nodine, president of the Virginia Community Development Corp. (VCDC), said prices for tax credits have been “pretty stable.”
He said developers should know their investor. “Some have shown themselves to be undependable. A long-term track record of fulfilling commitments and a real local presence are important,” he said.
VCDC raised $25 million and acquired six 9 percent LIHTC projects in the first half of 2007. It also helped finance a project with historic tax credits.
The St. Louis Equity Fund raised $14.3 million and acquired three projects in the first half of the year.
The Kansas City Equity Fund, which is affiliated with the St. Louis fund, began raising funds in the beginning of the year.
Its goal is to raise $5 million by the end of 2007, according to President Erica Dobreff, who said the fund was working to close its first deal.