Low-income housing tax credit (LIHTC) pricing will increase or, at the very least, hold steady for the next several months, according to a survey of 17 national and regional syndicators.
“Given the demand for credits, pricing should tip in favor of developers for the rest of the year,” says Stephen M. Daley, executive vice president of The Richman Group Affordable Housing Corp.
Popular Community Reinvestment Act (CRA) markets like New York City will continue to see the highest pricing.
However, non-CRA equity in the market should benefit developers in other areas of the country as well, Daley says.
The average price paid per dollar of credit in the second quarter was $0.71, according to AFFORDABLE HOUSING FINANCE's mid-year survey. That's about a 3 percent increase from the $0.69 average in late 2009. Developers saw an even bigger increase in the top CRA markets.
The surveyed syndicators raised a combined $3 billion in capital in the first six months of 2010. Nearly all report better-than-expected activity.
The higher pricing is attributed to increased investor demand. As corporate profits improve, companies have more money to invest in tax credits. New investors attracted by strong returns have also entered the scene. Yields paid to investors in the second quarter averaged 10.5 percent, according to the survey.
A third factor is the recent Tax Credit Exchange Program, which removed a good amount of LIHTCs from the market. The program allowed developers to swap unused credits for cash.
“The very rapid increase of equity investment in the market was surprising,” says Raoul Moore, senior vice president of syndication at Enterprise Community Investment, Inc. “In 2009, with limited capital availability, many deals could not be done. In 2010, there is substantially more equity in the market and a shortage of available deals, causing an increase in credit price and a reduction in investor returns.”
Others also noted the quick change.
“This market is enough to give us all whiplash,” says Joe Hagan, president and CEO of the National Equity Fund, Inc. (NEF). “Just when folks thought that depressed pricing to developers and double-digit returns had become the new normal, we started seeing a shift back toward equilibrium. Returns are still very attractive, but competition has increased in CRA markets, and percredit pricing has inched up. That's great news for many developers, but it's a challenge as well. Will yields fall too far too fast and discourage activity, particularly from non-bank investors that have more recently returned to the market?”
Syndicators offer warnings
The new flow of equity comes after a dramatic decline in LIHTC investment during the past two years that caused prices to plummet and many affordable housing deals to stall as developers tried to fill financing gaps. LIHTC prices are still far from what they were five years ago.
With the market still trying to find the right balance, syndicators remain cautious.
“I believe that the entire industry needs to be mindful of the risk of a double-dip recession,” says Benjamin D. Mottola, president of Stratford Capital Group. “Job creation and corporate profitability are critical to the success of our industry.”
Developers should also keep an eye on the fate of the credit exchange program. Industry leaders have been pushing to get the temporary program extended, but legislation that includes the extension has yet to pass.
If there is a double-dip recession, yields drop below 8 percent, and the exchange program is not extended, there could be another equity shortage as investors that recently re-entered the market drop out, explains Hal Keller, president of the Ohio Capital Corporation for Housing (OCCH).
Overall, developers will still need to find construction lending to bridge equity, develop in strong markets, and secure soft financing to provide housing with rents that are well below market rate yet produce a minimum debtservice coverage ratio of 1.2x, says Mark McDaniel, president and CEO of Great Lakes Capital Fund.
Bond market remains weak
Tax-exempt bond deals with 4 percent tax credits continue to struggle.
“I think investor demand for 4 percent credits is likely to improve from nonexistent to limited,” says Todd Crow, executive vice president and manager of tax credit capital at PNC Real Estate.
Executives at Red Stone Equity Partners, LLC, report seeing some demand for 4 percent projects with strong developers but only in the very large markets.
“Bond deals with high-loss write-off ratios, high levels of debt per unit, and moderate rehabs are still challenged to find equity investors in most markets,” says President Eric McClelland.
The syndicators have many funds in the works for the second half of 2010.
Alliant Capital was in the process of closing a $135 million multi-investor fund. The firm is also planning an additional multi-investor offering and several single-investor funds this year.
“The 9 percent market will continue to be robust with pressure on pricing and yields,” says Carl Wise, senior vice president.
Boston Capital is raising capital for two national multi-investor funds and four proprietary funds.
Boston Financial Investment Management is back in the market and working on closing a multi-investor fund. Formerly MMA Financial, the firm is also planning four single-investor funds this year.
Franklin Capital Group expects to raise another $10 million to $15 million.
Great Lakes Capital continues to raise capital for an $80 million regional multi-investor fund and its $50 million community-based funds, which are targeted to mid- and small-size financial institutions. It is also preparing for two proprietary and two guaranteed funds.
The Massachusetts Housing Investment Corp. is busy closing out deals for which investors have already committed. Its next fund will begin marketing in the fourth quarter, says Peter Sargent, director of capital development.
The Midwest Housing Equity Group, Inc., will be completing four multi-investor funds in the second half and plans to raise an additional $100 million.
NEF hopes to raise about $600 million this year. It is talking with investors about a new multi-investor fund.
OCCH has raised the capital it needs for its 2010 closings. Later in the year, it will begin to raise money for its 2011 multi-investor and proprietary funds, with a target of $175 million to $200 million.
PNC has completed two fund syndications this year and plans to close a third in November. It will also maintain a series of active proprietary accounts, reports Crow.
RBC Capital Markets—Tax Credit Equity Group reports raising $230 million in the first six months of the year. In the second half, it expects to exceed $350 million in fund closings, says Michael Riechman, co-director of tax credit investments. It will have a $125 million to $150 million multi-investor fund, with the rest in proprietary funds.
Raymond James Tax Credit Funds, Inc., is planning its next national multiinvestor fund, RJTCF Fund 37, which will be about $150 million to $200 million in size. It's also working on private- label funds, reports Steve Kropf, executive vice president and director of investments.
Red Stone plans to close an additional $250 million to $300 million in the second half, primarily through a series of proprietary funds.
The Richman Group will have another multi-investor fund, its third for the year compared with one in 2009. Like the others, it is also working on proprietary funds.
The St. Louis Equity Fund, Inc., expects to raise another $6 million to add to the $5 million it has already raised this year.
Stratford Capital reports working on closing a $50 million multi-investor fund. Its next multi-investor fund is scheduled for the fourth quarter and is expected to be about $80 million to $100 million.