Cynthia Lacasse is a veteran of the low-income housing tax credit (LIHTC) business. She is president of John Hancock Realty Advisors, Inc., a longtime tax credit investor. This year, she is also president of the Affordable Housing Investors Council (AHIC), a leading industry organization.
Lacasse, who joined John Hancock in 1995 to do acquisitions and became head of its tax credit investment group around 2000, shares one investor’s perspective by discussing what worries her about the market, as well as her goals for AHIC.
Q What will be new or different at AHIC this year?
A A little more than 10 years ago, AHIC was created to provide a venue for corporate investors in Sec. 42 LIHTC properties to come together and educate themselves on all aspects of LIHTC investing. Yields on tax credit investments have continued to come down over the years as the market worked to sort out the real risks of this asset class and how they compare to risks and returns on other investments.
Over the past 18 months, the market pushed LIHTC pricing to a point where yields became unacceptable to some investors, and they pulled back. I think we are now in a period where industry players are trying to find the right price point that will bring enough demand back into the market. I’m not sure that everything has completely shaken out yet, but I think it is important to acknowledge that the supply of LIHTC investments, by virtue of the tax credit allocation formula, is limited, so it may not take much of an increase in pricing and thus demand to bring the market back to some sort of equilibrium. To me, this is evidence that Sec. 42 is now a mature asset class. Investors understand the risks quite well and are going to make their decisions about the prices they are willing to pay accordingly.
In response to this recent pricing pressure, many LIHTC investors started looking around in a more deliberate way to see what other types of investments made sense. As a result, we’ve seen some of our members increasing their investment volumes in state and New Markets Tax Credits. In addition, some members are investing in alternative energy tax credits while others are watching that market very carefully with an eye toward stepping in at some point if the opportunity presents itself. A few of our members are also looking at other affordable housing and community investment opportunities, such as “workforce housing.”
Another item of note is that for the first 15-plus years after Sec. 42 was created, this was an acquisition and asset management business. As the volume of deals reaching the end of their compliance periods increases, in addition to a reported increase in market demand for deals that are in years 11 to 15 of the compliance period, dispositions are now an active part of all syndication and direct investment shops. Even though we still look at this asset class from a long-term hold perspective, given where we are in the cycle, the industry has now matured into an acquire, manage, [and] dispose operational structure, just like any other real estate asset class.
As an educational organization, it is AHIC’s responsibility to respond to the needs of its investor members. While the core programming that we offer will continue to focus on Sec. 42 acquisition and asset management, we will respond to the changing interests and expanding needs of our members by adding more emphasis on other types of tax credit investments as well as asset dispositions.
Q What goals do you have for AHIC in 2007?
A In a recent letter to AHIC members, I outlined three goals for my year as president of the organization. First, to stick to the basics and ensure that we offer members: educational seminars that are well taught and provide desired content; well-organized, relevant, and timely program panels; and ample opportunity to network at our three member meetings this year. Second, to work with others in the AHIC leadership to enhance internal communication among AHIC and its members and external communication between AHIC and the tax credit and housing investment industry. Third, to facilitate a dialogue among the AHIC membership about some members’ expanding interests beyond Sec. 42 and the role, if any, the organization should play in this evolution.
Q As an investor, what concerns you most about the LIHTC market these days?
A The current low yields are telling us that this asset class should be performing with very few, if any, problems. I think the market got to this price point because portfolios have historically performed quite well. If that ceases to be the case and we get significant performance erosion, those of us who bought at these low yields (and most of us did) will look back and say we took too much risk for the returns we underwrote. Having said that, I’m cautiously optimistic that deals that are receiving credits today, if properly underwritten and capitalized, will perform well. Everyone has received an education in the past 10 to 15 years. State housing finance agencies have learned that making credit allocations to well-thought out, properly financed properties built by experienced, well-capitalized developers will result in the best chance of providing much-needed affordable housing to their citizens for the long term.
Q In the past year, a few key investors stopped investing or reduced their levels of investment in LIHTCs. What effect did that have on other investors, and what’s it going to take to get those investors who left back in the market?
A As the market kept pushing the returns on LIHTC investments down, eventually some investors concluded that they could get better risk-adjusted returns elsewhere and either cut back on their investments or stopped investing altogether. Both cutbacks and complete pullouts happened in 2006. If perceived risks remain constant—no further degradation in terms, underwriting, guarantees, etc.—and returns go up, you would expect demand to increase.
As I stated before, given the constraint on the supply of investments in this asset class, it may not take much of an increase in yields to bring some sort of demand equilibrium back to the market.
Q How did you and your firm react to the recent high prices and low yields?
A We definitely pulled back on our investments in Sec. 42. John Hancock Realty Advisors is an “alternative asset” origination group at John Hancock. As such, we are expected to make investments with relatively high risk-adjusted returns. As the LIHTC investment asset class has matured, we have looked for other areas where we can use our core competencies to get some good returns for our company. We have invested pretty heavily in state tax credit deals, and are looking very seriously at New Markets and alternative energy credits. In addition, we have started making equity investments in for-sale and rental affordable housing and other community-based/urban real estate that is not financed through tax credits.