Several state and local equity funds are expanding their business models to meet increased competition and demands of the low-income housing tax credit (LIHTC) market in 2006.
“Some are getting into new lines of business such as New Markets Tax Credits, property management and acquisition loans, while others are expanding their geographic service area into other states,” said Bernard T. Deasy, president of Merritt Community Capital Corp., which provides equity for affordable housing developments throughout California.
Some groups are also coming out with smaller funds to allow them flexibility as the market shifts and yields change, added Mark McDaniel, president of the Great Lakes Capital Fund, headquartered in Michigan.
Homestead Capital, which is based in Portland, Ore., and operates in several Western states, plans to diversify its product lines, said Deborah Saweuyer-Parks, president and CEO. Her fund plans to finance at least one Native American transaction this year.
“State and local equity funds continue to be successful,” said Hal Keller, president of the Ohio Capital Corporation for Housing. “Because our organizations have, by definition, a geographic focus, state qualified allocation plans drive much of what we do. That might translate into an increased emphasis on preservation, special-needs housing or lease-purchase housing. In terms of investors, our investor base continues to be strong but, as is the case with all syndicators, it is a challenge to balance out the high prices demanded by developers while delivering an acceptable return to investors.”
Affordable Housing Finance magazine recently asked these and other state and local fund executives to report on their 2005 activities and 2006 plans.
Great Lakes Capital Fund reported that it plans to come out with two funds totaling about $200 million and acquire about 50 projects this year after raising $100 million and acquiring 46 deals in 2005.
The organization has a permanent loan product available for tax credit-financed developments, and it also plans to offer a construction loan product in 2006.
“There’s a trend of providing ‘one-stop financing’ – construction loan, permanent loan and equity – and the financing and equity is underwritten at one time,” McDaniel said. “We have incorporated this trend with our permanent loan product and equity, and will incorporate the construction loan product into this process when it is available this year.”
He’s concerned about continued high prices and low yields in the LIHTC market, as well as the erosion of partnership agreement terms, including guarantees and operating reserves.
The Great Lakes fund recently invested in a project in Walker, Mich., north of Grand Rapids, which will provide 44 units of affordable housing, with 29 of them targeted to individuals in need of supportive housing. The development is the first financed under the group’s Green Communities Initiative in partnership with Enterprise, a leading provider of capital and expertise in the affordable housing industry. The construction will incorporate green building products and practices.
Hawaii Investors for Affordable Housing, Inc., is looking to raise $30 million and acquire three projects this year after raising $35 million and acquiring five projects, all 9% tax credit deals, in 2005.
“Pricing trends seem to be stabilizing,” said President Stacy Sur. “With rising interest rates, the return to investors needs to keep pace.”
Homestead Capital wants to raise about $100 million and acquire 15 projects in 2006 after raising $93.5 million and acquiring eight projects last year.
“The funds will be structured similarly to previous funds,” said CEO Saweuyer-Parks. “However, Homestead may focus on some strategic regions and create state-specific funds within its footprint.”
The group also expects its predevelopment loan fund, Homestead Community Financing, to be more “robust” in 2006, providing more access to capital, she said.
When asked about underwriting trends, Saweuyer-Parks said that with the increased competition in the industry, some competitors have loosened their standards to entice developers. Vacancy-rate assumptions have become less conservative, and reserves have decreased over the 15-year period, she said. She stressed, however, that Homestead has not wavered from its underwriting standards.
One of the organization’s recent projects is The Fortson, a workforce housing project in Seattle’s Pioneer Square Historic Preservation District. The project will offer 132 one-bedroom apartments, targeted at renters earning no more than 60% of the area median income. The project has been endorsed by Mayor Greg Nickels and fits into his City Center Seattle strategy for creating strong urban neighborhoods, according to Homestead.
Housing Vermont plans to raise about $23.8 million and acquire eight projects this year after raising $34.3 million and acquiring nine projects in 2005, according to President Andy Broderick.
When asked how state and local funds are changing, he said that the funds are beginning to see the first wave of Year 15 properties – projects coming to the end of their compliance period – looking for refinancing or resyndication, so many of the nonprofit syndicators will be proactive as the Year 15 dates approach, he said.
The nonprofit state and local equity funds, Broderick said, also continue to move toward more sophisticated asset management.
Merritt Community Capital Corp. will raise about $50 million and acquire four to six projects this year after acquiring four projects in 2005.
The California-based organization reported that it paid an average price of $1.07 per dollar of tax credit in 2005. “The market for LIHTCs will continue to be hot,” Deasy said.
Merritt plans to broaden its outreach to nonprofit developers throughout California.
Merritt recently invested in the resyndication of Josephine Lum Lodge, a 150-unit development for low and extremely low-income seniors who can live independently. Built in 1973 in Hayward, Calif., the project was developer Eden Housing’s first multifamily development. The acquisition and rehabilitation was financed with tax-exempt bonds and 4% LIHTCs.
Midwest Housing Equity Group, Inc., hopes to raise about $60 million and acquire 30 projects this year. The nonprofit finances projects in Nebraska, Kansas, Iowa and Oklahoma. It raised $35.2 million and acquired 24 deals in 2005, according to President James Rieker.
Mountain Plains Equity Group, Inc., headquartered in Billings, Mont., has raised about $7 million for its first tax credit fund, which will purchase tax credits in Montana, Wyoming and North Dakota, reported President and CEO Donald Sterhan.
The fund closed on its first three projects in North Dakota in the fourth quarter of 2005, he said.
The Northern New England Housing Investment Fund will raise $51.5 million for 2006 and 2007. During that same period, it hopes to acquire about 15 projects, said President John Anton.
The organization, which operates in Maine and New Hampshire, acquired 13 projects and raised roughly $24.5 million in 2005.
The Ohio Capital Corporation for Housing (OCCH) is looking to raise about $200 million and acquire 40 projects this year, up from $185 million and 26 deals in 2005, according to Keller, the president.
“In 2006, OCCH will market our regular fund, comprised mostly of 9% deals, but with a greater emphasis on Sec. 8 preservation and public housing authority revitalization projects,” he said.
In 2006, OCCH will also continue to market new debt products through The Ohio Capital Finance Corp., an OCCH subsidiary and a certified Community Development Financial Institutions Fund organization.
Looking ahead to the rest of the year, OCCH leaders will be watching for several trends, including increasing pressure on pricing for 9% deals. They predict that returns will rise slightly due to pressure from investors dissatisfied with 2005’s drop in yields.
Developers need to think about rising operating expenses, especially real estate taxes and utility costs, said OCCH officials. Projects for which developers are seeking tax credits this year will likely not come online until 2008 when these expenses could be much higher, so that should be taken into consideration, Keller said.
One of OCCH’s recent projects is the Briggsdale Apartments in Columbus, Ohio. Developed by Community Housing Network, the facility provides permanent, supportive rental apartments for individuals who have had mental illnesses, substance-abuse issues or histories of chronic homelessness.
The project had a long uphill battle, but is important because it is linking housing with supportive services, according to OCCH. Briggsdale Apartments features 35 studio apartments, community space and offices for 24-hour staffing.
The Virginia Community Development Corp. wants to raise about $30 million and acquire 18 projects this year after raising $49 million and acquiring 18 projects in 2005, reported President and CEO Ralph Nodine.
Tax credit activity 2005-2006
|(cents)||Pay-in*||Raised||Goal (millions)||Goal (millions)|
|Great Lakes Capital Fund||94||5.3%||40%||$100||46||$200||50|
|Hawaii Investors for Affordable Housing, Inc.||N/A||N/A||N/A||35||5||30||3|
|Merritt Community Capital Corp.||107||4.2%||1% or less||N/A||4||50||4-6|
|Midwest Housing Equity Corp., Inc.||89||6.2%||02||35.2||24||60||30|
|Northern New England Housing Investment Fund||N/A||N/A||30%||24.5||13||51.53||153|
|Ohio Capital Corporation for Housing||94||9.2%||9.7%||185||26||200||40|
|Virginia Community Development Corp.||N/A||N/A||18.3%||49.3||18||30||18|
* "Pay-in" is the percentage of funds paid upfront (on closing of operating partnerships).
1 Less than 1% at closing and about 65% at substantial completion except for leveraged pay-ins.
2 Pays 100% at construction completion.
3 Goal for 2006-2007.
Source: Affordable Housing Finance survey, February 2006