When 2007 came to a close, the Great Lakes Capital Fund had raised a record $220 million in low-income housing tax credit (LIHTC) equity.
“We had our best year,” said Mark McDaniel, president and CEO of the Michigan-based nonprofit fund.
It was a big surprise considering how stormy the LIHTC market has turned in the past year. Several major companies, including Fannie Mae and Freddie Mac, have ceased or reduced their investing, and the price per dollar of tax credit has fallen sharply.
Like the national syndicators, state and local equity funds such as Great Lakes are figuring out ways to adapt and raise capital. Fund leaders also say that the lower prices and a smaller amount of capital in the market will mean that some affordable housing deals just won't get done.
It could also mean that some states will not be able to reserve their entire LIHTC allocation this year. “It will be interesting to see what happens with the national pool,” said Hal Keller, president of the Ohio Capital Corporation for Housing (OCCH), referring to the pot of unused housing credits that gets distributed to other qualified states to use. In 2007, about $6.4 million in unused credit authority was parceled out from the national pool.
McDaniel and other LIHTC syndicators say 2008 is even more challenging than last year as the market remains unsettled. Participants are searching for the magical point where prices to developers will allow projects to be built and yields to investors will be high enough to attract tax credit buyers. The Great Lakes Capital Fund has repriced its latest fund three times, with yields moving up to about 6.5 percent, said McDaniel.
For some developers, deals are simply falling apart at the last minute. McDaniel's group has recently been contacted by several developers with projects in Michigan and Indiana. The developers are looking for help because their original syndicators have come back and said they can't do the deal, according to McDaniel, who said his group has so far been more of an adviser than a new syndicator.
In general, LIHTC market experts say prices have fallen about 10 percent since last year.
McDaniel attributes his fund's 2007 success to the decision to offer its first guaranteed fund last year. That fund had a return rate of 4.15 percent and raised $130 million. Historically, the group has raised one large multi-investor fund of about $180 million each year. This year, it is planning to have a couple of small multiinvestor funds, a guaranteed fund, and a few single-investor funds. This gives Great Lakes, which operates in Michigan, Illinois, Indiana, and Wisconsin, several different ways to raise equity.
In Ohio, OCCH closed a $160 million fund in December, providing capital for a good portion of the year, said Keller. He estimates that his next fund will have a yield that's between 6.5 percent and 7 percent, giving it a return roughly 1 to 1.5 percentage points higher than recent funds.
In 2007, OCCH raised about $223 million in LIHTC equity. Keller isn't certain how much he will raise this year for LIHTC deals, but he expects it will be less. It will likely be a few more months before there is clarity in the market, according to syndicators.
“With Fannie and Freddie on the sideline, we have a concern,” Keller said. “It's not clear what the subprime effect will [be] on Community Reinvestment Act (CRA) banks. I think it will be mixed.”
Keller said the state and local equity funds might be in a better position than some national funds. This is because the regional funds depended on Fannie and Freddie to a lesser degree. “[The retreat of Fannie and Freddie] certainly hurts, but maybe not as much as it did the national syndicators,” he said. Second, CRA-motivated investors may first look to the local funds because they target specific regions more than a national fund.
Keller has warned developers not to expect more than 85 cents per dollar of credit. He said he is paying more than that but wants developers to budget conservatively. Like McDaniel, Keller has also heard of LIHTC projects that are in trouble. In one case, a syndicator pulled out of a deal four days before closing. OCCH ended up funding the project.
Merritt Community Capital Corp., headquartered in Oakland, Calif., closed 2007 with a $42 million fund. Like other fund leaders, Merritt President Bernard Deasy anticipates raising less capital this year. Just how much less is uncertain. In California, LIHTC prices were still on average in the low 90-cents range per tax credit dollar, according to Deasy in late March. California remains a preferred market because the overall rental market is so strong.
Deasy noted that it's not just lower tax credit prices that are making it tough to do deals. “Other sources are not plentiful either,” he said. “There are budget pressures at local governments, making other sources of financing harder to line up as well.”