A time machine has sent the low-income housing tax credit (LIHTC) market back to the roaring days before the recession. And, it looks like it may stay there for the near future.
Despite expectations for a correction, prices have remained strong throughout the year. In early October, investors reported seeing recent bids as high as $1.18 and $1.21 in the hot Community Reinvestment Act (CRA) markets.
“My expectation is we will continue to see robust demand among investors for tax credit investments,” says Todd Crow, executive vice president and manager of tax credit capital for PNC Real Estate. “Based on where the market is today, my opinion is we are at all-time highs in tax credit pricing. From my vantage point, it looks like there is more room on the downside than the upside. It’s hard to see yields going much lower or prices going much higher. I also don’t see any real pressure on the downside. Absent some external shock to the system, a significant change in the overall economy, I expect 2016 to be a bit milder version of 2015.”
A change in prices will likely be moderate, according to Crow, who is also president of the Affordable Housing Tax Credit Coalition. “I don’t know if I would call it a correction,” he says. “Maybe just a little bit of the froth out of the market.”
“I think this is probably the most competitive year that many people have been through,” says Beth Stohr, director of new production, affordable housing tax credit investments, at U.S. Bancorp Community Development Corp. “I’ve heard people say this is 2006 all over again. It does feel like we’re back at the other peak in the marketplace. It’s a very competitive time.”
“Going into next year, it’s going to be difficult, at least in the first quarter, to figure out where the market will be,” she says. “There is no sign that there’s going to be any less interest in LIHTCs.”
One key will be what happens when economic investors begin budgeting for the next year. Companies typically enter their budget planning cycles in the last quarter of the year. They’ll look at where LIHTC yields are and assess that against other investment opportunities.
Ryan Sfreddo, managing director, investor relations, at Red Stone Equity Partners expects the LIHTC market to hold its course for a little while longer.
“Although my crystal ball is shattered and beyond repair, I tend to think that the 2016 LIHTC market will begin not all that differently than the way it is ending 2015, from both a pricing and term perspective,” he says.
With interest rates inevitably on the rise and many banks digesting their consumed CRA investments, Sfreddo says he sees yields eventually increasing during the latter part of 2016.
Looking ahead to Year 15
Going into the new year, Stohr will be watching for changes the state housing finance agencies (HFAs) may make in their qualified allocation plans for awarding LIHTCs.
“Each HFA operates a little bit differently, but they all seem interested in the cost-per-unit and how to reduce this,” she says. That could bring some new tweaks to soft cost requirements or reserve requirements.
This year, developers have also been more interested in talking about the terms under which their deal partnerships are “unwound” at the end of the 15-year compliance period, according to PNC’s Crow.
“There’s a lot more discussion about the economics, about the relative authority within the partnership agreement to control or have input in the disposition of the asset,” he says.
Many developers have learned from going through the Year 15 process, and this insight is helping them shape new agreements in preparation for the eventual exit of the investors.
“It’s not necessarily a good thing or a bad thing,” Crow says. “Some different mechanics are being brought into the partnership agreements to maybe make the execution on the back end a little easier down the road.”
This time, the time machine is traveling to the future to prepare for 2030.