Some low-income housing tax credit (LIHTC) deals are struggling in the wake of declining equity prices. The outlook is grim. Several industry experts say they expect the market to go from bad to worse during the course of this year, making it one of the gloomiest times for LIHTC developers.

"There's no question that the market has changed substantially by the withdrawal of Fannie Mae and Freddie Mac and large banks," said Deborah VanAmerongen, commissioner of the New York State Division of Housing and Community Renewal (DHCR).

Citi continues to invest

One of the key areas of interest this year is which investors are in and which are out. Several industry players have reported that Fannie and Freddie, two major investors, are out of the market this year. However, the companies have said little publicly about their plans. Freddie Mac said it won't know more about its 2008 LIHTC activities until later this year but remains involved in affordable housing.

However, Citi Community Capital said rumors of its withdrawal from the market are inaccurate.

What is different is that Citi will have a preference for guaranteed funds in 2008. The group's overall investment volume in new funds is expected to be about $750 million this year, the same as it was in 2007. Citi has invested largely in unguaranteed funds in the past, but that preference is shifting.

"We expect to purchase more guaranteed deals," said Managing Director Andrew Ditton at the end of February. "It will depend on the market."

Citi plans to focus on guaranteed funds because they have an advantage when it comes to capital allocation charges. If a major commercial bank or a government- sponsored enterprise guarantees a product, the capital allocation against investment changes from 100 percent to 20 percent, Ditton explained.

In 2007, Citi also invested $1 billion in the secondary market, but that was based on opportunity. Any secondary-market investments this year will also be based on availability and opportunity, Ditton said.

So far in 2008, Citi Community Capital has closed on a $30 million investment, an unguaranteed fund with Alliant Capital. It is looking at closing on a large unguaranteed fund next.

Like many other investors, Ditton is carefully watching the market in 2008.

"The market is in flux," he said. "There are many unknowns in the investor community, including who's in and who's out. I suspect that as the year progresses, some of that will be uncovered, and we will have a better sense of the supply-and-demand balance. There are also unknowns about syndicators in the marketplace. Questions about the participation of those players add to the uncertainty. And there is a fairly significant overhang of projects purchased by syndicators [in 2007] that have yet to find an investment home. All of these factors are contributing to uncertainty in the market."

The HFA view

Despite the drop in LIHTC pricing, tax credits are not being returned from failed deals, reported several state housing finance agencies (HFAs) contacted by AFFORDABLE HOUSING FINANCE in February. These agencies typically allocate credits and monitor LIHTC developments, giving them a unique perspective into the equity market. It's important to note that it may still be too early to tell if recently reserved credits will be returned from deals that are struggling to get done.

"With 2007 allocations, we have been fortunate," said Sean Thomas, director of planning, preservation, and development at the Ohio Housing Finance Agency. "We have not seen too many developers come back because they had problems raising what was originally promised in early 2007."

Out of 40 projects that were reserved credits, two deals were dropped by syndicators and are scrambling to find other syndicators, he said. In another deal, a developer was having trouble raising equity and was considering reducing the number of units in the project but found a way to make the transaction work.

In 2008, OHFA received 164 applications for site and market evaluations in February. The state has a two-tier application process, and full LIHTC applications are due in May.

Thomas said he has been hearing estimates that tax credits prices will be about 83 to 85 cents per dollar of credit in his region at that time. If deals saw that kind of drop, many of them could face as much asa $500,000 gap, he estimated.

Equity letters used to be good for a year, but now it is just three months, Thomas said.

Thomas noted that the Ohio Capital Corporation for Housing syndicates 50 percent or more of the deals in the state, and it was able to close all of its 2007 deals.

Despite the tough environment, OHFA and others said they are not yet loosening their requirements on deepincome targeting.

In Washington, no credits have been returned, but three projects, which didn't have their pricing completely tied down, are seeing gaps in the range of $200,000 to $600,000, said Kim Herman, executive director of the Washington State Housing Finance Commission.

Herman estimated that prices have dropped about 10 percent from a year ago.

"We're very much watching the market," Herman said. However, no policy changes had been made.

LIHTC developments typically have five or six sources of funding, so the commission is working with all the partners to try to overcome any problems and make sure housing is built. In February, Herman was also working with state leaders to increase the state housing trust fund, which had $130 million in 2007.

In New York, LIHTC applications were due Feb. 27. Although DHCR has not yet had any recent deals come back, VanAmerongen estimated that there is about a 10 cents difference between what sponsors expected to get from syndicators from when the agency reserved credits and what they will get.

The HFA is not backing away from its qualified allocation plan (QAP) requirements, but it is considering establishing criteria under which it would consider requests for additional financing, either more tax credits or other subsidy, she said. DHCR would ask sponsors several questions to determine what help, if any, it could offer. For example, the agency would want to know how much of a developer fee has been deferred. In addition, DHCR would want to know how strong the market is and how the deal was originally underwritten.

VanAmerongen stressed the need for deals to be properly underwritten. If the department receives applications for deals that won't underwrite well, it could hold credits back and do a second round of allocations.

She expects the crisis point to hit this summer, when deals really must proceed or die. She added that there was a time not long ago when there were other investors besides Fannie, Freddie, and major banks. "It's incumbent on syndicators to get aggressive and bring other investors back into the market," she said.

Like officials in the other states, leaders at the Virginia Housing Development Authority said they do not expect to make any policy changes at this time, but may consider doing so when looking at changes to the 2009 QAP.

In Virginia, five developers who received LIHTCs in 2007 are applying for additional allocations this year, reported Jim Chandler, director of the LIHTC program. He said one of his biggest concerns is "that the declining prices for credits will reduce the number of units that can be produced and also create a situation where more of the other limited affordable housing resources are needed for developments to be feasible."

California Treasurer Bill Lockyer, who chairs the California Tax Credit Allocation Committee and the California Debt Limit Allocation Committee, said his team has not been advised of equity problems that are jeopardizing 2007 awardees. But some nervous developers want to be ready in case there is trouble.

"We have been receiving informal inquiries in the event such a reduction should occur, but have yet to see a gap resulting from reduced credit pricing," Lockyer said.

He is worried that lower credit pricing may reduce the demand for credits. "However, California is likely to continue to be significantly oversubscribed for 9 percent credits," he said. "In addition, we have yet to see a downturn in demand for 4 percent credits."

Although a decline in prices does not appear to be pushing developers to seek additional credits, Lockyer said there have been requests from a few 4 percent credit recipients reaching their placed-in-service dates because they have been hit by project cost increases.