A tailwind is finally blowing behind the low-income housing tax credit (LIHTC) industry as it enters the new year. A strengthening economy and a favorable new accounting treatment are two reasons for the improving market outlook.

“This time in 2013, investors were very cautious about allocating money to LIHTC funds,” says Tony Bertoldi, senior vice president, syndications and investor relations, at City Real Estate Advisors (CREA). “Some were hesitant that the accounting change wouldn’t pass, that Community Reinvestment Act reform wouldn’t take place, and that Congress would be unable to pass a budget. As those obstacles disappeared one by one, investors became more and more active in the tax credit market, culminating in a very busy fourth quarter. With tax reform seemingly on the back burner and a federal budget in place, all market indicators seem to be positive.”

LIHTC syndicators are feeling as good as or better than they did a year ago about the market, according to ­affordable housing finance’s annual survey. That’s a change from the forewarning issued by several syndicators heading into 2013.

“The market has been relatively stable over the last year, for the first time in a long time, and any change should be relatively minor,” says Steve Kropf, president and CEO of Raymond James Tax Credit Funds.

The surveyed syndicators paid an average of 90 cents per dollar of credit this past fourth quarter, unchanged from a year ago. Yields to investors averaged just a tick above 7 percent.

Fifteen syndicators expect pricing to hold firm, while four predict an increase between now and July. No one anticipates LIHTC prices dropping in the next several months.

“Prices will hold steady in the first half as allocations by housing finance agencies begin to be made and spillover deals from the fourth quarter command attention,” predicts Hal Keller, president of Ohio Capital Corp. for Housing, which had its best year, raising $331 million in equity and closing $320 million. “I do believe prices will go up in the second half as more money flows into the market.”

There is still a wide spread—as much as 20 to 25 cents, in some ­­cases—­between deals in hot Community Rein­vestment Act (CRA) markets and non-CRA ­markets.
But, some regulatory relief may be on the way. There is early movement to possibly expand CRA assessment areas to a broader, statewide or regional area, which could be a big boost for deals outside urban centers.

“For one thing, assembling funds for multiple CRA investors might not be as difficult a jigsaw puzzle going forward,” says Stephen Daley, executive vice president at The Richman Group Affordable Housing Corp. “The other benefit could be leveling the playing field on pricing.”

Despite the differential, there’s still good interest in non-CRA area transactions, according to several syndicators. “There’s more competition for rural deals as syndicators seek to fill multi-investor funds, and a potential for increased pricing as a result,” says Tony Alfieri, managing director of RBC Capital Markets.

Lansing, Mich.–based Great Lakes Capital Fund (GLCF) is also seeing more deal competition. The Midwest is becoming a targeted investment area for both existing and new syndicators, says Mark McDaniel, GLCF president and CEO.

Issues for 2014

At the end of 2013, the industry received good news when the Financial Accounting Standards Board (FASB) determined that LIHTCs should be classified as investments and not deferred tax assets. The board supported allowing qualifying investments to use the proportional amortization method, in which the costs as well as the tax credits and other tax benefits of the investment are reported in the income statement on a net basis as a component of income taxes.

The bottom line is this makes the accounting of LIHTC investments much easier and clearer to understand. So far, the FASB ruling has been an emotional lift. How it translates on the street remains to be seen.

“We expect this to be an important development for many investors, including some who have not participated in LIHTC investing because of accounting,” says Rick Gonzales, senior vice president at PNC Real Estate. “On the margin, we think this is likely to encourage investment. We’re waiting for the market to digest and to gauge reaction.”
While syndicators are hopeful that the change will deepen the investor pool, they’ll also be watching to see if it turns out to be too much of a good thing.

The concern is that too much new competition and capital will cause yields to drop, which would push some economic investors out of the market.

Other big issues remain, including the expiration of the 9 percent flat rate this year. A return to a floating rate, which has been closer to 7.5 percent, would mean significantly less equity on some deals.

“We’re most concerned that without the continuation of the fixed 9 percent rate, equity to deals would decrease without the addition of soft funds to fill the gap,” says Joe Hagan, president and CEO of National Equity Fund. “This could put stress on higher deferred fees or push for additional hard debt.”

There’s also the big uncertainty of tax reform, which threatens to eliminate or alter the long-standing LIHTC program. Most syndicators say that reform efforts have stalled in Congress, at least for now.

“We believe it will be difficult for Congress to undertake a comprehensive reform of the tax code in 2014, although we expect they’ll continue to look at the code and eventually [reform it],” says Jeffrey Goldstein, executive vice president and COO at Boston Capital.
Tax reform and its effect on the LIHTC program will remain a concern until the matter is resolved, adds Raoul Moore, senior vice president, syndication, at Enterprise Community Investment.

Secondary, preservation deals heat up

Several syndicators report a large amount of secondary activity in the market. This shows that LIHTC investments are marketable beyond their initial investment, says Stacie Nekus, senior vice president, investor relations, at Alliant Capital, which was recently involved in two secondary transactions.

“There are some investors, particularly corporations, where the length of the investment was prohibitive,” she says. “An active secondary market, paired with the FASB change, may act as an enticement for new investors to enter the market.”

Fifteen of the surveyed syndicators, or 75 percent, cited seeing more preservation deals, especially LIHTC projects reaching the end of their compliance periods.

“Such properties tend to be in relatively good shape, and with the qualified tenancy already in place, these deals tend to work well from a syndication perspective,” says Christine Cormier, senior vice president at WNC. “We anticipate more deals of this ilk as properties hit the end of the compliance period.”

R4 Capital, too, reports seeing a good number of rehabs involving older LIHTC properties. “So long as the developer is completing a significant and sufficient rehab to the units and amenities, we like these deals, in part because we can point to a long track record of occupancy and success in the given property’s market,” says Marc Schnitzer, R4’s president.

PNC Real Estate also reports seeing more preservation projects. In response, this year it’s planning to introduce a private equity real estate fund that focuses on preservation. The Richman Group also says it’s formulating strategies for preservation funds, and CREA has formed its Strategic Investments Group to provide financing solutions for deals that are candidates for resyndication.

2013 Tax Credit Activity
COMPANY Capital Closed
(in $millions)
Projects Acquired
42 Equity Partners $40.00 15
AEGON USA Realty Advisors 238 18
Alliant Capital 440 48
Boston Capital 540 62
Boston Financial Investment Management 350 32
City Real Estate Advisors 441 47
Enterprise Community Investment 645 73
Great Lakes Capital Fund 186.4 28
Massachusetts Housing Investment Corp. 79.7 14
National Equity Fund 530 56
Ohio Capital Corp. for Housing 320 46
PNC Real Estate 541 55
R4 Capital 200 28
RBC Capital Markets Tax Credit Equity Group 721.3 61
Raymond James Tax Credit Funds 684 92
Red Stone Equity Partners 321 38
The Richman Group Affordable Housing Corp. 608 66
Stratford Capital Group 140 17
Virginia Community Development Corp. 48 23
WNC 348 56