While the housing crisis has focused on the mortgage meltdown, serious trouble has also settled over the affordable housing sector this year.
The nation’s biggest tool in the financing of affordable housing is the low-income housing tax credit (LIHTC), which developers sell to corporate investors to raise money for their housing deals. The core investors in the tax credit program in recent years have been Fannie Mae, Freddie Mac, banks, and other financial institutions, which use the credits to offset their federal income tax liability. Upheaval in the financial markets, however, has reduced the number of LIHTC investors and the amount of tax credit equity available.
Some in the industry estimate that as many as 10 percent to 20 percent of the affordable housing deals receiving credits this year may not find investors, and the developers that do find buyers will likely receive less money for their LIHTCs than expected, leaving large gaps in their project budgets.
On average, LIHTC prices were roughly 95 cents per dollar of credit last year. These days, prices have tumbled to about 85 cents, according to a recent survey by Affordable Housing Finance magazine. On a $15 million deal, that’s a price difference of $1.5 million.
“If it hasn’t already become clear, developers should keep in mind that this is an investors’ market with a clear trend toward more conservative underwriting, particularly with regard to the need for reserves, guarantees, and specifics about rents below market rate,” said Joe Hagan, president and CEO of the National Equity Fund, Inc. (NEF), a leading syndicator of LIHTCs.
Several syndicators, who serve as the link between affordable housing developers and tax credit investors, say developers should watch for several important trends in the months ahead.
Developers need to be prepared for some continued pressure on pricing and yields, said Carl Wise, senior vice president at Alliant Capital. In addition, there will be more scrutiny of the developer’s balance sheet as well as the proposed project’s potential exposure to the condominium and single-family home markets.
Developers should also watch for “issues that could impact deal timing, limited availability of soft or public financing, and rental markets that continue to be soft or weak,” said Paul Cummings, senior vice president of syndication for Enterprise Community Investment, Inc.
Todd Crow, director of institutional sales and portfolio management at PNC MultiFamily Capital, added that “the most important trend for developers to watch relate to the health and well-being of investors and, to a lesser extent, syndicators.”
NEF’s Hagan also emphasizes the importance of choosing partners carefully. “Really, the best deal is the one where your partner relationship will work well for you over 15 years, not just at the time your deal is bid,” he said. “That has always been true, but it’s even more so today. Thinking in terms of anything less could really come back to haunt you.”