Low-income housing tax credit (LIHTC) investors and syndicators are much more reserved going into 2012 than they were a year ago.
Several leading firms are no longer projecting growth like they did last year. Instead, they are conservatively anticipating their investment volumes to be roughly the same as this year.
That’s a sign that the overall market may be tightening up after a big spike in pricing and drop in yields, a trend that could trigger some economic investors to stop or slow down on their investing.
While major banks will remain active LIHTC buyers in 2012, the question is will other investors.
“When you look at the larger banks, I think the top six of us account for almost 50 percent of the marketplace,” said Beth Stohr, president of U.S. Bancorp Community Development Corp. “The remaining 50 percent, that bucket, is less loosely known. That may cause some adjustments in the marketplace, but I think they’re yet unknown.”
Developers should stay in close contact with their syndicators and investors through the end of this year and into 2012 to gauge the pulse of the market, said Stohr.
In the last few years, RBC Capital Markets Tax Credit Equity Group has closed about $500 million to $600 million in annual LIHTC investments. “We’ll do that again in 2011 and hope to do the same in 2012,” said Craig Wagner, director of business development. “[But] there are a lot of unknowns out there.”
The investor landscape is already shifting. RBC’s last fund had 12 investors–eight insurance companies and four banks. The company’s new fund will have a decidedly different mix, with mostly banks and only a few insurance companies.
Some insurance firms are saying they’ve done so much LIHTC investing in the last two years that they want to digest what they’ve done, Wagner said.
That appetite of insurance companies and other economic investors is one of the big question marks going into 2012, according to Wagner and others on the Tax Credit Equity Roundtable at AHF Live: The Affordable Housing Developers’ Summit in Chicago in early November.
David Leopold, senior vice president at Bank of America Merrill Lynch, noted how he and the others on the roundtable are split on their 2012 expectations. While most of the panelists project their levels to be flat with 2011 volumes, AEGON USA Realty Advisors anticipates growth, and Midwest Housing Equity Group, Inc. (MHEG) and National Equity Fund, Inc. (NEF) forecast doing a little less volume next year.
Perhaps, the varied expectations suggest a coming equilibrium, said Leopold, who manages the origination of LIHTCs, New Markets Tax Credits, and historic tax credits at the bank. Bank of America plans to continue to invest at roughly the same level next year, which is more than $600 million.
Leopold went on to say that some recent deals have been over-sourced because credit pricing was higher than expected. If the industry gets too aggressive about the pricing assumption, some 2012 deals may find themselves with gaps.
Another critical industry issue will be the return of the floating rate on 9 percent LIHTCs. The Housing and Economic Recovery Act of 2008 set a 9 percent floor on the rate for recent deals that are placed in service before the end of 2013. This flat rate has been important because it allows for deals to receive additional credits/equity.
Unless Congress acts to continue to have the 9 percent fixed rate or state allocating agencies come up with alternative plans, the industry will likely have to go back to underwriting deals at a lower rate beginning next spring, Stohr said.
That could mean a very difficult transition period for deals next year.
Industry leaders hope the 9 percent fixed rate will be included in an extender package. Rep. Pat Tiberi (R-Ohio) and Sen. Olympia Snowe (R-Maine) are expected to sponsor the legislation.
The trouble is there’s a long list of extenders that need to be passed for 2012. Because the 9 percent fixed rate has a 2013 date, some legislators may not see it as a priority even though the impact will be felt next year, said speakers.
Roundtable moderator Todd Sears, CFO at Herman & Kittle Properties, Inc., an Indianapolis-based developer, quizzed the panel on their latest deals and terms to paint a picture of a market that has seen huge and rapid shifts this year.
The average price has increased to about $0.90, up from a moderate $0.70 a year ago, according to Joe Hagan, NEF president and CEO.
The swings can also be seen in The Richman Group Affordable Housing Corp.’s latest fund. Looking at the pricing differential just within this one fund, there’s a swing between high and low of about $0.15, said Stephen Daley, executive vice president.
He and others cautioned that there are many factors in the equation, and developers shouldn’t just look at price per credit.
Jim Rieker, president and CEO of MHEG, said he is willing to pay a high price for a credit. “I just hope you can live with the pay-in,” he said. “That’s why pricing is not the number we need to focus on. There are so many variables involved.”
MHEG’s last fund had a yield of about 7.5 percent. The returns for the new funds will drop to 6 percent to 6.5 percent. At those returns, investors start to get “a little shy,” Rieker said.
Others also wondered if 6 percent is the floor for investors.
Rieker added that he’s concerned about loosening deal terms. “We [the industry] have been down that road before, and we got into a little trouble,” he said.
Other speakers agreed that developers, who have been receiving multiple bids for the LIHTCs, are pushing back on terms. One said he has seen operating reserves go from six months to three months on some deals.
What investors look for
Roundtable panelists made it clear that project sponsorship is the first point they look at in a deal.
Investors also want to review audited financial statements and the sponsor’s portfolio. However, it’s a not a check-the-box kind of approach, according to Pat Nash, managing director of JPMorgan Capital Corp., meaning that deals are looked at individually.
Hagan said that 70 percent of NEF’s portfolio is with nonprofit sponsors. From just a liquidity perspective, many of them are weak. However, that’s not the only criteria. It’s also important to look at an organization’s staying power and ability to resolve problems.
Ease of execution is also important, added Stohr. She recommended that developers prepare a package that includes a financial review plus other key materials that they can present to lenders and equity providers.
Sears also asked the bank investors how the Community Reinvestment Act (CRA) influences their LIHTC investing.
“It gives priority to how you are going to spend your limited equity dollars,” Stohr said. “We also try to balance that with the economics. … There’s a balance between the two, but I think it lends to how you lay out your priority list.”
Bank of America’s Leopold said banks get a value for doing deals that help them meet their CRA obligations. “That doesn’t mean that we are not concerned about yields,” he said. “We are. But it does mean CRA gives us a value that we will pay for.”
On the other side, AEGON is not a CRA-motivated investor so it has the flexibility to go to all areas of the country and compete for deals, said Chris Long, vice president. That’s good from a public policy perspective, he said.
Daley added that he thinks there could be a widening spread between CRA and non-CRA market deals.