By Donna Kimura
Higher low-income housing tax credit (LIHTC) prices are good for developers, but they’re causing big concerns for others in the industry.
One worry is that the falling yields will push economic investors to the sidelines.
“A year ago, people said the floor was 8 percent,” said Russell Ginise, managing director of tax credit investments at RBC Capital Markets. “Six months ago, they said it was 7.”
Recently, the conversation has become 5 percent to 6 percent, he said at the National Council of State Housing Agencies conference in June. “It’s very investor specific,” Ginise said.
Yields to investors decline as tax credit prices increase.
Bank of America is one of the nation’s largest LIHTC investors. Pricing is determined by several different factors, including the timing of the equity pay-in, deal risk, and competition, explained David Leopold, senior vice president at Bank of America Merrill Lynch.
Competition is all about how many investors and syndicators are bidding on the same deal and driving prices up.
Some recent deals in California and New York City have received bids of more than $1 per dollar of credit. Pricing in most other areas has gone up as well.
The higher pricing is good because it helps developers fill financing gaps, but the bad news is that it does lower yields and make the investment less attractive to some investors.
The increasing demand for LIHTCs also raises concerns that important deal terms will loosen amid the frenzy to buy and sell credits.
One syndicator said he has started to see some cases where reserves are falling below the recommended six months of expenses. For many, that’s troubling.
“Reserves are good for everybody,” said Hal Keller, president of the Ohio Capital Corporation for Housing, after hearing about the lower reserves. “They’re good for the [housing finance] agency. They’re good for the tenants. … They’re good for the investor. I’m frankly surprised that’s happening.”
Syndicators and investors speaking at the NCSHA conference said their LIHTC portfolios held up well during the economic downturn. However, a few noted some stress in their portfolios or isolated problems with some sponsors.