The dearth of tax credit equity, more conservative debt underwriting standards, and vanishing sources of soft capital are making it much more difficult to pencil out deals.
In “Establishing Upfront Feasibility,” panelists at AHF Live gave tips on how to navigate the new equity environment to get your 2009 deals closed. The most important lesson was to line up equity investors far in advance of getting a tax credit award, a stark change from just a year ago, when equity investors would go out in search of developers.
Many tax credit investors like banks and insurance companies are keeping their cards close to their chest, waiting on the sidelines for the market to recover while only rewarding their closest customers with debt and equity. Tax credit syndicators are throwing up their hands in frustration as deals get scuttled left and right.
Many developers are now striking deals with direct investors rather than using a syndicator, to bolster their certainty of execution. By using a direct investor, developers can also sometimes procure their debt and equity all in a one-stop shop. “About 70 percent of our tax credit development has been done with syndicators, but that will probably shift over the next 12 months,” said Ken Outcalt, senior vice president of development at The NRP Group.
When working with direct investors, a little more education and hand-holding is required as opposed to working with a syndicator, noted Jeff Kittle, managing director of developer Herman & Kittle. And many of the larger direct investors have smaller appetites than they did a year ago, forcing developers to knock on the doors of second-tier investors.
“If you have $4 million in credits, you might have four or five investors. You turn yourself into a syndicator at that point,” said Kittle. ““But with a direct investor, I have more comfort that I’ll close in this environment. In my mind, there’s more certainty on a direct basis.”
Ever since the tax credit equity market went south, the nightmare scenario of an equity investor backing out at the zero hour has been the experience of many developers. “If we have somebody, we move to close as soon as possible,” said Kittle. He estimated that developers can get a higher price, sometimes by as much as 10 cents, from direct investors, though the process is more time-consuming than using a syndicator. Herman & Kittle now stress upcoming deals in the 60 cent per tax credit equity range, to make sure the deal will hold water should pricing drop further.
Many developers took construction, permanent, and bridge financing for granted in the past. Now, soft sources of funding have become critical to establishing feasibility, panelists noted. Kittle said his company has increasingly turned to soft sources like Community Development Block Grant funds or the Federal Home Loan Banks’ Affordable Housing Program, to make deals pencil out. And Outcalt said that NRP is “uncovering any possible source,” such as solar tax credits, to make a deal work.
“Like never before, we need to over-source our deals to the greatest extent possible,” said R. Lee Harris, president of Cohen-Esrey Real Estate Services, Inc. “You need to look everywhere now, because you can’t count on anything.”