Less than 24 hours after the election of a president who represents change, more than two dozen affordable housing leaders assembled to hash out ideas for getting through the financial crisis in the low-income housing tax credit (LIHTC) market.
The industry is in the unfamiliar position of not having enough investor equity. What has been a roughly $8 billion industry has shrunk to an estimated $4 billion, another victim of the bad economy as banks and other investors reduce their investment activities. The harsh reality is that with fewer LIHTC dollars, fewer affordable housing units will be built. What’s more troubling is that many expect 2009 to be even more challenging as banks consolidate and corporate profits sag.
“We have developers who are carrying projects that they can’t afford to carry at this point,” said David Reznick, chairman of the Reznick Group, an accounting and advisory services firm that has a focus on affordable housing. “Closings are delayed. Closings are not happening. Operating costs are rising. Incomes are flat. Citizens are losing jobs, losing homes. Our business though is on the ground floor of the return to prosperity.”
Following on the themes sounded the night before by both President-elect Barack Obama and the man he defeated, Sen. John McCain, Reznick said the affordable housing industry is made up of Democrats, Republicans, and Independents. “We must now be united,” he said at a roundtable discussion at AHF Live: The 2008 Tax Credit Developers’ Summit in Chicago.
Developer R. Lee Harris, president of Cohen-Esrey Real Estate Services, Inc., in Kansas City, described the recent troubles as a train running over the industry. “It was a big freight train, and it clobbered us good,” he said. “It’s important at this conference that everybody have a realistic perspective about what’s going on in the industry. We’ve got equity for many developments that is simply not available. Where equity is available, pricing is down 20 cents or more. If you get $400,000 a year in credits, what does that mean? That’s an $800,000 gap that we’re facing. That happened just like that.”
Despite painting a grim picture, Harris said not all is lost. “We have to get creative,” he said, noting that his firm is looking at smaller markets, smaller projects, and deals using historic tax credits. Saying that he can’t wait for the rest of the market, Harris has also started his own federal equity fund.
A year ago, Bob Moss, senior vice president and director of origination at Boston Capital, said green building was the new Community Reinvestment Act (CRA) in explaining what was driving tax credit investors. “That’s changed a little bit,” he said this year. “CRA is the only green right now.”
LIHTC funds, he said, are predominantly driven by CRA-motivated investors. “We’re going to need economic investors to climb out of this,” he said.
Cynthia Lacasse, president of John Hancock Realty Advisors, provided her perspective as a LIHTC investor. “In these times, the way we look at deals has not changed fundamentally,” she said. “We are looking for good deals with good sponsors in good locations. Obviously, this is a tough time for everybody. We’re very conscious that all of our partners will be going through difficult financial times. It’s even more important to us that we are working with partners who can sustain themselves through those times financially and in other ways. We’re focusing on that as well as all of the other real basics that make good deals.”
Ronne Thielen, managing director of Centerline Capital Group and president of the Affordable Housing Tax Credit Coalition, said the coalition has been working on proposals to make the program more attractive to investors. One idea is to reduce the tax credit program from 10 years to five years on a temporary basis, which has the potential of attracting corporations that are willing to invest over a shorter period but have not wanted to make a 10-year commitment.
To sell LIHTCs to corporations that are unfamiliar with the program means going to their marginal yield, said Bart Harvey, retired chairman of Enterprise Community Partners and Enterprise Community Investment. “Their marginal yield is high,” he said.
Rob Hoskins, president of The NuRock Cos., a Georgia-based housing developer, added that there is a need to look at expanding the LIHTC program to serve households earning up to 80 percent of the area median income (AMI) instead of 60 percent of the AMI. “I can’t tell you how many times that I’ve had folks that are at 61, 62, 63 percent of the area median income that would love to live there,” he said. “If they can’t live in the community then they’ve got to go to a Class C housing environment.”
He also questioned why some state housing finance agencies continue to push for deals in small, rural markets at a time when many of those projects will not be able to find an investor and do not make economic sense.
Deborah VanAmerongen, commissioner of the New York State Division of Housing and Community Renewal, said her agency will continue to pursue its policy goals. It, however, will have to look at deals through “a different prism,” including if a deal can get funded.
During the roundtable discussion, there was also a lively discussion about the underwriting of deals and the performance of LIHTC properties, with Harris saying that about one-third of the asset class is “under water.”
On the other side, Buzz Roberts, senior vice president for policy at the Local Initiatives Support Corp., said the LIHTC program works and “delivers the goods.” He said the foreclosure rate on tax credit properties is less than one-tenth of 1 percent.
“We didn’t create this crisis out there,” said Patrick Sheridan of Volunteers of America, a leading nonprofit developer. “Affordable rental housing is performing very well as an asset class.”
Although the coming year is expected by many to be even more difficult than in 2008, several participants in the roundtable discussion expressed optimism in the wake of the election. There is expectation that there will be more opportunities and interest in affordable rental housing under the new administration.