When looking at deals, it used to be about the three Ls-location, location, location. Now, that’s been replaced by the Ss-strength, strength, strength, said Jim Rieker, president and CEO of the Midwest Housing Equity Group, Inc.
That’s strength of development team, strength of guarantees, strength of reserves, and strength of market.
Beth Stohr, president of U.S. Bancorp Community Development Corp., pointed out that there are three new Ls-liquidity, low leverage, and longevity.
They were among the investors and syndicators painting a picture of the low-income housing tax credit (LIHTC) outlook Tuesday at AHF Live: The 2009 Affordable Housing Developers’ Summit in Chicago.
Moderator Todd Sears, vice president of finance at Herman & Kittle Properties, Inc., an Indianapolis-based developer, asked the panel to do some “market math” and estimate where the market may level out.
Stohr offered a rough calculation that estimated the 9 percent LIHTC pool at about $6.3 billion in credits. Assuming an average price of $0.70, that leads to an equity level of about $4.4 billion.
Stohr said she counts seven investors who can put in roughly $4.8 billion in equity over the next 12 months. In addition, there is probably some other equity out there.
If you look at the market in its simplest, rawest form, it appears there could be a decent amount of potential equity overall. However, she pointed out that it doesn’t address how to deal with gaps and not all deals are created equal, meaning some projects are stronger and more appealing to investors.
Joe Hagan, president and CEO of the National Equity Fund, Inc., also noted the issue of geography and the Community Reinvestment Act (CRA). Banks are motivated to invest in tax credits to meet their CRA obligations, with most of the CRA activity on the East and West coasts.
A developer from Detroit expressed frustration about not being able to find an investor and asked for an explanation.
Christopher Long, senior vice president at Bank of America Community Development Banking, said one concern is that the differential between market rents and LIHTC rents in the city are likely minimal.
Overall, Bank of America continues to have appetite for LIHTCs, said Long. It is a CRA investor, so the location of the projects is important, he said.
Rieker, who specializes in the Midwest, made the case that there are CRA needs in the area. All of the local regional banks have CRA obligations, but they have some concerns about liquidity and are holding on to cash. “Still, there are deals getting done in the fly-over states, and there is a tremendous need for housing in these states,” he said. “I would dare anyone to go into those states and say, ‘You are not as important as New York or Los Angeles.’ You may have a riot on your hands.”
Sears quizzed the investors and syndicators about recent deals they liked and didn’t like.
Hagan recounted approving a deal that day. On the positive side, it was one with a solid developer, had good financials, and was well underwritten. What he didn’t like was that the deal was a project with Tax Credit Assistance Program (TCAP) money in it and the state decided that it wanted 4 percent interest on the TCAP funds, essentially preventing the developer from making cash flow for 15 years.
Stringent requirements from the states are one of Hagan’s big concerns going into 2010. The other, he said, is how to fill the gap.
He recounted one deal that could have worked if the developer exchanged about 23 percent of his credits and kept the rest of the LIHTC equity in. However, the state pushed for a 100 percent exchange.
Hagan hopes NEF will do at least $400 million in tax credit deals this year.
Michael Riechman, director of investor relations at RBC Capital Markets, said his firm is focused on sponsorship and working with well-capitalized sponsors. He said he is not against going into smaller markets, but the deals need to have the right leverage or little debt. RBC is hoping to close about $250 million to $350 million in equity this year.
When discussing when a developer should bring a deal to a syndicator or investor for the first time, Riechman said the earlier, the better. The longer the syndicator has to shop the project, it will improve its chances for getting an investor and a good price.
Cynthia Lacasse, president of John Hancock Realty Advisors, Inc., said she is looking at the capability of sponsors to sustain their organizations in tough times.
She said there is a strong need to get “back to fundamentals” in 2010.
Rieker said higher yields have helped some to bring in new investors into the market, but the bottom line is that companies have be making money and be able to forecast into the future to invest. “We need a little patience with this economy for starters, but there are people that we talked to in the past when yields were 5 or 6 percent and basically showed us the door when we walked in. Now, they are actually talking to us.”
Riechman added that he is seeing some activity with new investors, particularly insurance companies, but he emphasized that there is a long lead time in bringing new investors into the market.