First, the good news: 4 percent low-income housing tax credit (LIHTC) and tax-exempt bond deals should benefit from an overall improved market.

More investor capital is flowing, and there’s increased interest in LIHTC projects of all kinds.

Now, the bad news: Bond deals are still going to be tough to do in 2011.

Bond transactions will remain difficult because of the economies of scale needed to offset the bond issuance costs and concerns about the amount of leverage involved, said Jeff Whiting, CEO of City Real Estate Advisors, Inc.

His firm anticipates seeing more bond deals in the months ahead.

For developers, a big advantage of using 4 percent credits and bonds is they are generally easier to obtain than 9 percent LIHTCs.

However, 4 percent credits generate less equity, often leading to funding gaps. Structuring these deals is also more complicated than a 9 percent tax credit deal because more elements are involved in the transaction, not to mention more people such as a bond issuer and bond counsel.

“The prospects for 4 percent LIHTC deals continue to be a product that many of our investors are not enthusiastic about,” said Mark McDaniel, president and CEO of Great Lakes Capital Fund. “The closer these deals replicate a 9 percent credit deal, the better.”

Great Lakes officials expect bond deals to continue to represent about 20 percent of the total closings this year.

In 2010, about 25 percent of Enterprise Community Investment’s acquisitions were bond deals.

“However, a majority of these deals only used the bond financing during construction and either had no hard debt or very low amounts,” said Raoul Moore. “The key to doing bond deals in 2010 was the availability of Tax Credit Exchange Program funds and or other soft financing sources.”

Raymond James Tax Credit Funds, Inc., expects its ratio of 9 percent to 4 percent deals acquired to be about 10 to one, said Steve Kropf, executive vice president and director of investments.

Overall, highly leveraged bond deals will continue to struggle, but there will be increased appetite for well-structured deals such as public housing authority replacement housing deals where the bonds are paid off after construction, said Hal Keller, president of the Ohio Capital Corporation for Housing.

His organization has been doing bond transactions through its proprietary funds. It has worked because they have been local investors and like getting more involved in the underwriting.  

St. Louis Equity Fund, Inc., will continue to consider bond deals. However, they need to be with strong partners and have returns not heavily dependent on losses, said President John Wuest.