An increased flow of low-income housing tax credit (LIHTC) equity led to a better-than-expected first six months of the year for many tax credit syndicators.
For developers, that means prices will increase or, at the very least, hold steady through the rest of the year, according to a survey of 17 national and regional syndicators.
The average price paid per dollar of credit in the second quarter was $0.71, according to Affordable Housing Finance’s mid-year survey. That’s about a 3 percent increase from the $0.69 average in late 2009. Developers saw an even bigger increase in the top CRA markets.
The surveyed syndicators raised a combined $3 billion in capital in the first six months of 2010. Nearly all firms reported better-than-expected activity.
The higher pricing is attributed to increased investor demand. As corporate profits improve, companies have more money to invest in tax credits. New investors attracted by strong returns, have also entered the scene. Yields paid to investors in the second quarter averaged 10.5 percent, according to the survey.
A third factor is the recent Tax Credit Exchange Program, which removed a good amount of LIHTCs from the market. The program allowed developers to swap unused credits for cash.
“The very rapid increase of equity investment in the market was surprising,” said Raoul Moore, senior vice president of syndication at Enterprise Community Investment, Inc. “In 2009, with limited capital availability, many deals could not be done. In 2010, there is substantially more equity in the market and a shortage of available deals, causing an increase in credit price and a reduction in investor returns.”
Although they are feeling better than they were a year ago, syndicators remain wary about the prospects of a full recovery.
“I believe that the entire industry needs to be mindful of the risk of a double-dip recession,” said Benjamin D. Mottola, president of Stratford Capital Group. “Job creation and corporate profitability are critical to the success of our industry.”
Developers should also keep a watchful eye on the fate of the Tax Credit Exchange Program. Industry leaders have been pushing to get the temporary program extended for another year, but legislation that includes the extension has yet to pass.
“More equity is coming into the market,” said Jeffrey Goldstein, executive vice president and COO of Boston Capital. “However, with the exchange in danger, more credit would flow into the market.”
If there is a double-dip recession, yields drop below 8 percent, and the exchange program is not extended, there could be another equity shortage as investors that recently re-entered the market drop out, explains Hal Keller, president of the Ohio Capital Corporation for Housing.
An expanded mid-year tax credit equity roundup will appear in the September issue of Affordable Housing Finance.