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 with an affordable housing focus. “Closings are delayed. Closings are not happening. Operating costs are rising. Incomes are flat. Citizens are losing jobs. They're 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. It's time that everyone is united, he said at a roundtable discussion at AHF Live: The 2008 Tax Credit Developers' Summit in Chicago.

Hard times

Developer R. Lee Harris, president of Cohen-Esrey Real Estate Services, LLC, 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 $0.20 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.

Most deals were closing without being repriced for the first half of the year, said Bill Kelly, president of Stewards of Affordable Housing for the Future, which is a network of eight leading nonprofit developers with about 80,000 units. “But then September came, and we have a lot of deals on hold now,” he said. “No purchasers for bonds in a lot of cases. Lots of problems with very good investors coming to us and saying we just don't know if we are going to have a tax liability in three years, in 10 years.”

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) to explain 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 tax credit 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 basics that make good deals.”

Finding solutions

Ronne Thielen, managing director of Centerline Capital Group and president of the Affordable Housing Tax Credit Coalition (AHTCC), 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 instead of making 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, adding that LIHTCs would also compete against other investment opportunities.

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.

Patrick Sheridan, senior vice president of housing development for Volunteers of America, was also among the developers voicing concern about the viability of new LIHTC deals in today's economy. “I'm all in favor of bringing in more investors, and certainly the more the better. And if that increases yield, then fine. But, remember, at some point yield being high doesn't make deals work from a developer's standpoint.”

He also said it was important not to lose the perspective that there is a strong social purpose and need to build rural and supportive-housing projects.

Deborah VanAmerongen, commissioner of the New York State Division of Housing and Community Renewal, said her agency, which allocates about $25 million in housing tax credits a year, will continue to pursue its policy goals. However, it will have to look at deals through “a different prism,” including if a deal can get funded, she said.

VanAmerongen's agency has had four deals recently fall out and return credits. As a result, a big focus is managing the project pipeline. “What we're trying to do is make sure that we get credits out as soon as we get them back,” she said, noting that four new projects have received the returned credits. “We are not letting credits sit there.”

During the roundtable discussion, there was also a lively discussion about deal underwriting and the performance of LIHTC properties, with Harris saying that about one-third of the asset class is “underwater.”

On the other side, Benson “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.

Roberts said he believes that the LIHTC industry will be fine in the long run, but getting through the current turmoil will be tough. “As everybody has said, the principal issue here is finding investors, bringing them back to the table,” he said. “And we need to look at various approaches that would make it easier to attract investors, whether it's refundability on some term or maybe a shorter credit period without losing the fundamentals of what makes this program so effective—its discipline and its accountability and its ability to work within a marketplace.”

Other ideas are also being floated to stimulate the LIHTC market. AHTCC has also proposed permitting a carryback of the credit for up to five years and to allow these credits to be used to offset alternative minimum tax liability during that period. Another idea is to give housing allocating agencies an additional year to make allocations before having to return unused credits to the national pool.

Two of the biggest LIHTC investors had been Fannie Mae and Freddie Mac, which until recently had each bought about $1 billion of credits a year. Speakers said the prospects of them returning to the market in the near future are slim, considering their financial conditions and being placed into conservatorship. Still, industry leaders are pursuing ideas to get them back into the market, including letting them cancel old credits for new ones.

Although the new 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. There is also an opportunity to appoint new leaders at the Department of Housing and Urban Development, said speakers.

“It doesn't cost money to create efficiency at HUD,” Reznick said. “It's not a budget issue to have the leaders of [the Federal Housing Administration] in dealing with staff say this is the way we want to do it.”