Developers should stay in close contact with their low-income housing tax credit (LIHTC) partners as they head into a new year filled with several unknowns.
Sharing information will be key to staying ahead of any market changes, advised investors and syndicators.
“Communicate early and often,” said Ryan Sfreddo, managing director, investor relations, at Red Stone Equity Partners. “These deals take 24 to 36 months from the time of the QAP (qualified allocation plan) launch, site selection, structuring your deal, applying for credits, and putting a shovel in the ground. It’s a long process.”
While there’s an abundance of investor capital today, that may not be true 24 months from now, he said, advising that developers should not get too aggressive on their early assumptions.
Beth Stohr, director of LIHTC investments for U.S. Bancorp Community Development Corp., also stressed that communication will be key to staying on top of market changes. “Short of keeping a fortune-teller on staff, stay in touch,” she said.
That means talking with investors, syndicators, and housing finance agency officials.
Sfreddo and Stohr were among the participants on the Tax Credit Equity Outlook Power Panel at AHF Live: The Affordable Housing Developers Summit in November.
Investor demand outpaces supply
Heading into 2015, developers were receiving strong prices for their housing tax credits while investor yields continued to tick down.
It’s a period where demand for high-quality Community Reinvestment Act (CRA) investments exceeds the supply, said David Leopold, senior vice president and tax credit executive at Bank of America Merrill Lynch. His bank, which also invests in historic and New Markets Tax Credits, was on track to do a little more than $1 billion in tax credit investments in 2014.
“The combination of a decrease in federal and local subsidies means there is a declining number of transactions that are closing,” he said. “At the same time, banks are increasing their tier-one capital.”
This is resulting in higher credit prices to developers across the country, especially in hot CRA markets like New York City and San Francisco. A few recent deals in Boston reportedly broke $1.08 per dollar of credit, and a Northern California developer revealed receiving $1.12 per dollar of credit.
The current demand for credits will continue as long as there’s some marginal benefit over alternative investments like CRA-qualified mortgage-backed securities, Leopold said during the panel discussion.
As investors pay high prices to win needed housing credits, yields have fallen to between 6.25 percent and 6.5 percent at the end of 2014, according to syndicators.
During the conference, there was talk that yields had fallen even lower into the 4 percent neighborhood. Such low yields are likely unique to some deals in the very top markets, explained Raoul Moore, senior vice president, syndicator, at Enterprise Community Investment.
Moore reported seeing increasing interest from corporate investors who are looking for socially responsible investments. “As affordable housing becomes higher on the list of priorities in this country, you’re going to see more and more of those socially responsible investors coming into the marketplace,” he said.
Tony Alfieri, managing director of tax credit investments at RBC Capital Markets’ Tax Credit Equity Group, added that a number of his investors have been keen on veterans housing deals.
Looking ahead to 2015, Alfieri said he sees the possibility of yields dipping to about 6 percent by mid-year. RBC buys credits about nine months in advance of selling them, and he’s watching the pricing trends and the orders coming in from investors. “If you work through the equation, yields are coming down,” he said.
Even in this heated market, deal terms have held steady, according to Stohr, explaining that top bank investors need to maintain strong underwriting terms.
While no one predicted any immediate changes in the market, panel members noted that a rise in interest rates would lead to lower pricing. If there is a change in interest rates or property performance, “you will see investor demand fluctuate with the realities of the market,” Leopold said.
The return of tax reform
Moderator Michelle Norris, president of National Church Residences Development Corp., also quizzed the panel about the prospects of tax reform and what it would mean for the LIHTC program.
“The whole tax reform is back in the forefront with the Republicans winning both the House and the Senate,” said Dominick Buffa, managing director at First Sterling Financial, a LIHTC syndicator.
Citing a 2013 report by the national accounting firm Novogradac & Co., Buffa described how changes in the tax code could result in a reduction in LIHTC prices and overall equity. Specifically, Novogradac looked at what would happen to prices if the corporate tax rate were to drop below the current 35 percent level.
The firm determined that a reduction in the top tax rate to 25 percent could reduce LIHTC investor equity prices for a 9 percent new construction investment between 4 and 8 cents, or more. And, a reduction in the tax rate to 25 percent combined with extended depreciation periods could reduce investor equity prices for a 9 percent new construction deal between 6 and 9 cents, or more.
In its report, Affordable Rental Housing After Tax Reform: Calculating Corporate Tax Reform’s Possible Effects on Equity Raised from Low-Income Housing Tax Credits, Novogradac also raises concerns that tax changes could result in a loss of $221 million to nearly $1 billion in annual equity raised, which would significantly reduce the total number of affordable housing units built or rehabilitated each year.
“What I’m concerned about is the amount of uncertainty that it’s going to raise in the market,” Buffa said.
First, the affordable housing industry has to make sure the LIHTC program survives tax reform, said Sfreddo. That means keeping in front of the issue and continuing education about the benefits of the program.
Connect with Donna Kimura, deputy editor of Affordable Housing Finance, on Twitter @DKimura_AHF.
