Cautious Start to the New Year

Big uncertainties hang over the low-income housing tax credit (LIHTC) market as the new year begins.

The unknowns include the impact of Donald Trump’s return to the White House on the investment arena, the prospects of a major tax bill, the introduction of new tariffs, and the availability of debt and equity at a time of rising development costs.

As a result, several LIHTC syndicators expect a weaker market at least in the early months of 2025.

“We believe the market will be cautious in 2025 until there is better visibility into any new policy decisions and direction moving forward,” says Catherine Such, head of Regions Affordable Housing. “There is strength in the market, to be sure. This is a time when it is only natural for participants to await further guidance on policy. If the 10-year Treasury rate remains at year-end 2024 levels or increases, there may be additional pressure on lower-tier pricing due to increased yield requirements. Further downward pressure on credit prices could cause source and use imbalances in some deals.”

Trump and his Republican allies will need to author a comprehensive tax package to address the 2017 Tax Cuts and Jobs Act provisions that are expiring this year, notes Jack Kukura, president of Marble Cliff Capital.

“As a result, I anticipate many LIHTC investors to sit on the sidelines until at least the outline of a workable tax package is presented by the White House and congressional leaders,” he says.

Other syndicators are hopeful that tax reform and additional policy changes will start to come into focus in the months ahead.

“While we will see some hold-over closings from deals signed in 2024, signing new business will slow in the first half of 2025 as developers and investors weigh a potential tax package that could impact LIHTC pricing. Additionally, tariffs are poised to be a focus of 2025 as we evaluate what impact they will have on project materials and construction pricing,” says Julie Sharp, executive vice president of Merchants Capital. “By midyear, we should have some clarity from Washington as to what potential tax reform looks like and how it could impact the market for LIHTC transactions.”

Aspects of a potential tax package that the Merchants Capital team will be watching include bonus depreciation, a reduction in competing credits, any changes to treatment of tax-exempt interest, and the possibility of a LIHTC expansion through a reduction in the 50% test and expansion of the 9% credit.

“At Cinnaire, we anticipate a slight weakening of the LIHTC market in 2025,” says Ryan Robinson, president of Cinnaire Syndication. “This projection stems from an imbalance in supply-and-demand dynamics. On the supply side, there is a growing volume of deals seeking capital, reflecting the ongoing and critical need for affordable housing development. However, on the demand side, while investor interest in LIHTC remains steady, there is insufficient capital in the market to absorb the current pipeline of deals.”

According to Cinnaire, several factors are contributing to this strain. “Investors are grappling with challenges such as rising costs of capital, competing investment opportunities, and evolving tax liability considerations,” Robinson says. “These pressures are making it more difficult for the market to achieve the equilibrium necessary for strong growth. Until we see a meaningful increase in investor capital, the market will likely remain slightly softer, with supply continuing to outpace demand.”

Volume Forecast

Opinion is divided on whether there will be more or fewer LIHTC deals closing this year. About 50% of the syndicators surveyed by Affordable Housing Finance expect there will be a drop in deal activity compared with last year, while 36% say the volume will be similar and just 14% anticipate more deals closing.

There will likely be fewer deals because “the size of the LIHTC allocation per project has grown so much over the last few years,” says Amy Dickerson, chief operating officer at Hunt Capital Partners.

Officials at Enterprise Housing Credit Investments also say there could be a possible drop in closings because of escalating development costs. Kari Downes, president, notes that some states have forward-allocated funding to fill budget gaps in deals that previously received credits. As a result, this could take away from new production this year.

Federal American Rescue Plan Act funding that was coming through the states in recent years is also at an end, adds Cynthia Lacasse, executive vice president and chief program officer at Evernorth. “The federal funds made 4% transactions feasible, so we saw an increase in production,” she says. With those resources gone, production could slip.

Jason Gershwin, managing director at R4 Capital, is among the syndicators expecting the number of industrywide closings to be about the same as in 2024.

“Despite external economic challenges, including the prolonged higher interest rate environment, the LIHTC market has remained robust and efficient,” he says. “There are always projected year-end closing deals that get delayed to early the following year, and there has remained a relatively steady flow of properties to invest in and of investor capital. At R4, we closed 40 equity investments and 22 tax-exempt loans in 2024, as compared to 41 and 17 in 2023. Especially on the equity side, we have seen transaction size continue to increase.”

Red Stone Equity Partners reported closing substantially more LIHTC deals in 2024 than the year before. Other firms also posted record years after the market challenges delayed many closings in 2023.

“Most of these backlogged deals cleared in 2024,” says Stephanie Kinsman, managing director, investor relations, at Red Stone. “Similar to 2024, we expect 2025 deals to better pencil from the outset and require less value-

engineering and reworking of their capital stacks since they were conceived in this new cost, rate, and OpEx environment. As such, we believe that a similar number of deals, if not slightly more, will close in 2025.”

Pricing Outlook

Syndicators are closely split on the outlook for LIHTC pricing to developers in the first half of the year, with 55% anticipating a slight decrease and 45% saying prices will hold steady.

“Pricing in the first half of 2025 is expected to be lower due to decreased investor demand,” says Jen Erixon, senior managing director, head of equity originations, at Walker & Dunlop. “Many investors are taking a measured approach in the market and waiting to determine what tax policies will be proposed by the new administration before they set their investment targets for the year. This temporary decrease in demand is negatively impacting pricing.”

Other syndicators agree that investors are going to be reserved until they know more from Washington.

“With developers bringing an increased number of larger projects, and with investors taking a cautious wait-and-see approach to federal tax policy, we expect pricing to generally decrease,” says Catherine Cawthon, CEO of Ohio Capital Corporation for Housing. “Developments in strong CRA [Community Reinvestment Act] markets and/or with long-standing equity partners will have the best chances to preserve relatively higher pricing.”

Because there was a decrease in pricing for developers throughout 2024, officials at National Equity Fund (NEF) expect prices to hold steady or continue to see a slight decrease in the first half. “Some investors may take a more conservative approach this year based on the unpredictability of the potential tax reform under the new presidential administration,” says Matthew Reilein, president and CEO.

The average price paid per dollar of 9% tax credits was 87.2 cents in the fourth quarter of 2024, similar to the 87.3 cents in the same period the prior year, according to AHF’s survey of syndicators in January.

Yields to investors averaged 5.71% in the recent fourth quarter compared with 5.6% in 2023.

In all, 23 syndicators participated in the survey. They reported closing nearly $19 billion in LIHTC equity last year, led by NEF, Raymond James Affordable Housing Investments (RJAHI), and PNC Real Estate.

The surveyed syndicators acquired a total of 1,151 developments in 2024.

“We expect pricing to hold steady through the first half of the year as any impacts of the new administration or changes in the capital markets (movements in short- or long-term rates) or changes in investor expectations are likely to have a delayed impact on lower-tier pricing, most likely lagging until the second half of the year,” says David Leopold, senior vice president and head of affordable housing at Berkadia.

Officials at CREA also say prices will likely remain firm to start the new year.

“We saw an increase in required sell yields from economic investors in the second half of 2024, which resulted in about a two-penny reduction to LIHTC pricing,” says Tom Pereira, executive vice president at CREA. “However, the funds that are preliminarily being marketed for the spring have similar sell yields to the funds recently closed, and there is generally more than a six-month lag between when investor yield requirements change and when that pricing to local general partners adjusts as many deals remain under LOI [letter of intent] and in the closing process for extended periods of time.”

Investor and Syndicator Requirements

The LIHTC leaders also shared different opinions on how syndicator and investor “asks” have been changing.

“… We are seeing increased focus both internally with our underwriting team and through investor review on confirming the financial strength of the partner and guarantor as well as addressing the specific aspects of the operating budget, including rents, vacancy rates, and specific operating expenses,” says Paul Cummings, senior vice president, director of originations and capital markets, at the National Affordable Housing Trust.

Those operating expenses may include insurance costs, utility budgets, staffing, and possible services.

“We will see increased scrutiny on construction costs, especially as the industry and economists watch tariffs closely, which could impact project budgets,” adds Merchants Capital’s Sharp. “I am also seeing a much tighter credit landscape at banks, as regulators have placed additional scrutiny on commercial real estate exposure. While affordable housing financed with LIHTCs continues to out perform other asset classes, we are still seeing a flight to quality with respect to sponsors and deal structures. I expect that to continue in 2025.”

Collectively, the industry is becoming more sensitive to operating expense underwriting as rising costs impact projects, says Berkadia’s Leopold.

Specifically, there is more attention on insurance costs and coverage, according to Steve Kropf, president and CEO of RJAHI. “Additionally, investors and syndicators are more focused on funding sources and services for permanent supportive housing deals.”

Others agree that operating expenses will continue to be an issue to watch.

“There continues to be pushback from investors on deals that feature high leverage and minimal operating cushion,” says CREA’s Pereira. “As operating costs have continued to rise, we are being asked to stress-test certain line items such as insurance premiums and repairs and maintenance. We are also closely monitoring a few different locations within the United States that appear to be experiencing high vacancy rates and offering reduced rents or other concessions to keep the properties occupied. If there are perceived weaknesses, additional reserves or guarantees may ultimately be required to place a deal into a fund.”