Ernst & Young report finds few foreclosures

BOSTON Low-income housing tax credit (LIHTC) investments on average provided returns 2% greater than originally projected, according to a recent study by Ernst & Young.

Understanding the Dynamics III: Housing Tax Credit Investment Performance analyzes 2003-04 data, which together with information from previous years provides for one of the most in-depth looks at LIHTC properties. About 13,500 properties are covered by the report.

The study found that the foreclosure rate for LIHTC properties was a meager .02% in 2004.

Yet, there are some concerns. About 34% of the properties looked at in 2004 were operating at below break-even levels after reserve funding. That raises the question of why there aren’t more foreclosures.

Several factors are likely involved, according to Richard Floreani, senior manager of Ernst & Young’s Tax Credit Investment Advisory Services. First, many of the properties are only slightly below break even, he said. Second, they have a support mechanism in place, including operating reserves and fee deferrals. Third, the underperformance tends not to last, Floreani said, explaining that very few properties have a chronic deficit. Over a two-year period, the percentage of properties not breaking even dropped to 18%. Over a four-year period, it was just 3.6%.

The study also looked at the disposition of properties that had reached the end of their 15-year compliance period. Ernst & Young found that about 54% were being resyndicated with a new allocation of tax credits, and 25% were being maintained as affordable, but without new credits. About 9% converted to market-rate properties.

– Donna Kimura

 

Affordable housing developers can’t ask for much more than what they got from the low-income housing tax credit (LIHTC) market in 2005.

They saw the price for tax credits soar and then hold at those strong levels for much of the year despite predictions of a coming correction.

That amazing performance continues to buoy spirits, heading into the new year. Leading developers, however, are tempering their optimism with a healthy dose of concern. Rosy market, maybe. Rose-colored glasses, no.

“My fear is being caught in a falling market, where prices head downward and deals had penciled out with higher pricing,” said Richard Barnhart, chairman and CEO of Pennrose Properties, LLC. The Philadelphia-based firm, which operates in seven states, did about 20 tax credit deals in 2005 and will work on a similar number of projects in 2006.

Developers who are unprepared for a sharp market turn often get squeezed and see their fees begin to erode.

That means Barnhart and others are going to be even more careful when putting together their deals.

Going into a new year, developers certainly hope that tax credit prices will maintain their recent levels. There’s also some feeling that there should be a greater price differential based on project quality.

Another big concern continues to be fast-rising construction prices, which are making it difficult for affordable housing developers to build projects. Even though tax credit prices have been high, often in the 90-cent range for a dollar’s worth of credit, developer fees and syndicator margins are still down because of increased expenses, according to some sources.

As a result, there may be some fallout in 2006, with some firms possibly consolidating or exiting the field, according to Barnhart.

The market was holding steady at the end of 2005, and there was no reduction in credit yield, according to Rob Hoskins, president of The NuRock Cos., a leading developer based in Georgia. Prices for Georgia state tax credits also increased in 2005, he noted.

Underwriting, however, is getting tighter. “There’s a lot more focus on true fixed expenses and true rental rates,” Hoskins said.

There will also be more emphasis on strong market studies, with more testing sought to ensure the accuracy of the data in the reports, he said.

The Boston-based The Beacon Cos. also has several deals in the pipeline. David Greenblatt, vice president of development finance, said he is optimistic that prices can maintain solid levels in 2006.

When it comes to underwriting, there could be some additional scrutiny on Sec. 8 contracts, he said. The Sec. 8 program has faced budget cuts and reform measures in recent years.

Greenblatt said he will also be keeping a close eye on the overall strength of the economy.