One basic law of Newtonian physics—what goes up must come down—seems not to apply to prices for federal historic rehabilitation tax credits.

Despite chaos in the capital markets and the danger of recession, investors are continuing to pay seemingly stratospheric prices for these tax credits, and their high bids show no sign of falling to earth anytime soon.

As the credit crisis deepened last year, developers of the second phase of workforce housing at Crown Square in St. Louis traded $2.7 million in federal historic rehabilitation tax credits for $3.1 million in equity from CityState Capital Group. That works out to $1.16 per dollar of tax credit and covers a big piece of the second phase's $19 million development cost.

“This is, I think, pretty damn high,” said Stephen Acree, executive director of the Regional Housing and Community Development Alliance (RHCDA), a development partner for Crown Square.

Prices for federal historic tax credits have remained steep while other financing sources have foundered. In comparison, the price of federal low-income housing tax credits (LIHTCs) has dropped as much as 10 cents per tax credit dollar over the last 12 months, to reach the mid- to high 80-cent range at press time, experts said.

Loans are also harder to find, both from conventional lenders like banks, which now demand more equity from borrowers, and from local governments, which are likely to tighten their budgets as the economy tilts down toward recession.

In contrast, prices for federal historic rehabilitation tax credits have risen steadily, pushing yields for investors down to the mid-teens from more than 30 percent three years ago, according to Mark Einstein, a principal with the Reznick Group, an accounting firm and consultancy specializing in affordable housing. Those yields are still lofty compared to other tax credits: They're three or even four times more than the yields earned by LIHTCs.

The reason for that discrepancy is that historic tax credit investors earn much more than just tax benefits. They also get a share of the project's cash flow and a payment when they exit the deal, said Einstein. Investors can even negotiate the timing of their investment so that they receive their tax credits before they have put all of their equity into the project.

Prices per dollar of historic tax credit vary widely depending on how the deals are structured. Bank of America (BofA) is now paying prices up to $1.30 or more for a dollar of tax credit. That's up from prices ranging between $1.05 and $1.20 last year, according to Claudia Robinson, senior vice president for BofA.

“There are half a dozen active investors,” said Bill MacRostie, president of MacRostie Historic Advisors, based in Washington, D.C. The others include big banks like PNC Bank, Wachovia, and U.S. Bank, in addition to paint giant Sherwin- Williams and energy company Chevron. Despite the credit crisis, none of these companies show any sign of scaling back their bidding, said MacRostie.

New investors, on the other hand, have been slow to enter the market even with its attractive yields. “There's room for more people [to invest in historic tax credits],” said Einstein of the Reznick Group.

The complexity and expense of historic tax credit deals has helped keep the pool of major investors small. At Crown Square, the developers had to create multiple ownership entities to get the most out of the different kinds of tax credits at the property. For example, at Crown Square's phase of affordable apartments now under construction, a LIHTC partnership owns the property and leases Crown Square to the historic tax credit investors, which act as a master tenant.

The fancy footwork cost the developers $500,000 in legal and accounting fees, but without the structure, the property would have lost $1 million in LIHTC equity. That's a net gain of $500,000 for the 80-unit project.

Development partners RHCDA and the Old North St. Louis Restoration Group plan to eventually spend $34.5 million to rehab the 27 crumbling historic buildings at Crown Square in two phases finishing in 2009.

Tax credit syndicators handle most of this kind of complexity on behalf of their LIHTC investors. But the historic tax credit world is a little too small to support a thriving syndication business: It amounts to roughly $1 billion a year compared to the $9 billion LIHTC business, said Einstein.

Because only a handful of investors buy historic tax credits, these investors have avoided the type of bidding wars that erupted over LIHTCs and drove LIHTC prices up and yields down. Although that meant prices for historic tax credits didn't soar as high when times were good, the small size of the market and the high yields of the investments have helped protect historic tax credits from the crisis in the capital markets that has hurt the price of LIHTCs.

Because the small group of historic rehabilitation tax credit investors are all very familiar and experienced with the program, they remain confident in their underwriting. And with yields so much higher than LIHTCs and other comparable investments, these investors are continuing to plow plenty of cash into historic tax credits, keeping the market strong.