A strong majority of low-income housing tax credit (LIHTC) syndicators expect to see more deals closing this year after rising interest rates and other challenges slowed a number of projects in 2023.

“There was significant inventory that did not close in the fourth quarter of 2023, but that will clear the market in the first quarter of 2024,” says Josh Ghena, senior vice president, equity business funding, at Cinnaire. “Additionally, deals currently in the market have been structured to be feasible under current market conditions, and the market is less volatile than it was in 2022 and 2023.”

As a result, he says, it stands to reason that the timeline to closing will go down and the number of closings will increase.

“There were many deals that leaked over into 2024 that are now on surer footing to get to closing, and, now that interest rates are settling and predicted to slowly continue to decrease, our hope is that 2024 deals won’t experience the interest rate-related delays we saw in 2023,” agrees Tammy Thiessen, managing director and co-head of originations and sales, at RBC Community Investments.

Julie Sharp, executive vice president at Merchants Capital, also expects the market to see more transactions crossing the finish line this year.

“However, the deals that secure investor equity will have to do so by demonstrating extremely strong fundamentals (or social impact) and balance reduced equity pricing with other sources,” she says, adding that it’s been encouraging to see more deals structured with the addition of other tax credit sources such as solar, energy-efficiency, and state housing credits.

Not all syndicators expect more deals to close this year as market challenges remain.

“Many states had to fill funding gaps in 2023 by allocating additional credits, thereby decreasing available credits for future allocations,” says Steve Kropf, president and CEO of Raymond James Affordable Housing Investments. “Further, with the increased construction costs, the needed credit or soft money has increased on a per unit basis. As a result, we expect fewer 9% deals in 2024.”

Should key provisions of the Affordable Housing Credit Improvement Act pass in early 2024, it’s likely there will be an increase in 4% deals that could offset fewer 9%, but that increase in deal volume might not occur until 2025, he says.

Overall, about 72% of the syndicators surveyed expect the market to be stronger or about the same compared with 28% who say it will be weaker this year.

The average price paid per dollar of 9% tax credits was 87.3 cents in the fourth quarter of 2023, down from about 88.9 cents a year earlier, according to the Affordable Housing Finance survey.

Yields to investors averaged about 5.6% in the fourth quarter, up slightly from 5.5% the year before.

In all, 25 syndicators were surveyed. They closed nearly $17.2 billion in LIHTC equity last year, led by Raymond James Affordable Housing Investments’ $1.77 billion. It was one of nine firms that reported raising more than $1 billion in equity last year.

The syndicators acquired a total of 1,065 developments in 2023.

The Outlook for Prices

Jason Gershwin, managing director at R4 Capital, says prices will likely hold firm at least in the early part of the year.

Until legislation to expand the LIHTC program is passed by Congress, the supply of credits remains lower than it was a few years ago, he says, referring to the expiration of a 12.5% allocation increase in 2021 and the waning of peak allocations of disaster credits.

“Within the current LIHTC market, we see a steady supply of property investment opportunities and steady demand from investor capital, which suggests that we should not anticipate material changes in credit pricing during the first half of 2024,” Gershwin says.

Overall, 65% of the surveyed executives expect pricing to hold steady in the first half of this year, while 35% say pricing will decrease or it remains uncertain. No one expects to see prices increase in the next few months.

“Pricing decreased in the second half of 2023, mostly due to rising yield expectations of economic-minded investors stemming from increased interest rates and more attractive alternatives,” says Tony Bertoldi, co-president of CREA. “As interest rates stabilize or begin to decrease, yield requirements could come down but at a measured pace. We do not anticipate there will be much movement on pricing over the next six months, but we do anticipate there will continue to be strong demand for high social impact deals and deals with compelling debt opportunities.”

Recent changes in investor and syndicator requirements may also continue this year.

“Investors and syndicators have been looking more closely at stress-testing deals to account for any unforeseen challenges that could arise in the future,” says Heather Pierce, fund development manager at CAHEC. “It seems this practice of building in a cushion for expenses, or making sure there are large enough reserves to offset a deficit, is here to stay.”

2023 Tax Credit Activity
Company Capital Closed (In $ Millions) LIHTC Projects Acquired
Aegon Real Assets US 227.6 11
Berkadia Affordable Housing 289.6 13
Boston Financial 1,039 58
CAHEC 112.5 16
Cinnaire 403 41
CREA 1,348 79
Enterprise Housing Credit Investments 1,730 89
Evernorth 149.5 18
Hudson Housing Capital 1,300 57
Hunt Capital Partners 378 24
Marble Cliff Capital 74.5 11
Massachusetts Housing Investment Corp. 117.4 10
Merchants Capital 642.7 53
Merritt Community Capital 95 8
National Affordable Housing Trust 99.3 6
National Equity Fund 1,433.70 93
Ohio Capital Corporation for Housing 263 26
Raymond James Affordable Housing Investments 1,770 104
RBC Community Investments 1,170 66
Red Stone Equity Partners 1,009 60
Regions Affordable Housing 649 32
R4 Capital 672.6 41
The Richman Group Affordable Housing Corp. 1,100 57
W&D Affordable Housing Equity 587 45
WNC 521.9 47
AHF Survey, February 2024

Deal Requirements

Some investor partners began layering in additional deposit requirements and/or preferring to work with existing development partners, according to Amy Dickerson, chief operating officer at Hunt Capital Partners, adding that investors are beginning to increase liquidity and net worth covenants of sponsors due to increases in project sizes.

“We expect those investors to continue those preferences through at least the first half of 2024,” Dickerson says.

One of the biggest changes has been investors seeking higher yields, note several syndicators.

“Investors are also very focused on the deal and partner strength, including financial strength of the partner and the overall portfolio strength,” says Lori Little, president and CEO of the National Affordable Housing Trust.

Matt Reilein, president and CEO of National Equity Fund, agrees there’s been a flight to quality and a “focus on credit due to rising insurance costs, post-pandemic holdover eviction issues, and more focus on stress-testing upfront to absorb potential impacts down the line.”

“The expenses and guarantor strength are a focus for the investor requirements,” he says.

Developers are encouraged to do what they can to be “shovel ready” when approaching a LIHTC syndicator, adds Stephanie Kinsman, managing director, investor relations, at Red Stone Equity Partners. “Especially in times like these, it is better to have all financing and development partners in place working toward a quick closing versus conducting a bid auction for a deal closing in 12 or so months,” she says.

Kinsman is hopeful that 2024 deals will “better pencil from the outset,” requiring less value-engineering and reworking of the capital stack because they are coming up in the new cost and rate environment.

“As we enter 2024, there remains an increased investor focus on impact investing and the environmental, social, and governance (ESG) benefits of making LIHTC investments,” adds R4 Capital’s Gershwin. “Thus, we expect that the ability to identify and quantify the ESG impacts of investing in affordable housing properties will continue to be an important aspect for developers to focus on throughout 2024 and beyond.”

Overall, investors want deals to meet “typical credit standards with fewer waivers as the ongoing stresses on sponsor portfolios and balance sheets raise concerns about individuals deals,” says Philip Porter, senior vice president and head of acquisitions at Enterprise Housing Credit Investments.