A year ago, 16% of the low-income housing tax credit (LIHTC) syndicators surveyed said pricing to developers would decrease, while 79% expected pricing to hold steady in the first six months of 2022.

Fast-forward to today, 50% of the firms surveyed by Affordable Housing Finance say pricing will decline, 45% say pricing will hold steady, and 5% think pricing will increase in the first half of this year.

The change comes as investor yield expectations have increased given the higher cost of funds and interest rates, which usually means a price drop. So far, the market has managed to stay pretty even-steven.

“While investors have signaled a desire for somewhat higher yields in 2023, there are counterbalancing constraints on the supply of credits, which should keep supply and demand roughly in balance,” says Scott Hoekman, president of Enterprise Housing Credit Investments, noting the constraints include the recent expiration of a temporary 12.5% credit boost that was in place for several years as well as overall project feasibility due to rising costs and interest rates.

The average price paid per dollar of 9% tax credits was 88.9 cents in the fourth quarter, unchanged from the second quarter, according to AHF’s survey. However, the average price was up from the 85 cents found in the fourth quarter of 2021.

Yields to investors averaged about 5.5% in the recent fourth quarter, up from the 5.11% average found in the second quarter.

The 23 surveyed syndicators closed more than $17 billion in LIHTC equity last year, led by Enterprise’s $1.7 billion. Eight other firms also reported raising more than $1 billion each.

Steve Kropf, president and CEO of Raymond James Affordable Housing Investments, is among those who think the overall LIHTC market will be stronger this year.

“As we seemingly have worked through the majority of interest rate increases and inflation is cooling, we expect 2023 to be a better year for developers in that they will have more certainty regarding their development costs,” he says. “If the economy dips into a modest recession, that could damper investor demand, but that will largely be offset by the fact that state agencies will likely allocate fewer 9% deals as a result of the extraordinary measures many states implemented in 2022 to preserve the feasibility of deals previously allocated.”

The Impact of Delayed 2022 Deals

The new year has started with a backlog of deals after a big spike in construction costs forced a number of projects to be delayed and pushed into 2023. This could impact the market in several ways.

“Most of the deals that did not close last year are still sitting on pipelines this year, preventing new commitments from being made as investor allocations are limited,” says Tony Bertoldi, co-president of CREA. “As more time and resources are spent figuring out solutions on prior deals, there is less progress being made on newer deals, which is taking away from overall production.”

He notes that 2023 could be “a bit of a reset year for the industry as developers focus on addressing budget gaps in deals that have been sidelined for the last 12 to 18 months and clearing product that was signed with now stale pricing guidance.”

Investors and syndicators will continue to prioritize well-capitalized and experienced general partners who are able to navigate administrative processes at the federal, state, and local levels and secure as many resources as possible for their developments, according to Bertoldi.

“One significant result of multiple deals slipping into 2023 is that investors are increasingly focused on committing to deals in 2023 that are definitely ready to move forward,” adds Lori Little, president and CEO of the National Affordable Housing Trust. “If sponsors want to put their deals in the best position to secure best in market deal terms and pricing, it is prudent of them to make sure that they have proactively identified and resolved any hurdles that might delay closing.”

Investors have stood by their pricing for deals that are carrying over into the beginning of this year, according to David Leopold, senior vice president and head of affordable housing at Berkadia. That’s good, but as those deals close, they may skew industry statistics on where equity pricing really is at this time, he says.

Many of the delayed deals have started to move forward, according to several syndicators.

“While the extreme volatility in economic conditions has calmed down some, it remains a challenging economic environment to get LIHTC transactions closed,” says Jason Gershwin, managing director at R4 Capital. “We are seeing most, if not nearly all, of the deals within our pipeline that were originally expected to close in 2022 proceed to a scheduled closing within the first several months of 2023. Developers are being resourceful, seeking and receiving additional soft funds and, in some cases, putting in their own money to get deals closed.”

Eye on the Economy

In the months ahead, syndicators also will be keeping a close watch on the overall economy as multiple forecasts see a recession coming.

“Many indicators suggest that there will at a minimum be some type of slowdown in the economy during at least the first half of 2023,” Gershwin says. “Ultimately, in the medium- to long-term future, a material decrease in corporate profitability could have a negative impact on the number of active LIHTC investors. However, this concern is in many ways mitigated by a multitude of factors, including simple supply and demand (the supply of credits in the 2023 market is lower than in recent years) and the tremendous long-term positive track record of LIHTC investments built up over the last 35-plus years.”

Investor concerns about a slowdown in the economy have the potential to create uncertainty in the LIHTC market, says Josh Ghena, senior vice president, equity business funding, at Cinnaire.

“In the face of this uncertainty, we anticipate all parties to scale back and be more conservative in their risk assessments,” he says.

Increased interest rates may lead to an economic slowdown, adds Tammy Thiessen, managing director of originations and sales co-head at RBC Community Investments.

“We are continuing to assess the overall ongoing impact of the COVID years and potential longer-term implications on the economy at a macro level and its impacts on the LIHTC market,” she says. “On the deal level, there could be longer-term increases related to specific operating expense line items, such as insurance costs, payroll, and utility costs. In the short term, competing forces in the economy make for challenging times managing deal pricing, underwriting, and investor economic expectations. However, the LIHTC market has repeatedly shown resiliency in managing through challenges we have faced over the years. There is no ‘normal year’ anymore.”

Others note the possibility of a silver lining emerging amid the otherwise grim news of a slowdown. It could lead to “lower construction costs—in both labor availability and materials—and the potential for the Fed to slow, or even pivot, on rate increases in 2023,” says Stephanie Kinsman, managing director, investor relations, at Red Stone Equity Partners.

“With market-rate projects and other construction slowing or being put on hold, materials and labor pricing should begin to come down and help offset some of the additional interest costs we are seeing in affordable projects,” adds Amy Dickerson, managing director, investor relations, at Hunt Capital Partners. “The LIHTC market tends to chug along during downturns in the broader economy so we would not expect to see a drop-off in activity, although sourcing of capital for LIHTC projects will continue to require more soft money due to higher interest rates and high investor yield requirements.”

Other trends that may emerge this year include the use of State and Local Fiscal Recovery Funds from the American Rescue Plan Act “to finance long-term affordable housing loans, which will facilitate significant additional financing for affordable housing projects, including those using LIHTC,” says Moddie Turay, president and CEO of the Massachusetts Housing Investment Corp.

The industry may also begin to see more developments utilizing the average-income option under the LIHTC program now that the Internal Revenue Service has provided guidance that looks to ease earlier concerns.

“Additionally, the Inflation Reduction Act also expanded the solar credit and allowed it to pair more easily with the LIHTC credit,” says Julie Sharp, executive vice president at Merchants Capital. “The use of multiple credit types in the capital stack is a consistent theme we see emerging as developers seek to offset higher interest rates.”

Company Capital Closed in (in Millions) LIHTC Projects Acquired
Aegon Asset Management 330.5 N/A
Berkadia Affordable Housing 203.8 11
Boston Financial 1,391.8 78
CAHEC 185.0 23
Cinnaire 435.0 58
CREA 1,332.4 87
Enterprise Housing Credit Investments 1,708.0 91
Evernorth 101.0 19
Hudson Housing Capital 1,025.0 N/A
Hunt Capital Partners 416.7 23
Massachusetts Housing Investment Corp. 162.1 14
Merchants Capital 492.2 39
Merritt Community Capital 245.4 12
National Affordable Housing Trust 156.0 12
National Equity Fund 1,226.3 74
PNC Real Estate 1,187.4 83
Raymond James Affordable Housing Investments 1,533.0 99
RBC Community Investments 1,217.7 71
Red Stone Equity Partners 1,291.5 86
Regions Affordable Housing 586.0 44
R4 Capital 755.3 49
The Richman Group Affordable Housing Corp. 913.0 50
WNC 475.6 59
Source: AHF Survey, February 2023