Leading syndicators and investors discuss the low-income housing tax credit market at AHF Live: The Affordable Housing Developers Summit on Nov. 14 in Chicago.
Leading syndicators and investors discuss the low-income housing tax credit market at AHF Live: The Affordable Housing Developers Summit on Nov. 14 in Chicago.

Activity in the low-income housing tax credit (LIHTC) market gained momentum in the second half of 2018 after a sluggish start caused by the uncertainty created by the tax reform legislation.

“After people did figure out what their tax liability was they sort of came back into the market in a stronger way,” said Tony Bertoldi, executive vice president of CREA. However, there’s still a big separation between pricing expectations in terms of what investors are expecting and what developers need to make deals work, he said at AHF Live: The Affordable Housing Developers Summit in November.

Despite the market changes, a number of investors and syndicators reported being on pace to have their best year, including Bank of America Merrill Lynch, CREA, and WNC.

The reason for this is the lion’s share of the investments continue to be driven by the need for banks to meet Community Reinvestment Act obligations. In addition, banks continue to be profitable and still have tax liability, which is contributing to the competitive market, said Scott Hoekman, president and CEO of Enterprise Housing Credit Investments. “The question is what happens next year,” he added, noting that some investors are expecting their yields to rise because interest rates are going up.

However, Hoekman does not expect to see a big dip in pricing at the deal level going into 2019.

Several syndicators and investors noted being very active in 4% LIHTC deals with tax-exempt bonds even though these transactions are more highly leveraged than 9% LIHTC transactions.

“Having been in the business as long as we have been, and we have a lot of deals that have gone through the 15-year compliance (period), we don’t find the 4s any more risky than the 9s,” said Christine Cormier, senior vice president at WNC.

Fannie, Freddie return

A few economic LIHTC investors, such as insurance companies, retreated from the market after tax reform and have not come back. However, the return of Fannie Mae and Freddie Mac has helped fill that hole, said Bertoldi during the Tax Credit Equity Outlook Power Panel at AHF Live.

The government-sponsored enterprises were out of the LIHTC market for about a decade while under conservatorship but returned as housing credit investors in 2018.

Michelle Norris, executive vice president at National Church Residences, quizzes syndicators and investors during the Tax Credit Equity Outlook Power Panel at AHF Live.
Michelle Norris, executive vice president at National Church Residences, quizzes syndicators and investors during the Tax Credit Equity Outlook Power Panel at AHF Live.

Each enterprise will have an annual investment limit of $500 million, less than a 5% market share for each. Within this funding cap, any investments above $300 million in a given year are required to be in areas that have been identified as markets that have difficulty attracting investors. These investments are designed to preserve affordable housing, support mixed-income housing, provide supportive housing, or meet other affordable housing objectives. A focus for both Fannie Mae and Freddie Mac has been rural deals.

So far, their re-emergence has not had a big impact on the overall LIHTC market, according to several syndicators.

“I think we’re going to have plenty of investors and plenty of deals,” said Ronne Thielen, executive vice president at R4 Capital.

Income-averaging option

One of the biggest changes to hit the LIHTC program recently is the addition of the income-averaging option.

The Consolidated Appropriations Act of 2018 established income averaging as a third minimum set-aside election. Income averaging allows LIHTC-qualified units to serve households earning as much as 80% of the area median income (AMI) as long as the average income limit at the property is no more than 60% of the AMI.

A project using the income-averaging option must make at least 40% of its units affordable to eligible households.

Previously, housing credit units were restricted to households earning no more than 60% of the AMI. The prior minimum set-asides called for having 20% of the units targeted to no more than 50% of the AMI or 40% of the units at no more than 60% of the AMI, and these options remain part of the federal program. However, income averaging offers another alternative for developments.

“From a social, policy (perspective), it makes so much sense. The real issue for us is the underwriting,” said Hal Keller, president of the Ohio Capital Corporation for Housing. “... The devil is in the details. We’re in favor it, but we’re very curious about the financial impact.”

A few income-averaging deals have closed in California, but many developers, investors, and housing finance agencies are still figuring out specifics, especially around compliance issues. Another hitch is that each housing finance agency is putting a slightly different spin on income averaging, so the option is not uniform from state to state.

Overall, investors have not wanted to see a lot of market-rate units in their LIHTC deals because they do not receive housing credits for those units and they bring market risk to the properties.

Now, with the option for some LIHTC units to go up to 80% of the AMI, everyone will need to test those rents against market-rate apartments in the area and make sure there’s a discount, said Hoekman, noting that he thinks investors will accept the option as long as there’s strong underwriting in place.

Income averaging could be a good tool for not only making deals work but for also accomplishing what the industry wants to do in the greater communities, Hoekman said.

Cost containment

The LIHTC industry is also trying to figure out how to contain rising development costs.

Thielen said R4 Capital recently closed on the financing for an 84-unit development in downtown Los Angeles that will be constructed with purpose-built shipping containers from China. This design is expected to significantly reduce the hard costs of constructing the community, which will be home to people who have been homeless.

“It’s something that’s new, and it’s very unique at this point,” Thielen said.

Victoria O’Brien, senior vice president at Key Community Development Corp., added that KeyBank invested in a deal that had a modular construction component. “A lot of the risk in that is making sure that the off-storage materials are secured,” she said.

In that instance, the developer was able to avoid the Davis-Bacon wage requirements, which helped keep costs down, according to O’Brien.

Session moderator Michelle Norris, executive vice president at National Church Residences, noted that a recent study prepared by Abt Associates for the National Council of State Housing Agencies found that the development for a housing credit development was only slightly higher than for a market-rate property.

“This is a social program as well as a real estate program,” Norris said. “That’s a hard thing to try to explain to people—that there is cost for that social program.”

New moves

The panel also discussed the LIHTC program’s role in preserving affordable housing as well as in bolstering the health-and-housing connection.

CREA is working on closing its first assisted-living LIHTC deal. “I think it’s a product that we’ll be seeing much more of particularly with the aging population,” Bertoldi said, noting that these are very complex projects, and operating an assisted-living development is a different business than that of managing conventional affordable housing properties.

Bank of America Merrill Lynch has been involved in financing supportive housing developments for a number of years, said Susan Moro, senior vice president at the bank.

These deals have evolved to serve more integrated populations and do carry hard debt. As a result, it’s important to understand the funding streams, project reserves, and service providers, she said.

Longtime syndicator WNC recently closed a California preservation fund, Cormier said.

Preservation also continues to be high on Bank of America Merrill Lynch’s radar, with the company completing a number of notable Rental Assistance Demonstration deals, according to Moro.