Robust investor activity continues to drive the low-income housing tax credit (LIHTC) market this year.
“It feels a little bit like 2004 or 2006 again,” said Fred Copeman, principal and leader of CohnReznick’s Tax Credit Investment Services Group. “I’ve heard syndicators in the last two days telling me they are turning equity away. It’s been a while since I’ve heard that.”
Copeman discussed the equity market at the National Council of State Housing Agencies conference in Chicago during a panel session moderated by Richard Goldstein, a partner at the Nixon Peabody law firm.
The strong investor demand has meant big-time prices. In San Francisco, one of the hottest Community Reinvestment Act (CRA) markets, LIHTCs have commanded as much as $1.18 per dollar of credit, according to reports. Deals in other CRA regions are also seeing prices well over a dollar.
At the multi-investor level, the median tax credit price increased four cents, from 89 to 93 cents between April 2013 and April 2014. During that same period, yields should have declined about 30 basis points based on the increase in pricing, but yields only went down about 10 basis points, said Copeman. That’s because syndicators have been working hard to keep yields above 7 percent, a level that many feel is required by investors.
However, those yields may start to dip. Just in the last month, a few syndicators have indicated that they plan to offer 6.75 percent deals, according to Copeman.
Joe Hagan, president and CEO of National Equity Fund, said he’s seen prices averaging between 91 and 94 cents.
The ultra-competitive market has been making it tough for syndicators and investors to acquire deals even in non-CRA areas. But, for developers, the strong prices couldn’t have come at a better time. They are helping make up for the loss of other important housing funds like HOME dollars, which has been cut in the federal budget, according to Hagan.
Investor demand and competition has also been strong in non-CRA regions. There’s been competition in markets throughout the Midwest, according to panelists.
“Where we’ve seen a huge uptick in demand is the national products,” said Raoul Moore, senior vice president, tax credit syndication, at Enterprise Community Investment.
He said a number of CRA investors are buying non-CRA deals to help boost their average yield. “They are looking at both sides of the equation,” he said.
Brenda Champy, senior vice president and director of acquisitions at Boston Capital, noted that even when bids are competitive, developers are often waiting longer to select an equity partner.
Banks continue to make up a large bulk of the investor market. They invest for the tax credit benefits and to help meet their CRA obligations. Insurance companies are another key LIHTC investor.
Jim Logue, COO of Great Lakes Capital Fund, a large regional syndicator, said his firm closed a $120 million fund last year, with about half of the fund’s investors being insurance companies.
It’s still too soon to tell if recent changes blessed by the Financial Accounting Standards Board will bring in new economic investors into the market. The hope is the changes will make the accounting of LIHTC investments clearer and, therefore, entice new investors.
The accounting change means one less story, one less issue, that a new corporate investor has to explain to a CFO, said Beth Stohr, director of new production, affordable housing tax credit investments, at U.S. Bancorp Community Development Corp.
So far, the hot market has not eroded deal terms, according to syndicators, who said overall terms have held steady across the country. Moore noted that there may have been a recent exception in New York City, perhaps the hottest LIHTC market in the country, where there were signs that things like reserve funds or guaranteed terms were being reduced.
Syndicators and investors are also watching closely to see how much flexibility bank examiners will allow when it comes to CRA assessment areas. If banks can invest in a broader region and still receive CRA credit, it could be a big boost for deals outside the major urban centers.
