Several issues are on the radar screen for low-income housing tax credit (LIHTC) investors as they head into the second half of the year.

Bank of America Merrill Lynch is providing a $23 million construction loan and $25 million in direct low-income housing tax credit equity to help Affirmed Housing build The Link, a development that will bring more than 80 affordable and supportive housing units to San Diego.
Courtesy Affirmed Housing Bank of America Merrill Lynch is providing a $23 million construction loan and $25 million in direct low-income housing tax credit equity to help Affirmed Housing build The Link, a development that will bring more than 80 affordable and supportive housing units to San Diego.

A softening of market-rate rents, potential project delays, and higher interest rates are all being carefully monitored. Although investors feel pretty good about the LIHTC market this year, they’re still cautious.

“Overall, the market is fairly healthy and very robust,” says Jennifer Seamons, senior vice president and national originations manager at KeyBank’s Key Community Development Corp. “There’s a lot of liquidity to get projects done.”

The market had a chance to stabilize in 2018 after the volatility caused by tax reform and other factors that impacted the investor base.

“With tax reform fully in effect, banks have a good sense of where their tax liability is going to be, so toward the middle part of 2018, investors were starting to settle in,” Seamons says.For investors, the market continues to be competitive, especially for the major banks with Community Reinvestment Act (CRA) obligations.

“CRA regulations are still in full effect,” Seamons says. “If and when CRA reform happens, it could provide a different lens for LIHTC investors. At this point, CRA is a primary driver, and investors have obligations they need to meet under CRA, so it’s still a very competitive landscape.”

KeyBank is able to offer an entire platform around a project from debt to equity to permanent loans, and having this range of services provides a nice competitive advantage, she says.

Officials at the bank expect to achieve a similar level of activity as they did in 2018 when KeyBank provided more than $2 billion in loans to affordable housing deals as well as closed $350 million in investments, mostly LIHTC equity.

This year, Seamons has noticed more mixed-income deals coming across her desk. This may be due, in part, to housing finance agencies wanting market-rate units to be included in LIHTC properties to help create a more diverse community and spread limited housing credits to more developments.

However, Seamons notes that the market-rate economy is starting to peak a bit and market-rate rents are softening in some areas across the country.

This means KeyBank is cautiously evaluating mixed-income deals to get a good understanding of what would happen to the overall project if there are any changes in the market-rate component.

The bank also had several deals with the new income-averaging option in its pipeline in mid-April. Previously, housing credit units were restricted to households earning no more than 60% of the area median income (AMI). The new option allows LIHTC units to serve households earning up to 80% of the AMI as long as the average income limit at the property does not exceed 60% of the AMI.

Seamons says it will be important to review how close the 80% rents are to market rents. Without a significant discount, potential renters may opt to pay a little more and live in a market-rate apartment rather than go through the income qualification tests at a LIHTC property, making the units at the affordable development tougher to lease.

In addition to dialing in on the rent spread, KeyBank will also likely want to see the income-average band at a property be a little less than 60%. This way, the property will have a cushion to be able to maintain its overall income requirements even if a unit should fall out of compliance.

In another recent trend, KeyBank has also been involved in several affordable housing deals that do not utilize LIHTCs, says Rob Likes, national manager of Community Development Lending and Investment at KeyBank.

“With the LIHTC being a capped program, we need to see more of and expect to see more non-LIHTC affordable housing projects,” he says, noting that the bank has served as an investor and lender in these deals.

Looking ahead, Likes says he’ll also continue to monitor interest rates and construction costs, which could impact the viability and schedule of projects.

Another concern is the many LIHTC properties that will be coming out of their compliance periods in the years ahead. If resources stay at the same level, there’s likely not going to be enough credits available to preserve those units and build new developments, he says.

“Given the fact that we need a lot more affordable housing, we need to develop additional supply, and we need to preserve the existing supply. We need to use LIHTC. We need to use all the tools available to generate additional supply and continue to be creative in trying to find additional ways to create and preserve affordable housing,” Likes adds.

Bank of America Merrill Lynch had a record 2018, investing about $1.7 billion in equity (and approximately $3 billion in debt) into affordable housing and community development projects. LIHTC investments made up the largest piece, but historic rehabilitation credit and New Market Tax Credit investments are also included in the total.

BofAML community development bankers expect to invest a similar overall amount in 2019, and they’re seeing growth in their historic tax credit business.

“We’re still looking to provide the full suite of solutions for clients, investing in tax credits, providing construction loans, and then permanent debt options,” says Maria Barry, national executive of community development banking. “That model hasn’t changed, and we have the capital to lend and invest and will continue to respond to our clients’ needs through all economic cycles.”

This has worked well especially as the bank has been seeing larger LIHTC projects in the market and has the ability to create efficiencies in many of those deals, she says.

In a new move, BofAML is working to extend its relationship with developers and residents after the properties are built. This includes connecting new LIHTC developments with local bank centers.

“We’re able to provide information that will promote solutions that are geared for residents, including financial education,” Barry says. “It’s another way to help the residents of these developments get better financial footing and have access to a bank to ask questions.”

The bank had a successful pilot in New Jersey and plans to roll out the program nationally this year.

It has also invested in a few developments that utilize modular design, an area where interest is growing, according to Barry.

“That’s an important area to continue to investigate because it may provide benefits given the high cost of construction,” she says.

In addition, her team has been seeing more deals that utilize both 4% and 9% LIHTCs in the same project.

Barry says one concern pertains to project delays, which can be caused by bad weather, labor shortages, or other reasons.

She encourages developers and their partners to build a cushion into project schedules to address unforeseen delays and still meet critical LIHTC program and other deadlines.