Despite developers' hopes that the low-income housing tax credit (LIHTC) market would stabilize this year, conditions remain frustratingly unsettled due to a lack of investor capital.

That means prices are likely to fall even further, according to several syndicators.

“In this current environment of financial uncertainty and what amounts to an oversupply of credits, we don't expect overall pricing to stabilize,” says Chris Grim, director of equity investments at Red Stone Equity Partners. “The exception might be in major markets where there is an overlap of active investors trying to secure more market share.”

Pricing to developers will decline further, and yields to investors will continue to rise, adds Joe Hagan, president and CEO of the National Equity Fund, Inc. (NEF). “I can't imagine anyone is in a position to predict much beyond that,” he says.

The LIHTC market's turbulence comes as the global economy sputters and corporate profits sag, reducing investor demand. With less capital in the market, many affordable housing projects currently in the pipeline will likely not get built.

In addition, tax credit prices have been falling. In January, syndicators reported that prices to developers averaged about $0.79 per dollar of credit at the end of 2008, approximately $0.10 lower than a year ago.

Prices may need to drop further, and yields to investors may need to increase before the market stabilizes, according to Stephen Daley, executive vice president at The Richman Group Affordable Housing Corp. “There's still too little equity in the marketplace,” he explains.

The climate raises a number of significant issues for the industry.

“We are very concerned about the financial health of the development organizations that have for so long spearheaded LIHTC projects, particularly the nonprofits,” Hagan says. “Many of even the strongest nonprofits are at risk of becoming seriously distressed by yearend if they can't move their projects forward. That has significant implications for the nation's ability to jump-start affordable housing development and benefit from the jobs and community revitalization that can accompany it.”

Syndicators are feeling the pain as well. A recent AFFORDABLE HOUSING FINANCE survey of syndicators found that the six firms also surveyed in 2007 raised a cumulative $2.5 billion in capital in 2008, compared to approximately $4.4 billion a year ago The drop in activity also can be seen in the number of projects acquired. The same firms acquired 356 projects in 2008, about a 42 percent drop from the 618 properties they reported acquiring in 2007.

New moves

Prices aren't the only changes that tax credit developers will see in 2009.

Hagan expects the market to have more proprietary funds this year than last. At the same time, multi-investor funds, which have been an industry staple, will be smaller.

“Multi-investor funds are, in many ways, more effective from a LIHTC program perspective,” he says. “They effi- ciently combine capital and have at least some flexibility to invest nationwide, even beyond Community Reinvestment Act markets. But the reality is that proprietary funds give investors more control, and that's key in this market. If you can't deliver exactly what investors want and where they want it, they just won't take the deal.”

Leaders at Enterprise Community Investment, Inc., also expect to see smaller funds for single-investor and multi-investor products.

Timing also will become increasingly critical this year. Enterprise officials will be closely managing deal acquisitions to coincide with fund closing in order to minimize pricing risk.

The Richman Group says it will also work on timing so equity closes alongside deals this year. In addition, the firm is going to “stick to the basics,” says Daley, including emphasizing “strong deals in strong markets with strong repeat developers.”

Ryan Sfreddo, managing director at Centerline Capital Group, noted that its 2009 funds will have higher yields and higher reserve levels. A greater percentage of fees will also be earned and collected over time instead of upfront.

At Raymond James Tax Credit Funds, Inc., the new funds may feature longer guarantees, according to Steve Kropf, senior vice president.

Joseph Resende, a principal at Franklin Capital Group, says 2009 is shaping up to be a continuation of last year, with deal volume remaining low. “We've become a boutique player focused on fewer but safer properties where, in general, we have a proprietary interest,” he says. “I expect that to continue.”

Issues to watch

Many in the industry are pinning their hopes on a new economic stimulus bill that would include provisions to revive the anemic tax credit market.

“There are a number of things being considered in stimulus conversations that would be helpful,” says NEF's Hagan. “We think a five-year LIHTC carryback for investors could have a real impact, as could changes that would accelerate the way investors claim their credits.”

He's also been supportive of discussions involving an additional $5 billion in HOME funds to help fill financing gaps for projects that have stalled due to the drop in available equity.

At press time, it had yet to be determined if LIHTCs would be addressed in an economic stimulus bill. An early Senate Finance Committee proposal did not include any incentives aimed at boosting investor interest in housing credits, but there were hopes that an amendment would include such measures.

Industry groups have been urging members of the affordable housing community to contact their senators and representatives to seek their support for a LIHTC plan.

Meanwhile, developers need to stay in contact with their syndicator and investor contacts, stresses Hagan. “If your contacts have equity and you can close, do it as quickly as possible,” he says. “Equity that is available today could be gone tomorrow, and your syndicator might not have any control over when or if an investor finds itself forced to pull back.”

In another move, developers should also consider seeking the maximum amount of LIHTCs possible, with the 30 percent boost provided by the Housing and Economic Recovery Act of 2008, says Hagan. Even with today's lower prices, a deal may still work if it has more credits.

Developers should also be conservative on their pricing expectations and be prepared to improve the underwriting presentation of a deal, according to Enterprise leaders.

2008 Tax Credit Activity
Company Capital raised in 2008 (in millions) Projects acquired in 2008
Boston Capital $571 45
Centerline Capital Group 163 41
Enterprise Community Investment, Inc. 660 91
Franklin Capital Group 25 5
National Equity Fund, Inc. 452 70
Raymond James Tax Credit Funds, Inc. 300 60
Red Stone Equity Partners 195 17
The Richman Group Affordable Housing Corp. 335* 49
*The firm noted that it closed on more than $500 million in equity after raising more than $1 billion in 2007.
Source: 2008 AFFORDABLE HOUSING FINANCE magazine survey