Low-income housing tax credit (LIHTC) syndicators are bullish on the market going into the new year despite early concerns that the U.S. economy is heading toward a recession.
“We saw 2008, and the housing crisis was something we hadn’t seen in the history of our program, and then we saw corporate tax reform,” said Mike Jacobs, senior vice president, originations, at National Equity Fund. “If there is a recession, it’s not going to look like those.”
Even if an economic downturn brings new challenges, the LIHTC has shown its resilience, said Jacobs during the Tax Credit Equity Outlook Power Panel at AHF Live: The Affordable Housing Developers Summit in mid-November.
“If we do head into a recession, what’s going to be important is to know your investor and know your investor is going to stand by you,” said Susan Moro, senior vice president, community development executive, at Bank of America.
Other syndicators said they feel a recession may be further down the road, coming after 2020. Other issues to watch include Community Reinvestment Act (CRA) reform and next year’s presidential election, which could bring a new set of policies affecting investments.
At this time, the market is in a great position, according to Tony Alfieri, managing director and co-head of the Tax Credit Equity Group at RBC Capital Markets, noting that he’s seeing most, if not all, LIHTC deals clearing the market. It may not quite be frothy, but the market is solid enough that deals are getting done, and developers are getting close to their asking price, he said.
There’s been an uptick in pricing from a year ago, said Gayle Manganello Ellis, senior vice president and manager of originations at PNC Real Estate. “Some of the publications have shown about 92 cents on average, but I’ve seen a widening of the gap between the low end and the high end. We are seeing over $1 [per credit] in some areas. … I think we’re going to see CRA-located deals getting higher pricing than deals that don’t have CRA buyers because the expectations of the investors are different whether they are economic or CRA.”
“We’re also seeing a wider band in terms of internal rates of return, probably wider than we’ve ever seen,” added Marge Novak, executive vice president, capital group, at Cinnaire. “I’ve never seen close to a 300-basis point spread between CRA returns and economic returns.”
Syndicators also discussed the 4% LIHTC program as the demand for private-activity bonds exceeds the supply in a number of states.
Brenda Champy, director of acquisitions at Boston Capital, said she is tracking the 4% LIHTC and bond program in California, where approximately $450 million in federal credits with bonds is expected to become available, a roughly 20% increase over the past few years, plus another $500 million in state tax credits. “We will be watching closely and participating in the market as we try to digest efficiently and manage the pricing of a 20% increase on the bond side with the federal credits,” she said.
On another front, some state housing finance agencies have begun adding points in their qualified allocation plans or taking other steps related to a project’s LIHTC pricing.
“Some states are trying to dictate pricing to stretch their credits to get more units built,” Jacobs said. “That’s commendable in many ways. The problem is not all deals are created equal.”
The state agencies are doing their best, agreed Vihar Sheth, senior vice president at U.S. Bancorp Community Development Corp. The problem is the desired optics can be achieved by manipulating the project’s pay-in schedule or making other moves, which can introduce new risks and unintended consequences that will make it less likely that units are delivered on time or on budget, he said
Social impact is also becoming much more important to LIHTC syndicators and investors.
“This year, we had an investor tell us their regulators wanted them to report the social impact of their LIHTC deals,” Champy said. The more social impact they could show, the better it would be for the investor trying to meet their regulatory obligations.
The syndicators and investors on the panel cited working on a variety of high-impact projects that will or are serving people recovering from opioid addiction, youths aging out of foster, people in need of assisted living, veterans, and Native Americans.
