A majority of low-income housing tax credit (LIHTC) syndicators expect pricing to hold steady in the second half of the year. However, several caution that prices could dip as the market sees an increased supply of credits this year.

They cite the new 4% credit floor, a long-sought change that was approved by Congress at the end of last year and will help finance an additional 130,000 affordable units between now and 2030, estimates Novogradac, an accounting and advisory firm.

In addition, 11 states and Puerto Rico are receiving extra LIHTC authority to help communities rebuild from recent disasters, and there’s legislation to further expand the housing tax credit program. All of this is good, but it could take time for the market to absorb all the credits at first.

While keeping a close eye on the supply and demand for credits, about 70% of the syndicators surveyed by Affordable Housing Finance expect pricing to stay steady, and 25% expect prices to drop in the second half of the year.

“Dating back to late 2019, we have seen LIHTC pricing decrease by 3 to 4 cents in most markets,” says Jason Gershwin, executive vice president at R4 Capital. “We have noticed a less acute decrease in pricing over the past six months. While we do expect that the lingering effects of the fixed 4% credit and large amount of awarded disaster credits will combine with the likelihood that legislation will further increase credit supply to put additional downward pressure on LIHTC prices, other market factors may increase investor demand and therefore counter the downward pricing trend. Though a further decrease in credit pricing is possible, we expect LIHTC pricing six months from now will be relatively the same as it currently stands, especially for top developers with projects in strong markets.”

Officials at the Massachusetts Housing Investment Corp. (MHIC) also expect pricing to remain steady.

“There continues to be strong Community Reinvestment Act demand in the markets MHIC serves,” says Joe Flatley, president and CEO. “Additional credits in the market have not impacted pricing thus far, but that is a fluid situation that we are actively monitoring.”

Another factor is that many investors seem to be reaching their limits for 2021 and now are selectively reviewing 2022 opportunities, according to Lori Little, president and CEO of the National Affordable Housing Trust. “We expect that some developers may see strong prices for the right deals but generally expect that some pricing offered now may be at or below what was being realized at the end of the second quarter as financial partners were trying to finalize their 2021 pipelines,” she says.

Overall, investor appetite has remained strong this year, but given the additional supply in credits from the fixing of the 4% rate and ongoing concerns surrounding the COVID-19 pandemic, investors continue to focus on deals with resilient capital structures, including strong debt-service coverage ratios and contingency levels, and developed by strong sponsors, adds Stephanie Kinsman, managing director, investor relations, at Red Stone Equity Partners.

The recent survey finds that 19 leading syndicators closed about $5.2 billion in equity and acquired 445 LIHTC developments in the first half of the year.

The price paid per dollar of credit averaged 90 cents in the second quarter, about the same as was reported in the fourth quarter of 2020. Yields to investors averaged 5.02%, up from 4.86% at the end of last year, according to the AHF survey.

More 4% Deals

“The LIHTC market did not skip a beat in the first six months of 2021 despite feeling the lingering effects of the pandemic, a presidential transition, and increased merger and acquisition activity amongst bank clients,” says Tony Bertoldi, co-president of CREA. “While LIHTC yields continued to compare very favorably to alternatives, a renewed focus on socially conscious investing initiatives by corporations brought further depth to an already very strong investor pool.”

On the deal side, bond deals benefited from additional equity resulting from the new 4% floor, according to Bertoldi, noting that a number of deals awarded under the “average income” option were restructured to provide more cushion, making them more palatable to the investor community.

Several syndicators report seeing not only more but also larger 4% deals this year. The new minimum rate is helping make many projects feasible.

“The additional sources resulting from the 4% floor created more cushion in deals that might have previously been undersourced, which could now be underwritten to a 1.20x debt-service coverage, as opposed to 1.15x, and feature a full six months of operating deficit reserves,” Bertoldi says. “These deals also continue to benefit from a low interest rate environment.”

The additional equity in 4% projects is helping to source the increasing construction costs taking place and could not have come at a better time, adds Tammy Thiessen, managing director, originations and sales co-head, at RBC Community Investments.

More transactions pencil out, but it has also created a lot of highly leveraged deals that are challenged to find equity sources, says Steve Kropf, president and CEO of Raymond James Tax Credit Funds.

Overall, the surveyed syndicators reported that of the 445 deals they closed in the first half, 206 were 4% projects and 239 were 9% deals.

COVID Impact
The COVID-19 pandemic brought increased scrutiny on deals last year, and those measures continue to remain in place, especially as some areas have seen a recent surge in COVID cases.

“Investors are still interested in seeing COVID stress tests on construction delays and operational metrics such as vacancy and rent trending,” says David Leopold, senior vice president and head of affordable housing at Berkadia, noting that LIHTC portfolios have performed well.

Investors are looking for a good understanding of construction cost buyouts due to the price increases in materials. In the past, there was limited focus on this, but now Berkadia is talking directly with general contractors more often than before about buyouts, according to Leopold.

On the deal level, R4 Capital has continued to incorporate more sensitivities in its underwriting and look carefully at potential construction delays, increased costs, and downside rental collections, according to Gershwin.

“On the fund level, we continue to perform a stress test on fund projections under which we assume that all fund projects’ construction and lease-up schedules are delayed six months to account for any potential impacts of COVID-19,” he says. “The stress tests prove that the funds and their respective properties are structured with the necessary protections to keep our investors’ returns constant.”

Others agree that the new reviews will be around for a while longer. “COVID stress-testing remains, and we foresee that being the case at least through 2022 as new variants come out and various parts of the country go in and out of stricter protocols,” says Amy Dickerson, managing director at Hunt Capital Partners.

The continuing challenges of COVID-19, the end of the eviction moratorium, and rising construction costs are among the concerns hanging over the industry in the second half of the year.

However, most syndicators are pretty optimistic about the coming months, including the potential passage of the Affordable Housing Credit Improvement Act (AHCIA) and a sweeping infrastructure bill.

“If that happens, more developments can move forward though there will be a scramble to bring enough investor capital into the market to absorb the additional credits,” says Scott Hoekman, president of Enterprise Housing Credit Investments. “While some are concerned about what that might do to pricing, I’m optimistic that our industry will rise to this challenge like we have so many others.”

With the AHCIA, new and nontraditional investors will enter the market, add officials at Merritt Community Capital Corp. “Particularly if there is also an increase in the corporate tax rate, investors will move quickly to get in before the increase, and, following the increase, a wider range of nontraditional investors will be attracted,” says Ari Beliak, president and CEO. “We believe that corporate tax rate increases coupled with the growing focus on ESG and investing for social impact will persuade nontraditional investors who have been on the sidelines to take to the field.”

The LIHTC market always seems to find equilibrium, agrees Matt Reilein, president and CEO of the National Equity Fund.

“Despite the market challenges of COVID, the LIHTC industry has proven resilient after only a short adjustment period, and the number of LIHTC developments in need of credits and/or bond allocations continues to increase steadily,” he says.

Company $ Closed in First Half (In Millions) Projects Acquired in First Half
Berkadia 119.5 8
Boston Financial Investment Management 315 28
CAHEC 73 25
Cinnaire 63.2 9
CREA 426 35
Enterprise Housing Credit Investments 613 38
Hudson Housing Capital 300 15
Hunt Capital Partners 218 14
Massachusetts Housing Investment Corp. 55.1 6
Merritt Community Capital Corp. 102 6
National Affordable Housing Trust 65.9 8
National Equity Fund 379.8 33
Ohio Capital Corporation for Housing 152.1 19
Raymond James Tax Credit Funds 725 62
RBC Community Investments 483 40
Red Stone Equity Partners 357.4 32
R4 Capital 352 19
The Richman Group Affordable Housing Corp. 250 31
WNC 176 17
Source: AHF Survey, August 2021