The low-income housing tax credit (LIHTC) has less than a 50 percent chance of survival if the affordable housing industry does nothing, said Terri Ludwig, president and CEO of Enterprise Community Partners.
Ludwig sounded the alarm to several hundred developers attending the AHF Live conference in Chicago.
Others have warned that the mighty LIHTC could be eliminated as Congress sets its eyes on tax reform, but Ludwig went further and laid down tough odds for the industry to consider.
She no doubt meant her remarks to be a call to arms for the affordablehousing industry, but that doesn’t mean her 50-50 bet was an overstatement.
Enterprise is well connected to what’s happening. What’s more is that one Washington insider said afterward that Ludwig’s assessment is on the mark.
Throughout the conference, developers were urged to show their LIHTC developments to their Congress members to generate support for the 26-year program, which could be tossed out with all other tax credits.
It is also critical to let the lawmakers know how important the housing credit is to producing jobs, especially during the economic downturn. The National Association of Home Builders estimates that a typical 100-unit LIHTC development generates about 122 local jobs, $7.9 million in local income, and $827,000 million in taxes and other revenue for local governments in the first year.
Market conditions
In a separate session, leading LIHTC investors and syndicators discussed the outlook for the equity market going into 2013.
“Probably the top six bank investors make up about 50 percent of the market,” said Beth Stohr, LIHTC director for U.S. Bancorp Community Development Corp.
Several key banks are coming to the end of their regular three-year Community Reinvestment Act exam cycles. When that happens, banks may reduce their investing, a loss in equity that can be felt throughout the market.
At the same time, the market has seen an exodus of economic buyers. In 2009 when yields were rising, there was a notable influx of insurance firms investing in housing credits. “In the past couple of years, the price of credits has increased and yields have decreased to a point where those insurance companies have retreated,” said Tony Bertoldi, senior vice president of syndication at City Real Estate Advisors, Inc.
“The tide has turned to where the price per credit is now coming down and yields are going back up in order to attract those economic buyers back to the market and have a little more equilibrium,” he said.
However, the enormous costs of Hurricane Sandy will likely keep a number of insurance firms on the sidelines.
Chris Cormier, senior vice president of investor relations at WNC & Associates, said she recently met with an insurance firm that has left the market following the disaster. “They are running sensitivities on their ability to use the credits they already have,” she said.
In addition, the Hurricane Sandy recovery will likely trigger a jump in construction costs. Some areas could even be stung by labor shortages.
The recent ups and downs of credit pricing have made forecasting very difficult.
Developers need to watch the minimum pricing that state housing finance agencies (HFAs) are using in their qualified allocation plans (QAPs). “It has been an overexuberant market at times this year,” Stohr said.
As a result, it has been difficult for the state agencies to get a good read on the market. “They are in a hard spot because of the volatility and wide swings,” she said, noting that developers can help the situation by being in real-time touch with syndicators and investors and relaying the latest market information to the HFAs.
There is a time lag between when QAPs are prepared and when developers secure a price for their credits. In 2012, prices have fluctuated roughly 100 basis points. “When you convert that to price per credit, it is $0.05 or $0.06 per credit,” Bertoldi said.
Cost issues
The other growing issue for the industry is development costs. Federal and local funding for affordable housing has been slashed in many areas, increasing pressure on the LIHTC program to fill a larger role in financing affordable housing.
There is also increasing scrutiny on how much developments are costing.
Moderator Michelle Norris, senior vice president and chief development officer at National Church Residences, a nonprofit that has developed more than 17,000 housing units, quizzed the panel on the growing issue of cost containment.
The last thing that a buyer wants to see is its name in a newspaper associated with a controversial $550,000 per unit deal, Bertoldi said.
While there is agreement on the need for increased efficiencies and better cost containment, some speakers acknowledged being involved in some pricey deals but stressed that the development costs were in order.
“Really look at the situation,” said David Leopold, senior vice president at Bank of America Merrill Lynch. “If you are trying to serve a very low-income population with supportive services, it’s going to take more tax credits per unit. If you are doing a HOPE VI project that involves redesigning the street grid and infrastructure, it’s going to take more equity per unit. If you are working in high-cost areas, most of which are where affordable housing is in the greatest need and demand, it’s going to take more equity per unit. We are willing to work with developers and look at the situation.”
Syndicators and investors are being very careful when they see extreme cases. However, in most deals the cost per unit has not surfaced as an issue.
“We look at the total cost of the preservation deal versus new construction,” said Bank of America’s Leopold. “Is the replacement cost more or less than the total cost per unit of the preservation? We also look at whether it is fitting a need in the market. There are some markets where your restricted rents are not below market rents.”
Political risks
Developer Paul Purcell, president of Beacon Development Group, asked the panel what the political risk is as the program moves increasingly toward preservation when the LIHTC industry has sold itself as a production and jobs programs. How should people frame the discussion?
Catherine Talbot, senior vice president of acquisitions at Boston Financial Investment Management, said the risk is that communities could lose valuable affordable housing if it is not preserved.
The need for developers and others in the affordable housing industry to advocate on behalf of the housing credit was echoed by the panel.
“I’ve been fearful since the election that people have gotten a little complacent on what the threat is to the LIHTC program,” said Raoul Moore, senior vice president of syndication at Enterprise Community Investment, Inc. “With the looming tax reform and deficit reduction efforts that we are going to see, and both parties have clearly said that we need, we face serious threats.”
Until Congress members see LIHTC developments in their hometowns, the program does not resonate with them.
“It has to happen in the districts,” said Corine Sheridan, vice president and director of LIHTC business development at Boston Capital. “It is about getting our elected officials to see the developments, to hear about the jobs that are created and the tax revenue that is generated. Introduce them to your residents.”
