A big question is whether low-income housing tax credit (LIHTC) prices, which steadily climbed in 2010, will push further north this year.

A good majority of syndicators surveyed at the end of January—14 out of 19—expect prices to continue to creep up before stabilizing later in the year.

However, that doesn't mean it's all smooth sailing. Syndicators still see several big waves on the horizon.

“Whatever predictability folks believe returned to the market in 2010 is likely to be gone in 2011,” says Joe Hagan, president and CEO of National Equity Fund, Inc. (NEF). “Things are moving quickly.

Prices have risen quickly in some parts of the country as investors have eagerly returned to those markets. Others are still starved for equity without Community Reinvestment Act (CRA) investors to focus on their communities."

To make deals attractive to nontraditional, non-CRA investors, the returns have to be high. And, for many deals, that level of pricing won't work without the Tax Credit Assistance Program funds that helped fill gaps last year, says Hagan.

Another unpredictable variable is the overall economy. “The LIHTC market can't be healthy for very long if our investors, syndicators, and developers aren't financially stable,” says Hagan. “Ongoing pressures remain a threat."

The potential for pendulum swings in pricing and interest also persists, according to John Anton, president of the Northern New England Housing Investment Fund.

“The first half of the year will likely involve syndicators investing capital already raised and will be likely characterized by competition among syndicators as they work to earn fees associated with getting money out the door,” he says.

“Developers and syndicators will assume that the new pricing created in the first half of the year represents the equilibrium point for the balance of the year.

That mid-year market reset—does pricing go up, down, or hold steady—will be the event to watch."

Hal Keller, president of the Ohio Capital Corporation for Housing, adds several other issues to the watch list, including talk of tax reform chilling the equity market, cuts in gap financing programs, and higher interest rates.

Better than expected 2010

Their wariness is understandable even though there's no question that the LIHTC market improved in 2010 with more investor capital flowing. It was a rebound from a major slowdown in 2009 when the tax credit market was dragged down by the larger financial crisis and weak economy.

The firms recently surveyed by AFFORDABLE HOUSING FINANCE raised $6.8 billion in LIHTC capital and acquired 878 developments in 2010. That's a big change from the prior year. A year ago, 16 firms took part in the survey and reported raising $3.2 billion and acquiring 360 projects in 2009.

The increase in capital and ensuing competition for deals pushed the average price paid per dollar of tax credit in the fourth quarter of 2010 to $0.74, according to the survey of national and regional syndicators. That's up from the $0.69 average reported at the end of 2009.

Although prices increased, the average yield to investors held at 10 percent, the same as a year ago.

The market improvement can be seen in the strong numbers posted by several companies.

NEF reported raising $835 million in 2010, a record for the 23-year-old Chicago-based syndicator. Midwest Housing Equity Group, Inc. (MHEG), also posted its best year, raising $126.5 million and acquiring 44 projects. Red Stone Equity Partners, LLC, said its investor closings were up more than 75 percent from the year before. Enterprise Community Investment, Inc., reported that its 2010 production was up more than 70 percent from 2009. And, Community Affordable Housing Equity Corp. said it had its most productive year at both the upper and lower tiers.

“2010 was a better year for LIHTCs than anybody predicted at the beginning of the year,” says Greg Judge, COO at Boston Financial Investment Management, which relaunched its syndication activities last year after a transition to new ownership.

He sees the market continuing to draw wide investor demand. “We expect downward pressure on yields throughout the year until some level of equilibrium is reached,” Judge says.

One reason it was a better than expected year is the emergence of new investors who were drawn by the doubledigit yields. They joined the traditional bank investors who buy credits to help meet their CRA obligations.

“The entry of the economic investors into the market in 2010 has allowed us to acquire product in a larger and more diverse geographic area,” says Raoul Moore, senior vice president, tax credit syndication, at Enterprise.

Two years ago, the issue was not enough capital. This year, with more investor interest, the issue could be not enough developments.

“We continue to expect considerable investor demand for 2011 even with some erosion in yields,” says Eric McClelland, president of Red Stone Equity Partners. “However, the market for the deals themselves has become very competitive. The difficult task for 2011 will be obtaining enough product to meet investor demand."

The Richman Group Affordable Housing Corp. led the way in 2010, raising $922 million.

Looking at this year, Stephen M. Daley, executive vice president at the firm, anticipates “continued upward pressure on credit pricing, which may cause some of the non-CRA motivated investors to begin to back off or reduce their participation in the market."

Others also noted the importance of what the non-CRA investors will do this year.

“The entire industry needs to be wary of deal pricing increasing to the point that economically motivated LIHTC investors are forced back to the sidelines due to the large availability of alternative investment choices,” says Benjamin D. Mottola, president of Stratford Capital Group.

Beyond the CRA hot spots Although deals in major CRA markets continue to attract the highest prices, several syndicators feel good about the prospects for projects in smaller and rural areas this year.

“Non-CRA markets are performing well with the entry of more insurance companies and non-banks into the market," says Michael Riechman, managing director of tax credit investments at RBC Capital Markets-Tax Credit Equity Group. “As a result, non-CRA markets have been seeing an increasing amount of capital."

He emphasizes the importance of the product. The key is to have projects that are “in sync with the local market,” says Riechman.

“Given the strong appetite from economic investors, deals outside large CRA markets will fare OK as long as the deals are well-structured and yields are attractive compared to yields in large CRA areas,” agrees Steve Kropf, executive vice president and director of investments at Raymond James Tax Credit Funds, Inc.

Jim Rieker, president and CEO of MHEG, specializes in projects outside the big CRA territories. His firm raises capital for deals in Nebraska, Kansas, Iowa, and Oklahoma. “These deals continue to do very well,” he says. “The key is to continue to control expenses, knowing that rents can't be raised too much. Strong underwriting up-front helps prevent later woes."

Google Invests in New LIHTC Fund

After breaking into the low-income housing tax credit (LIHTC) market last year, Google has started 2011 with a new affordable housing investment.

The Web search engine giant has invested in a new LIHTC fund, with the first tranche of $28 million closing Jan. 28. A second tranche is expected to close in the second quarter of this year.

Upon closing of the second tranche, the proprietary fund will involve three properties— new construction projects in Santa Fe, N.M., and Allston, Mass., and an acquisition/rehabilitation project in Minneapolis.

AEGON USA and its affiliates acted in multiple roles, including fund manager and guarantor.

The first tranche will help finance the construction of the Villa Alegre Senior Apartments, which will provide 50 affordable apartments for seniors in Santa Fe. The development will have geothermal heating and cooling and solar panels to generate electricity.

The investment will also fund the Riverside Plaza Apartments development in Minneapolis, which will include the rehabilitation of nine multistory buildings with 1,303 family units, which are home to about 4,500 residents, according to Christoph Gabler, senior vice president for AEGON USA Realty Advisors, LLC.

The community includes one of the country's largest on-site education facilities within a housing complex, including services for early child care and a charter school, according to officials.

“We are excited about our investment partnership with Google,” said Brian Herman, senior vice president for AEGON USA Realty Advisors, in a statement. “We take great pride in forming long-term relationships with companies, including Google, and we look forward to working with them on future projects."

Carreden Group, Inc., an investment banking firm that specializes in advising guarantors in the tax credit market, represented AEGON in structuring the deal.

“The emergence of tax credit equity and liquidity from corporate investors is positive for the market,” says John Faulkner, managing director at Carreden.

Having raised more than $600 million in tax equity over the past 12 months, Carreden has been very active in market development, working to attract new LIHTC investors, including Google.

The tech company has invested in three funds in the past 12 months. The first was a $25 million investment with Union Bank's Community Development Finance division, involving two properties, including one in Sunnyvale, Calif., near Google's headquarters.

The company followed up with an $86 million fund with U.S. Bancorp Community Development Corp. involving seven affordable properties in the Midwest and West.

Carreden also acted as exclusive financial adviser and placement agent with Union Bank and U.S. Bancorp on these transactions.

While banks and financial institutions have been the major LIHTC investors over the years, the market has seen several new investors, including Kroger Co. and Waste Management, emerge in the past year as yields increased from their early 2008 lows.

A key question is whether new economic investors will remain in the market as yields decline.

“I expect these new investors to stay for the simple reason that there's a lack of alternative investments that offer as attractive economics," says Faulkner.