Low-income housing tax credit (LIHTC) prices will hold steady for the first half of the year, predict a majority of syndicators in early 2022.

“Overall, we expect LIHTC pricing to remain relatively stable over the next six months,” says Jason Gershwin, executive vice president at R4 Capital. “Though we have seen highly competitive bidding in certain markets causing pricing on those properties to increase over levels we saw in 2021, we expect LIHTC investors to demand investment returns that are similar to those delivered in 2021, which should hold pricing steady.”

About 79% of the syndicators surveyed by Affordable Housing Finance agree that prices to developers will hold firm in the first half of the year, while 16% say prices will decrease and just 5% say prices will increase.

In general, the market should remain pretty stable this year, says Scott Hoekman, president of Enterprise Housing Credit Investments. However, he cites two events that could affect pricing—interest rate increases and the passage of the housing credit provisions in the Build Back Better (BBB) legislation.

“Both of these factors would likely reduce price per credit to developers—investor yield requirements tend to rise with interest rates, and a sudden influx of tax credits via Build Back Better would likely result in some supply/demand imbalance in the short run,” Hoekman says.

If the legislation included an increase in the corporate tax rate, “that would have helped because investor yields would increase even with no change in price to the deal, helping to drive more capital into the market to take up the increased tax credits,” he adds.

The sweeping BBB legislation, which has been stalled in the Senate, is one of the big unknowns for the affordable housing industry this year. The bill includes increases to the annual 9% LIHTC allocation, a reduction of the 50% bond financing threshold test to 25%, and other significant changes.

While the legislation is strongly supported by the affordable housing industry, members note that if it is enacted the market will likely need to go through a temporary adjustment period.

“If the BBB bill passes with the current LIHTC components intact, it will lead to a historic increase in production for the industry,” says Tony Bertoldi, co-president of CREA. “As the bill comes into effect, we anticipate LIHTC pricing to fall as the supply of tax credits increases. This should bolster yields, increasing demand from existing economic investors and potentially drawing new investors into the market. State agencies and market participants would need to adapt to an increased number of deals. In particular, contractors will need to adapt to the growth in demand while managing the ongoing effects of the pandemic, especially in relation to labor shortages and fluctuations in materials pricing. Eventually the market will find equilibrium at an expanded scale, and we will thankfully see increased production of affordable housing in a country where the need for affordable housing continues to be unmet.”

Shrinking Supply

Without new legislation, there’s a notable drop in the LIHTC allocation cap, which has fallen to $2.60 per capita this year now that a 12.5% cap increase has expired after being in place for four years.

The reduction in allocations means fewer affordable housing developments will be financed this year, especially with projects facing rising construction and labor costs. BBB calls for increasing the annual LIHTC cap for several more years along with other program improvements.

“Given a more limited supply of 9% transactions in the market, the demand and price for low-leveraged transactions will increase as syndicators and investors balance leverage metrics within their funds or investment portfolios,” says Julie Sharp, executive vice president, tax credit equity, at Merchants Capital.

If the BBB housing provisions are not enacted this year, allocations to projects will be extremely competitive, adds Ari Beliak, president and CEO of Merritt Community Capital Corp. “Add to that, if Congress fails to renew the 12.5% credit increase, projects will find it even harder to secure credits,” he says. “This will decrease investor yields and increase pricing, as the deal supply decreases at a time when many investors are seeking to increase their annual investment. In addition, it will make strong relationships with developers even more important with an increased focused on non-economic terms.”

Twenty-three syndicators took part in the survey early this year. Together, the firms closed nearly $15 billion in LIHTC capital and acquired 1,092 housing credit properties last year.

The average priced paid for LIHTCs was about 85 cents per credit in the fourth quarter of 2021, down from 90 cents the prior year. Yields to investors averaged about 5.17% in the recent fourth quarter, up from 4.86% during the same quarter in 2020.

Continued Construction Delays

Syndicators recognize that developers have been facing labor shortages, continuing delays related to COVID-19, and supply chain disruptions on lumber, appliances, and other products. It’s meant working closely with development teams and taking a careful look at projects.

“In the beginning of the pandemic, we needed to implement a sensitivity analysis on the deals to determine if they could absorb a three-month delay in construction,” says Matt Reilein, president and CEO of National Equity Fund. “More recently, sponsors have been building additional cushion into the timelines they present. On the fund side, we include some adjusters or cushions to the overall fund to allow the fund to absorb delays in credit delivery if necessary. Those have proven accurate and valuable over time.”

There are concerns about delays both prior to closing and during construction, adds Lori Little, president and CEO of the National Affordable Housing Trust.

“We have not seen any deal close or complete ahead of schedule, and so we are working with our development partners and investors to be reasonably conservative on timing assumptions while also making sure that the metrics of the deal work for all partners,” Little says.

RBC Community Investment’s development risk management team is keenly focused on the issue, according to Tammy Thiessen, managing director and originations and sales co-head, noting that some developments have been delayed because materials are not available or there’s a limit on how much one party can purchase.

“Unfortunately it’s the new reality,” Thiessen says. “Transportation is another issue of concern. It’s more expensive to ship material to sites, including longer lead time due to transportation availability. Planning is key to successfully mitigating these issues, and we discuss with developers the importance of early planning and quick buyout at the project commencement.”

RBC has included an additional budget verification process during its pre-closing due-diligence process, helping to confirm recent bids on items like lumber, says Thiessen.

More Bond Deals

With the establishment of a minimum 4% LIHTC rate, syndicators anticipate seeing more of these transactions this year.

“We saw that the fixed 4% rate allows many deals that previously did not pencil without additional sources to now pencil (or better pencil),” says Stephanie Kinsman, managing director, investor relations, at Red Stone Equity Partners. “Some 4% transactions also fared better in 2021 when facing construction cost pressures given the additional equity proceeds associated with cost increases as compared to 9% transactions with a fixed reservation amount. On the flip side, we are finding that some 4% transactions in high-cost areas are becoming exceedingly large and complex, thereby reducing the number of available equity distribution options.”

Officials at Cinnaire also expect to see more 4% projects, but they point out that “not all 4% deals are created equal. “As inflation drives costs higher and interest rates on debt go up, we expect the ‘gaps’ in sources and uses to grow,” says Josh Ghena, senior vice president, equity funding at Cinnaire. “Investors remain sensitive to highly leveraged 4% deals. Solving the gap by pushing rent assumptions and hard debt will only serve to make the deal less attractive. Without a corresponding increase in the availability of “soft money” to help fill these gaps, we see the number of deals that pencil out decreasing.”

A proposal in BBB to reduce the 50% bond test to 25% has the potential to drastically increase the number of 4% transactions, notes David Leopold, senior vice president and head of affordable housing at Berkadia.

Looking at how investor and syndicator requirements have changed over the past year, Leopold adds that there’s a greater focus on ESG requirements and tracking their impact on local communities.

R4 Capital’s Gershwin also cites increased investor focus on the ESG benefits of LIHTC investments.

“We expect that the ability to identify and quantify the ESG impacts of investing in affordable housing properties will be an important aspect for developers to focus on throughout 2022 and beyond,” he says.

Company Capital Closed in (in Millions) LIHTC Projects Acquired
Aegon Asset Management 374 16
Berkadia Affordable Housing 290 14
Boston Financial Investment Management 1,080 65
Cinnaire 245 34
CREA 1,130 82
Enterprise Housing Credit Investments 1,560 97
Evernorth 60.7 17
Hudson Housing Capital 700 41
Hunt Capital Partners 320 22
Massachusetts Housing Investment Corp. 66.6 10
Merchants Capital 160.6 17
Merritt Community Capital Corp. 137 11
National Affordable Housing Trust 181 16
National Equity Fund 1,230 87
Ohio Capital Corporation for Housing 340.5 40
PNC 929.5 68
Raymond James Affordable Housing Investments 1,305 116
RBC Community Investments 1,123 77
Red Stone Equity Partners 1,070 71
Regions Affordable Housing 481 40
R4 Capital 773 38
The Richman Group Affordable Housing Corp. 700 65
WNC 441.1 48
Source: AHF Survey, February 2022