Low-income housing tax credit (LIHTC) syndicators, who have been weighed down by huge uncertainties in recent months, are feeling more optimistic in the new year.
The positive outlook can be attributed to a more balanced market, continued low interest rates, and the extension of the 9 percent fixed rate, which add up to create more comfort about the deals coming ahead.
“I think the industry has some good momentum heading into 2013,” says Ryan Sfreddo, managing director, investor relations, at Red Stone Equity Partners. “The fixed 9 percent credit rate was extended, which is a very good thing. With credit pricing having corrected—or still in the process of correcting—the fixed 9 percent rate will make projects pencil that otherwise would not have had we fallen off of that cliff. Second, with multi-investor fund yields having risen above 7 percent, we are seeing growing interest and demand from economic investors, some of whom are new to the industry.”
Sfreddo is among 15 syndicators feeling better about the market.
Five others say they are less optimistic, and two feel about the same as they did a year earlier, according to an annual Affordable Housing Finance survey. Their outlook is colored by the black cloud that continues to hang over the industry—tax reform. The concern is that the LIHTC program could be altered, or even eliminated, as part of a larger tax reform effort.
“Potential sequestration, tax reform, and deficit reduction have all introduced uncertainty into the market,” says Raoul Moore, senior vice president of syndication, at Enterprise Community Investment.
The word “uncertainty” was echoed by several others.
Rising yields
The poll of national and regional syndicators found that the average price paid to developers in the fourth quarter of 2012 was about $0.90 per dollar of credit. That’s up from $0.87 in the same period in 2011 and way up from the approximately $0.70 average in 2009.
All the syndicators surveyed predict that prices will decline or hold steady in the first half of the year. No one anticipates prices increasing during this time.
This is seen as a healthy move after some of the big ups and downs of the market in the past few years. The stability will give everyone a greater ability to plan for the year ahead. But more important, a drop in pricing to developers means an increase in yields for tax credit investors, which syndicators say is necessary to attract a diverse pool of buyers.
“There is a lag that occurs between the buy and the sell side, and it appears that developers are beginning to realize the market shift toward higher yields and are beginning to adjust accordingly,” says Rick Gonzales, manager of sales and service at PNC Real Estate. “I expect this trend to continue during the first half of the year.”
Look for this year to be different for several reasons.
“The market is still adjusting to investor demands for higher yields and developer demands for higher pricing in an environment with a continued shortage of gap financing,” says Mark McDaniel, president and CEO of Great Lakes Capital Fund. “Area median income levels are leveling if not being capped at maximum rates, whereby reducing the amount of leverage the properties can service.”
Various banking standards and regulations also continue to affect investor decisions. “Yes, the market in 2013 will be different than 2012,” McDaniel says.
Several syndicators noted that a number of banks are entering new Community Reinvestment Act (CRA) exam cycles, which could affect the larger LIHTC market.
It “will likely temper the need for aggressive pricing in markets where there isn’t an imminent need,” says Greg Voyentzie, executive vice president at Boston Financial Investment Management. “That, coupled with higher yield requirements of economic investors, should serve to bring pricing down.”
As many large banks start new CRA investment cycles, they are being more selective about their deals, choosing opportunities with higher yields, adds Joe Hagan, president and CEO of National Equity Fund (NEF).
Some of the early optimism felt by the LIHTC industry is the result of economic investors starting to return to the market after walking away when yields fell to about 6 percent. The recent survey found that yields averaged about 6.5 percent in the fourth quarter but were on the rise.
“This year pricing seems to be more balanced between investor demands and what projects need to make them work,” says John Wiechmann, president and CEO of the Midwest Housing Equity Group. “The higher yields are bringing at least some economic investors back to the table.”
Steve Kropf, the new president of Raymond James Tax Credit Funds, agrees that economic investors are eyeing 2013 opportunities. “Clearly not as many as were active in 2010, but it seems more will be active than 2012,” he says.
Yields have increased 75 to 100 basis points between last year’s funds and this year’s offerings, according to Stacie Nekus, senior vice president of investor relations at Alliant Capital.
“The current yield environment of multi-investor funds ranging from 7 percent to 7.5 percent should induce investors who have been sitting on the sidelines to re-enter the market,” Nekus says. “When compared to alternative investments, this yield is very attractive and the investment has proven to be very stable.”
However, if yields fall back below 7 percent, the LIHTC industry can expect economic investors to walk again, say syndicators.
Hot issues
The recent extension of the 9 percent fixed rate and New Markets Tax Credit program was seen as a good sign, and there’s some feeling that sweeping changes won’t make it through Congress this year.
Still, tax reform clearly remains the biggest concern. Like everything else, the LIHTC program will be under scrutiny by Congress, says Christoph Gabler, senior vice president, community investments, at AEGON USA Realty Advisors. “It is a concern, but hopefully reason will prevail in congressional discussions about how housing can and be provided cost effectively,” he says. “The LIHTC program will have many advocates ready to protect and defend this highly successful model for housing development.”
Others warn against complacency and urge developers to educate their Congress members about the housing credit and its benefit to communities.
Syndicators also say developers should watch for a number of other issues this year.
“We are seeing a repricing in the marketplace,” says Stephen Daley, executive vice president at The Richman Group Affordable Housing Corp. “Yields on our funds have increased at least 125 basis points, yet we still see competitors bidding for deals at the lower levels. Developers should be cautious to ensure that there is an end investor willing to acquire the transaction at the price being offered.”
Tony Alfieri, managing director at RBC Capital Markets-Tax Credit Equity Group, also expects some deals that were bid in the third and fourth quarters of last year to come back to the market because they won’t close on their original terms.
“Market factors will continue to affect pricing and terms, so close on deals that can be transacted on reasonable terms,” he says.
Developers should also expect investors to be more focused on deal terms, says Victor Sostar, senior vice president and chief acquisitions officer at First Sterling Financial.
The market will also likely see additional credit and funding for Hurricane Sandy relief, he says.
Also on a positive note, “Veterans deals will receive a lot of attention this year,” says NEF’s Hagan. “We also think that with the Department of Housing and Urban Development’s new Rental Assistance Demonstration program that there will be opportunities for investments with housing agencies doing substantial rehabilitation on existing public housing deals.”
