Affordable housing developers should look at securing their low-income housing tax credit (LIHTC) equity before their debt on their next deals, reported several syndicators.
A project's debt is often figured out first when putting together a new deal, but in many cases LIHTC investors will want to pair their equity investments with construction loans or other debt to get a better overall return, said James Horvick, senior vice president, acquisitions and institutional investments, at Raymond James Affordable Housing Investments.
Horvick was part of the Tax Credit Equity Outlook Power Panel moderated by developer Caleb Roope, president and CEO of The Pacific Cos., at AHF Live: The Affordable Housing Developers Summit in Chicago.
This year, reports have shown that the national median housing credit price for developers has hovered around 88 or 89 cents per dollar of credit, noted Marge Novak, senior vice president, capital markets, at Berkadia.
There hasn’t been as big a drop in prices as expected amid higher investor yield expectations partly because there’s a lag in the market. Investors may have needed to invest in certain projects to help meet their Community Reinvestment Act requirements, and that may have resulted in them still paying strong prices for those deals.
Syndicators may have also been motivated to invest in projects by the need to close funds.
However, looking forward, the expectation is that investor yields will increase and prices to developers will decrease next year, according to several LIHTC leaders at AHF Live.
When the current group of multi-investor funds clears the market and work begins on new funds next year, that’s when pricing to developers may start to be impacted, according to Novak.
Close your deals, said Tony Bertoldi, co-president of CREA. Asked what he was optimistic about, he cited the Inflation Reduction Act of 2022, which codified a book income tax as an alternative to taxable income for a handful of companies that have enormous earnings.
“The credit can be used to offset this new 15% book income tax,” Bertoldi said. “It’s not payable until the end of this year. It’s taxable on 2023 income, and we have a lot of work to do to get these new entrants into the market, even if they want to get into the market because of the long hold period.”
But, the potential is there to bring in massive U.S. corporations into the LIHTC market, he said.
For deals that closed a year or two ago and are nearing the end of construction, developers should check on their stabilization progress, advised Horvick.
He noted that, after a tough year, there was a recent reduction in the 10-year Treasury and there’s hope that the Federal Reserve has reached the end of its interest rate hikes. “I’m optimistic that we’re at least past the worst phase of this current cycle,” he said.
John Jablonsky, senior vice president and head of investor relations at National Equity Fund, said his advice to developers has remained consistent all year: If you have a letter of intent with terms and a price that works for your project, waiting another month or two isn’t going to help get your deal done.
Julie Sharp, executive vice president at Merchants Capital, cited the challenges of the past year, including rising interest rates and construction costs that have led to gaps in project budgets.
Solutions have included working with state housing agencies for additional financing, reducing unit counts, pairing solar credits in deals, and also twinning both 9% and 4% LIHTCs in a single building, according to Sharp.
She agreed with others that if a developer has a deal that works, they should move on it.
