What effect does a 21% corporate tax rate have on affordable housing?
The marketplace is busy clarifying that answer right now. Few dispute the reduced corporate tax rate has some effect, notably on low-income housing tax credits (LIHTCs). The relative attractiveness of LIHTCs to some corporate investment managers may have diminished from pre-tax reform days. The good news is, LIHTCs still play a very active funding role and represent an important component to a project’s funding stack.
How important? What affordable housing funding strategies make sense, post-reform? For insight into today’s affordable housing funding opportunities, a good person to ask is Joseph Hague, a specialist in structuring tax-exempt, Federal Housing Administration (FHA), and Fannie Mae debt financings for affordable housing transactions at RED Capital Group, a leading tax-exempt bond underwriter and mortgage lender. Recently, he shared his views:
Where do things stand with LIHTC financing today? How does it compare with, say, a year ago?
I believe development of LIHTC projects is becoming more difficult overall. Interest rates are higher than a year ago, LIHTC pricing is lower, and construction is more expensive.
How have affordable housing developers and owners responded to the post-tax reform environment?
Most developers we work with are assuming lower pricing than compared with pre-tax reform. This typically means either deferring more developer fee, reducing scope, or finding alternative sources to fill gaps on LIHTC transactions.
What LIHTC deal strategies are particularly attractive today? Why?
While FHA mortgage terms are still very competitive compared with other mortgage financing products, Fannie Mae’s M.TEB (mortgage-backed security as tax-exempt bond collateral) forward financing structure is very attractive for borrowers. Recent Fannie Mae M.TEB forward financing interest rates have been comparable to an FHA Sec. 221(d)(4) mortgage, and we are able to close the Fannie Mae structure much quicker than an FHA 221(d)(4) mortgage. The Fannie Mae financing also does not require the developers to adhere to Davis Bacon wage requirements.
Any recent examples come to mind?
We recently closed a 700-unit West Coast public housing redevelopment project as the bond underwriter. We have a number of M.TEBs pending in the pipeline, expected to close soon.
How are you advising clients?
Although the processing of an FHA loan is lengthy, the FHA 221(d)(4) program for new construction and substantial rehabilitation developments typically allows for the greatest amount of leverage as compared to other loan products. It is a construction and permanent mortgage with full term and amortization. If speed of execution is a concern, the Fannie Mae M.TEB program is a very strong product. The M.TEB forward allows the borrower to lock in interest rates at construction closing. The M.TEB program is only a permanent mortgage, so the borrower will need to obtain a construction loan.
Where do you see LIHTC deal activity a year or two from now?
While I believe interest rates are going to continue to rise in the near term and construction pricing is going to become more expensive, I don’t believe there will be a substantial decrease in the number of LIHTC developments. I believe that the industry as a whole is very resourceful and will create structures to overcome challenges that arise.
Joseph Hague is director of RED Capital Markets, LLC. Hague specializes in structuring tax-exempt, FHA, and Fannie Mae debt financings for affordable housing transactions. He has worked with and advised local housing authorities, nonprofit developers and for-profit housing developers on capital structures and financings. Prior to joining RED, Hague worked as a financial analyst in National City's Commercial Banking Development Program. He received his bachelor’s of business administration degree from Ohio University.
