Who can forget the run-up to the Tax Cuts and Jobs Act of 2017?
You didn’t have to look far to find gloom-and-doom stories about the low-income housing tax credit (LIHTC) program. The financial media was filled with harsh predictions about LIHTCs. With apologies to Samuel Clemens, news of the LIHTC death were greatly exaggerated.
That’s also the confirming message of Tyler Probst, with Red Capital Markets, LLC, the investment banking arm of RED Capital Group, LLC, a specialist in structuring tax-exempt, FHA, and Fannie Mae debt financings for affordable housing transactions. Probst offers his take on the marketplace reaction so far:
How big a hit did LIHTCs take from tax reform? Have some overstated the issues?
Interestingly enough, the uncertainty around tax reform prior to its enactment had a greater impact on the industry than the actual policy change. In the end, the decrease in the corporate tax rate resulted in a moderate shift in equity pricing, where a more substantial overhaul of the law (the elimination of tax exemption on private-activity bonds, for instance) could have created much greater disruption in the market.
The reduction in the corporate tax rate may have resulted in a few fringe deals ultimately failing to reach the finish line, but only a few.
How important is the role of LIHTCs in structuring affordable housing deals, post-tax reform?
As critical as ever. For the foreseeable future, LIHTCs will remain an important financing source for affordable housing transactions. With equity pricing stable, we continue to see developers utilizing both 4% and 9% LIHTC executions on both new construction and acquisition/rehabilitation transactions.
What is your view of LIHTCs? How are you advising clients?
We believe the LIHTC market is stable and there is still strong investor appetite, especially in CRA (Community Reinvestment Act) markets. We are interested to see what happens with projects located in Opportunity Zones and what the impact, if any, there will be on equity prices.
We are advising our clients to pull together their deal team early on so the numbers can be flushed out as soon as possible. In today’s competitive environment, getting the right team (contractor, architect, lender, syndicator) established early is paramount to a deal’s success.
What are the keys to overcoming LIHTC deal challenges?
Flexibility! From the lender side, it is imperative to provide customizable solutions that can help keep a deal moving when any of a myriad of moving pieces start to shift. Additionally, on the post-closing side, the general contractor must have a deep well of subcontractors especially in states where labor shortages are commonplace.
What’s your long-term position on LIHTCs?
We remain optimistic about the industry as it serves a critical need. We expect governmental support to remain solid and see a possibility that future legislation, such as a permanent minimum credit rate for 4% transactions, could help the industry make even more progress in serving low-income families and seniors.
