At last, low-income housing tax credit (LIHTC) prices have settled after experiencing some wild swings during the last few years. Twenty out of 23 surveyed syndicators predict that pricing to developers will hold steady through the first half of the year, but several note that the most competitive markets could still see some slight increases. No one is anticipating a replay of the fast and steep changes that have marked the last two years.
So at least for now, the rough ride has calmed.
“Prices will stabilize in 2012,” says Hal Keller, president of the Ohio Capital Corporation for Housing. “Of course, deals on the coasts are always exceptions, but for most of the country I think prices will settle in at the high 80s to low 90s. The reason is that we are beginning to see a floor on yield.”
He says that many of the opportunistic investors are gone, leaving Community Reinvestment Act (CRA)- motivated banks and insurance firms. “I am hearing that a number of insurance companies are leaving the market as yields get into the 5.5 to 6.75 percent range,” Keller says.
Other syndicators agree. “Absent a larger national or international economic downturn, we expect pricing to developers to hold steady during the first half of 2012,” says Benjamin Mottola, president of Stratford Capital Group. “Investor yields have dropped to such a large degree over the past 12 months that we are beginning to see a fair amount of investor push back regarding pricing. This should, at a minimum, keep pricing stable to slightly declining over the next six months.”
Carl Wise, senior vice president at Alliant Capital, also expects pricing to stabilize. In addition to some economic investors reducing their investment amounts or demanding higher returns, several large CRA investors are starting a new three-year assessment period, which should result in some reduction in pricing pressure in the high-demand markets, he says.
AFFORDABLE HOUSING FINANCE's poll of national and regional syndicators found that the average price paid to developers in the fourth quarter of 2011 was about $0.87 per dollar of credit, a nearly 18 percent increase from the $0.74 reported by syndicators a year earlier.
Returns to investors averaged 6.7 percent in the fourth quarter of 2011, a striking 30 percent drop from the average yields reported for the same period a year earlier.
For the East and West coasts, prices will be affected by how heated the competition gets among syndicators and investors for prime deals. If the competition is as fierce as some expect, prices will be pushed up in these areas.
In the non-CRA markets, a key factor will be the interest of economic investors. To keep their attention, yields will have to be strong, which means developers may see a dip in the prices paid for their credits.
“Several of the non-CRA investors have shown decreased appetite at the current pricing and have indicated that, while they still have appetite, returns will need to be somewhat higher than the ”˜national market pricing' to interest them,” says Raoul Moore, senior vice president of syndication at Enterprise Community Investment, Inc.
The investor pool
Most syndicators reported matching or exceeding their 2010 activities. Two firms saw a decline, and three did not say how their results stacked up to the prior-year levels.
In all, the surveyed syndicators reported closing more than $7 billion in capital and acquiring more than 900 projects in 2011. (Some deals also have historic tax credits.) Most think they will raise even more LIHTC capital this year, with several firms projecting a 20 percent increase in their volume levels.
That's because the mainstay investors are expected to continue to have healthy appetites for tax credits. However, there's far less expectations for new investors to enter the scene. The key will be to find the sweet spot in the market that meets the needs of a diversified group of investors.
“There is a pretty strong group of core investors that were in the market during the high-flying times (2005- 2007) and have continued to invest,” says Greg Judge, COO of Boston Financial Investment Management. “I believe this group of investors will continue to invest and, in some cases, increase their investment in 2012. There is also a pretty significant group of investors that are more sensitive to yields. We believe that right now 6 percent is threshold for many of these investors, and, if yields drop below 6 percent, then some may exit the market.”
Judge notes that the threshold will move around subject to different variables, with interest rates and alternative investment yields being two of the most important.
Others also cite 6 percent as a likely tipping point, with returns below that turning some active investors into sideline observers.
“With yields continuing to decrease, the issue is not whether new investors will be entering the market but rather whether investors that have come back to the market in recent years—and insurance companies that have stepped in for the first time—will be able to continue their LIHTC investment strategies in 2012,” says Joe Hagan, president and CEO of the National Equity Fund, Inc. (NEF). “A lot depends on where yields for multi-investor funds end up. For economic investors, we think there is a floor of 6 percent.”
Issues to watch
Despite the generally high expectations for 2012, syndicators can easily identify a number of issues that could spoil housing production, including the demise of California's redevelopment agencies (RDAs), tax reform, and a still slow economy.
They also have a long list of ideas about what developers should keep an eye on in the months ahead.
“Developers should watch for a thinner investor market given the decline in yields and exodus of some economic investors,” says Steve Kropf, executive vice president and director of investments at Raymond James Tax Credit Funds, Inc. “To the extent the economic recovery gains traction and interest rates increase, investor yield requirements will also increase, which will pressure pricing to projects.”
For many deals, the biggest issue is going to be securing gap financing.
“The ever-shrinking amount of subsidy available from government will impact deal volume going forward,” Kropf says. “The budget pressure from certain states is limiting or eliminating substantial soft dollars.”
In California, the elimination of local RDAs, which have been a huge source of funding for LIHTC projects, will render many deals infeasible, he says.
The same concern was echoed by others, including Tony Bertoldi, senior vice president of syndications and investor relations at City Real Estate Advisors, Inc. “The lack of soft dollars for development will likely be the largest challenge,” he says, also noting the loss of RDA loans. “And, unfortunately, I don't see equity pricing making up the difference.”
“Although the LIHTC program has been the single-most successful housing program in the history of the nation, ”˜corporate tax incentives,' in which LIHTC has been lumped, are at the forefront of the tax and budget debates,” adds Andrew Warren, senior vice president at Centerline Capital Group. “While the program is hopefully not at serious risk, the availability of financing from the states in the form of soft loans or grants will most likely be impacted.”
The potential of the fixed 9 percent credit moving to a variable rate is another big issue for developers this year, points out Michael Gaber, COO and executive vice president at WNC & Associates. Risk mitigants in transactions, including operating reserves and operating deficits guarantees, will also continue to draw notice this year, adds Todd Crow, executive vice president at PNC Real Estate.
Several syndicators encourage developers to know their LIHTC partners. “If an offer looks too good to be true, it probably is,” says NEF's Hagan. “There is a real danger that some syndicators are bidding at levels that they won't be able to sell to investors. Be careful.”
Knowing your partners and having confidence they will be there for you at closing or 10 years post-closing means something, says Ryan Sfreddo, managing director at Red Stone Equity Partners, LLC. “Some questions developers might consider asking themselves when evaluating a LIHTC capital partner include: What is my syndicator's strategy and process to execute my deal? How long will it take? If there is a hiccup and something doesn't go 100 percent according to plan (which is almost certain), who can I call, and who makes the decision?”
And, “developers should be proactive in moving forward on deals with fair terms and pricing as investor yields have stabilized and have the potential to rise in the near term,” adds Tony Alfieri, managing director of tax credit investments at RBC Capital Markets”“Tax Credit Equity Group.
After all, it's hard to say how long the calm will last.