Developers will likely face a drop in low-income housing tax credit (LIHTC) pricing in 2023, according to several industry leaders.
Investors have worked to hold firm on the prices they committed to this year, but those levels will be hard to maintain in the months ahead. On deals that are entering the marketplace and looking for pricing in 2023, everyone needs to be prepared for some sort of correction, said Ryan Sfreddo, president of Red Stone Equity Partners.
While that’s tough on projects, the one bit of good news is that an adjustment isn’t expected to be as severe as what the market experienced after the 2016 election and the concerns created by tax reform. Back then, the price per dollar of credit plummeted by 10 cents or more.
A more modest adjustment is likely in store, according to several speakers during the Tax Credit Equity Power Panel at AHF Live in Chicago.
“I do see that going into 2023, there’s going to be some pressure on pricing,” agreed Jennifer Seamons, executive vice president at the Ohio Capital Corporation for Housing (OCCH). “When you add everything up into equation, it’s doesn’t make it look rosy, but I don’t think it’s going to be as dramatic as it could be.”
Moderated by developer Caleb Roope, president and CEO of The Pacific Cos., the panel also featured Rob Golden, vice president of community finance at Capital One; Lisa Gutierrez, senior vice president and director of business development at U.S. Bancorp Community Development Corp.; and Philip Porter, senior vice president and head of acquisitions at Enterprise Housing Credit Investments.
Several speakers described how tumultuous this year has been for developers, with projects facing significant delays and budget gaps caused by rising construction costs and escalating interest rates.
Once a developer plugged a hole in a bucket, another hole emerged, said Gutierrez. “There were constant hurdles that our developers were having to go through.”
This year, roughly one-third to half of the deals in OCCH’s pipeline experienced delays of more than four months, said Seamons, noting that a number of deals weren’t able close on their financing as planned this year and will slip into 2023.
Recognizing the turbulent market conditions, the Ohio Housing Finance Agency and other state housing agencies have been able to provide additional housing credits to help projects overcome budget gaps. In addition, some states may look to provide new funds from the American Rescue Plan Act, and developers are deferring their fees, added Seamons.
Preparing for 2023
The syndicators and investors also discussed the role of emerging corporate ESG (environmental, social, and governance) efforts in the LIHTC market.
“We want to be part of E, S, and G,” Gutierrez said. “I think the biggest thing is that we’re hearing affordable housing falls into the S, but I really do feel there is reasoning that could have us fall into all of the categories. We just the need the data in order to be able to assess that.”
It’s important for developers to be able to show the different outcomes that they are trying to achieve at their developments beyond just the number of affordable homes created, she said.That’s increasingly important for Community Reinvestment Act (CRA) investors, agreed Golden. “We want to see more impact,” he said, explaining that investors want to better understand the outcomes.
Enterprise’s Porter said ESG is motivating capital at the margin at this time. “It’s great to expand the total market and the total amount of capital in the market, but I’m not sure that ESG criteria will necessarily drive prices of the deal up and yields down consistently,” he said.
Enterprise is working to create ESG definitions for its business, and that framework will be made available for others to use, according to Porter.
The panelists had several messages going into 2023.
The days of taking new deals to the market by sending equity bid packages to 15 or 20 different equity providers, narrowing the offers down, and having the process go on for 60 days may not serve a developer well in this market, Sfreddo said.
“I think you keep it tighter,” he said. “Lean into your relationships. Relationships in this business really do matter. ... You’ve got to do what’s best for your deal. We understand pricing is important, particularly in this environment when you’re dealing with costs and pressures and the competing factors that those present, but keep it tight. Try to keep to your timeline. I know that’s much easier said than done right now, but try to stick to a path and stick to that time, and I think your investor partner will be grateful and stick with you.”
When deals are pushed to the limit from the start, it’s much harder to offer concessions after the fact, according to Sfreddo.
Golden recommended that developers get to know their CRA investors to better understand what motivates them. These early conversations may help when structuring transactions.
“I’m very optimistic about this industry,” Seamons said. “I think we are very resilient. … For those of you who are developers holding on to an LOI (letter of intent) for four to six weeks trying to renegotiate, get it signed. If you have a captive LOI in front of you, get it signed. The likelihood that it’s going to stay static for an extended period of time is probably very small. If you can live with the terms, if the pricing works for you, if it’s a trusted partner, get it signed.”
Gutierrez agreed that if developers have an LOI that works, they should take it. “If you are just about to go out to bid on a deal, communicate your hot button items so that the LOI negotiation doesn’t take almost six weeks to get signed. Communicate early and often about your pipeline so that your trusted investors and syndicators know what’s coming down the line and then you can find places for deals early.”
Porter added that he is also generally optimistic. “We’ll muscle through and figure it out,” he said. “We’ll just have to watch our working capital and get through.”