Charles Dickens wasn’t thinking about the affordable housing tax credit industry when he opened A Tale of Two Cities with the observation that “It was the best of times, it was the worst of times.” But the phrase captures the outlook for the tax credit industry perfectly, judging from the views of the Editorial Advisory Board of AFFORDABLE HOUSING FINANCE magazine.
Meeting in public session at AHF Live, the board was evenly split between those who think the tax credit industry is better and those who feel it’s worse off than it was a year ago. For the most part, the most pessimistic view came from the developers among the board members.
Several speakers said the industry had “weathered the storm,” referring to the recent turmoil in the debt financing and capital markets.
However, David Heller of The NRP Group, said the industry is “at a much worse place” this year.
He explained that his firm and other developers are not seeing growth in rental income despite planning projects on the assumption of 3 percent growth per year and despite the fact that expenses keep rising.
This is partly because of a change in how the income levels used to set rents are established by the federal government.
The economics of development in today’s environment mean tax credits will increasingly be used for preservation of existing projects, not for new construction, said Chris Tawa of MMA Financial.
The biggest concern is the reduction in demand for tax credit equity from two of the biggest investors, several panelists say.
Cynthia Lacasse, a new member of the Editorial Advisory Board, agreed with Heller that the industry is worse off now than a year ago.
But in the long run, she added, the industry is moving in the right direction. She believes the current challenges in raising equity will ultimately lead to a healthier market. Lacasse oversees tax credit investing for John Hancock Realty Advisors, a division of John Hancock Financial Services, Inc., and is president of the Affordable Housing Investors Council.
The majority of speakers at the roundtable felt that equity prices would need to decline further in order to generate higher yields. On average, several board members agreed that prices would probably drop by 5 to 8 cents per dollar of tax credit next year.
As Jana Cohen Barbe of Sonnenschein Nath & Rosenthal, LLP, put it, investors cannot keep investing when their cost of funds is higher than the yield on tax credit partnerships. “We are having a pricing correction and new investors are entering the market,” she said.
How can developers make sure their project is not one of those left behind as investors become more demanding?
Just remember these five words: “The new CRA is green.”
As Bob Moss of Boston Capital explained, for many years, a key force driving investment in tax credits was the Community Reinvestment Act (CRA). It is still a factor for banks, who are the primary investors. However, Moss contends that “green” features, such as solar power and energy efficiency, are also very attractive to investors.
