How Can Market Studies Be Improved? Equity Providers Talk

By Caitlin Jones
January 5, 2010 4 min read

Tax Credit Advisor, January 2010: What changes would investors and syndicators like to see to improve market studies for proposed low-income housing tax credit (LIHTC) projects?

At the recent 2010 Annual Meeting in Chicago of the National Council of Affordable Housing Market Analysts (NCAHMA), several equity providers and a prominent representative of corporate investors gave answers.

Market studies are central to the LIHTC program. State housing credit agencies require a market study for every proposed project awarded tax credits, usually during the application process. Generally prepared by a qualified market analyst, a market study is a document that provides the analyst’s reasoned judgment of whether or not the LIHTC project as proposed (e.g., targeted tenant type, unit sizes, amenities, rent levels) is likely to be successful. This assessment is based on an analysis of a wide variety of collected information and data about the project, site, the surrounding neighborhood, the market, local population, employment and income, rents and housing costs, and competing apartment properties.

Understanding of Comparables

“I always like to be able to walk away from the [market] study and have a clear understanding of what the three or four most comparable projects are to the project I am looking at, and why those projects are comparable,” said Chicago attorney John Simon, a partner in the law firm of Sidley Austin LLP whose clients include numerous corporate investors in housing credits. “If your best comp is 20 miles, why does that make sense? If we’re looking at single-family home projects and your best comp is garden style, why does that make sense?” Said Simon, “There are a lot of market studies that I read where it is not very clear what the best comparables are and why they are comparable.”

Syndicator Mark McDaniel, CEO of Great Lakes Capital Fund, which manages state equity funds in four Midwest states and in Upstate New York, said, “Depth of analysis on the comparables is really important. That’s not typically real strong.”

In addition, he noted, “I really want to get a handle on the fieldwork that you did. I want to know that you were actually out there, talking to people, and in the field. And I want to hear the stories about what you found when you were out there, when you were there, and who you talked to.”

Doug Lloyd, a vice president and underwriter with JPMorgan Capital, a major LIHTC investor, said he always asks for “more attention to shadow market analysis.” This generally includes analysis of any non-conventional properties in the market area, such as rental single-family homes and foreclosed homes up for sale, which might compete with the proposed LIHTC project for qualified low-income renters.

Lloyd indicated that while a shadow market may not be a factor in all areas, JPMorgan will look for shadow market analysis when considering a possible investment in areas such as Florida and the Phoenix area, for instance. “We tend to do a lot of that ourselves. It would be great [if there were] something standard,” he said.

Home Sales Market

Lloyd, McDaniel, and Vihar Sheth of USBancorp Community Development Corporation, another major LIHTC investor, also stressed the importance in market studies of a thorough and accurate analysis of the local home sales market, both regarding home prices and how easy or hard it is today to sell a home. One reason is to determine whether low-income renters can afford to purchase a home at current local home prices. Another is to determine, for instance, the reasonableness of projected capture rates for an LIHTC senior projects that assume attracting a certain level of local senior homeowners who sell their home and move to the property. Sheth suggested that some assumptions regarding the ease of home sales by seniors are overly optimistic given current tough conditions in many markets. McDaniel said he’s seen recent market studies for senior deals with no analysis of the local home sales market.

Sheth also suggested that analysts carefully scrutinize and question base assumptions in project pro formas, such as a 2 or 3 percent annual rent increases, to assure that projected rents are realistic for the project and market.

NCAHMA, a council of the National Housing & Rehabilitation Association, has developed guidelines for the preparation and contents of market studies for affordable rental housing projects, and professional standards for market analysts. These have been adopted in whole or part by many state housing credit agencies in their low-income housing tax credit programs. (For details on NCAHMA guidelines and standards, go to http://www.housingonline.com.)

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