More Tough Times Seen Ahead in LIHTC Market, But Some Glimmers Cited
By Caitlin Jones
5 min read
Tax Credit Advisor, July 2009: Low-income housing tax credit (LIHTC) program participants cited some glimmers of light but predicted continued tough times for the industry at least through year-end, at a recent conference in Los Angeles.
“We won’t have clarity by the end of the year” in the LIHTC equity market, predicted Fred Copeman of Ernst & Young LLP, whose clients include corporate investors in housing credits.
Copeman spoke on 6/16/09 at the 2009 housing credit conference of the National Council of State Housing Agencies. Other panelists were: direct investor Patrick Nash, JPMorgan Capital Corporation; syndicator Joe Hagan, National Equity Fund, Inc.; attorney Anthony Freedman, Holland & Knight, LLP; Linda Cargill, of asset management firm Cargill Investment Group, Ltd.; syndicator Jim Logue, Great Lakes Capital Fund for Housing; and moderator Kate Racer, of the Massachusetts Department of Housing and Community Development.
Copeman explained that the equity market won’t return to normalcy by December 31st in part because it will take the IRS a while to get out rules for the new credit exchange program, which was established by the American Recovery and Reinvestment Act along with the Tax Credit Exchange Program (TCAP). He predicted “the fourth quarter of 2009 is going to be like Grand Central Station at 5:30 Ã it’s going to be absolute chaos.”
On a positive note, Copeman said, “We are starting to see corporate investors come back into the market…I have heard from corporations that I haven’t heard from literally in decades…We are going to bring in new investors.”
Copeman described the severe retrenchment in the number of corporate investors in LIHTCs. He said it has fallen from about 100 in 1993, to about 27 in recent years à the top 25 banks, Fannie Mae, and Freddie Mac. But he added that these 27 investors in the past year or two were “whacked” by the subprime meltdown, financial market difficulties, and other factors, which have thinned the ranks of active players even further. “We weren’t well prepared for this particular perfect storm,” said Copeman, “so it will take a while to bring back the other 75. We won’t get those other 75 à we might get 25 of them back, and we’ll have to find 50 new ones.”
JPMorgan’s Nash, also president of the Affordable Housing Investors Council, an educational group for corporate investors in housing credits, didn’t think the outlook is positive for the rest of 2009 and probably for the first part of 2010, “until the economy begins to improve.”
He also favored legislative changes to the LIHTC program to make housing credit investments more attractive to corporate investors. One proposal being bandied about is a “carryback” proposal, which would enable investors to better utilize housing credits they already have but have been restricted from fully taking because of reduced profitability.
Hagan contended “we’re in good shape” for 2009, because of the new funds available for stalled projects under the TCAP and credit exchange programs, and assuming that just about all states turn in 40% of their 2009 housing credits for cash grants under the exchange program.
“This means that the total market size in 2009 for the tax credit program is a little over four billion dollars,” said Hagan. “Do we think there is four billion dollars worth of equity in the marketplace for 2009? I’m a little bullish à I think that it’s possible. I think that if we can work things right, that the good deals will get done this year.”
Hagan noted another positive is the ability to boost the yield levels for investors in LIHTC projects assisted with ARRA funds, thereby making credit investments more attractive to prospective new investors.
Cargill predicted there will need for a legislative extension of the TCAP and credit exchange programs, in part because of the short-time frames for use of the funds under these programs. An additional reason, she noted, is that new investors coming into the LIHTC market, who “may be a new generation of investors, will be looking at higher yields [on credit investments]. The gap will continue to be there.” She said they won’t be willing to pay as high a price for housing credits as has been paid in the recent past.
Freedman recommended that state housing credit agencies take back all their 2007 and 2008 credits from stalled projects and give the sponsors 2009 credits, and then exchange these older credits to the U.S. Treasury for cash under the exchange program. States can exchange 100% of these older credits compared to only 40% of their 2009 housing credits. “By bringing in old allocations and putting out “˜09 allocations,” said Freedman, “you not only give the projects a longer period to get in service, which they will need, but you’ll also have credits that can be more easily exchanged for exchange program funds, without having any negative impact on the equity in your state.”
Freedman suggested that a critical need is for the market to find the yield level that will trigger substantial new equity investment.
Several speakers also spoke about the need to try to examine ways to attract back high net-worth individuals. In the early years of the LIHTC program, in the late 1980s, individuals were the primary LIHTC investors. Today “retail” funds are a rarity. Individual investors are restricted in the amount of tax credits and losses they can utilize each year by the federal tax code’s “passive loss” rules, and syndicators can raise larger amounts of equity at lower cost from corporate investors.
