Housing Credit Yields Continue to Rise
By Caitlin Jones & A. J. Johnson
4 min read
Tax Credit Advisor, April 2009: The low-income housing tax credit (LIHTC) equity market appears likely to remain muted at least for a number of months, even as projected yields to investors ramp upward rapidly.
As was the case in 2008, many active investors – still mostly financial institutions and insurance companies – prefer to invest more directly and through proprietary funds and less through national multi-investor funds established by syndicators. (See p. 16 for the latest edition of Corporate Tax Credit Fund Watch.)
Nonetheless, some national multi-investor funds are still out there. Richard Floreani, of Ernst & Young LLP, said his firm is reviewing about six national multi-investor funds, ranging in anticipated final size from $50 million to $120 million. They have projected after-tax yields to investors ranging from 8.25% to 9%, though Floreani said some of the funds now at 9% initially had lower yields.
Syndicator Stephen Daley, of The Richman Group, anticipated a final closing by his firm within two months on a current national multi-investor fund sized a bit over $100 million that will have a “good concentration” of properties in the New York City area. The new fund, with a projected yield of 9%, is Richman’s first national fund since a $110 million fund that closed last August.
Daley said fund yields generally are rising to attract new equity. At higher yields, he said Richman’s seen “heightened interest” from investors, particularly non-CRA investors.
Daley said the new fund has expected average pricing to developers for identified properties in the low- to mid-70s (cents per credit dollar), compared to an actual average of 89 cents for the previous fund.
Chicago syndicator Joe Hagan, of National Equity Fund, Inc., said NEF is coming out now with a new national multi-investor fund with a target size of $100 million that needs to close by June. “We have very, very soft circles [from investors] for about half,” he said.
New York syndicator Ryan Sfreddo, of Centerline Capital Group, said his firm currently doesn’t have a national multi-investor fund on the street, but plans to come out with one later this year. “We are actively pricing and closing deals for our various proprietary funds – that’s really been our focus,” he said.
Those interviewed said tax credit investors are requiring, and receiving, higher yields, along with larger and longer guarantees and larger reserves from developers.
Floreani estimated about $5.5 billion in total housing credit equity was raised in calendar 2008. He didn’t have a projection of 2009 volume, noting there are currently too many variables and unknowns. Two unknowns are the impact of the new LIHTC credit exchange and gap financing programs, and whether Congress will approve further favorable housing credit program amendments this year.
Some early signs, though, suggest 2009 equity volume could be less – if current conditions stay the same and Congress doesn’t pass legislation enabling investors to fully utilize their existing housing credits and to make the tax credit more attractive to investors.
At a March conference sponsored by the National Housing & Rehabilitation Association, executives of major LIHTC investors Bank of America and JP Morgan said they expect to invest less in tax credits in 2009 than in 2008. Marianne Votta, of Bank of America, said the bank invested more than $1 billion in various tax credits (federal housing, historic, solar credits) in 2008. But she suggested the bank’s tax shelter appetite in 2009 will likely be smaller this year, for several reasons. B of A had a smaller profit in 2008 than in 2007, it acquired financially challenged firms Merrill Lynch and Countrywide in 2008, and it will inherit on April 1st more than $600 million in tax credit investments from Merrill Lynch.
Patrick Nash, of JPMorgan Capital Corporation, said his firm invested over $1 billion in housing credits in 2008. “We’re not going to do that much this year,” he noted. The firm in 2008 acquired loss-heavy Washington Mutual and inherited its $900 million housing credit portfolio.
A number of syndicators also raised much less housing equity in 2008 than in 2007, due primarily to fewer and smaller national funds and investors that curtailed their investment.
