LIHTC Market Nervous After Financial Events; Some Equity Players Are Still Active
By Caitlin Jones & A. J. Johnson
16 min read
After major hits in September to the U.S. financial markets, low-income housing tax credit (LIHTC) program participants are nervous about the potential impact on their industry going forward. With the industry already beset by a shortage of tax credit equity and lower credit prices that have left many developers with credit awards scrambling to find equity and close funding gaps, the latest financial tsunami portends possible further challenges ahead.
Meanwhile, however, syndicators and corporate investors interviewed by the Tax Credit Advisor recently said they are still raising equity or making new investments, with some of the investors on pace to surpass their 2007 volume.
Series of Events
The initial body blow to the LIHTC industry was the takeover on 9/7/08 of Fannie Mae and Freddie Mac by the federal government, which placed each in a government-run conservatorship for an indefinite period. Many LIHTC participants initially feared the two government-sponsored enterprises (GSEs) might be directed to sell off some or all of their existing housing credit investments – a considerable sum. Their fears were that this product could draw away corporate capital from new credit investments, further reduce the equity available for new tax credit projects, and skew tax credit yields.
Less than a week later, Wall Street investment bank Lehman Brothers collapsed after the federal government refused to provide aid; Merrill Lynch agreed to sell itself to Bank of America; and teetering insurance giant American International Group (AIG), which is tied to affordable housing in various ways, was rescued from the brink by a federal $85 billion loan commitment. On 9/22/08, it was announced that the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, had been approved to convert to commercial bank holding companies.
The market turmoil eased somewhat on 9/18/08, when federal and congressional leaders met and announced plans to quickly craft, enact, and implement a comprehensive plan to address the nation’s financial and mortgage crises. This process was underway as the Tax Credit Advisor went to press.
Federal Reassurance
The LIHTC industry caught some relief in the midst of these events. On 9/12/08, the Federal Housing Finance Agency (FHFA), the new regulator for Fannie Mae and Freddie Mac, and the entity in charge of their conservatorships, issued a statement that said the two GSEs, which are vital sources of financing and liquidity for affordable housing, will continue to do “business as usual” in their single-family and multifamily businesses.
In the statement, FHFA also noted, “As conservator, FHFA expects each Enterprise to continue underwriting and financing sound multifamily business. We also do not expect either company to liquidate its portfolio of LIHTC or mortgage-revenue bonds.”
Equity investors interviewed by TCA after this statement expressed relief. Syndicator Joseph Hagan, of National Equity Fund, Inc. (NEF). Chicago, IL, said “we’re certainly happy that there’s not going to be a huge sell-off of the tax credit portfolios.” At the same time, though, he said “we still have to be nervous about what’s going to go on with the portfolios.”
Spokespersons for Fannie Mae and Freddie Mac declined to comment on their future plans for their housing credit investments.
The current combined size of their LIHTC investment portfolios is unclear. In March 2007, Fannie Mae, in announcing the sale of $676 million in existing housing credit investments to Citibank NA, said this amount represented less than 10% of its total LIHTC portfolio.
Until a year or so ago, Fannie Mae was the largest single investor in housing credits by annual volume and Freddie Mac was a major investor. Both sharply curtailed their new equity investment commitments starting in 2007.
In a presentation 9/10/08 on a Web seminar sponsored by the U.S. Office of Comptroller of the Currency, syndicator Dana Boole, of the Raleigh, NC-based Community Affordable Housing Equity Corporation, reported an estimate that roughly $9 billion in total LIHTC equity was raised in 2007, and an initial projection that $5 billion will be raised in 2008 by year-end. He also showed a chart depicting a drastic change between 2007 and 2008 in the share of total equity raised by different categories of investors. In 2007, according to the chart, 40% of the $9 billion raised came from GSEs; 40%, banks; 10%, insurance companies; and 10%, other. For 2008, the projected breakdown is: banks, 60%; insurance companies, 30%; GSEs, 0%; and other, 10%.
Reaction to Events
The FHFA statement calmed nerves in the LIHTC industry. But syndicators, investors, and others interviewed suggested the industry is far from out of the woods, that recent events have intensified uncertainties about the future. It remains unclear when or whether current, prior, and new corporate investors can be attracted and prompted to invest enormous sums of additional capital in housing credits to plug the equity gap left by the departure of the GSEs and other major investors, and that will support credit price levels that enable new tax credit projects that are feasible.
Boston syndicator Jeffrey Goldstein, of Boston Capital, asked about the impact of recent events on the LIHTC market, responded: “My concern is the bigger picture – the continued instability in our economy, and the financial industry and the banking industry, which is undergoing through such turmoil, and yet these are some of the biggest buyers of affordable housing tax credits.”
Activity Still Occurring
Still, a handful of syndicators and corporate investors told TCA they are still raising equity or making new equity investments, and plan to continue doing so. In addition to NEF, Inc. and Boston Capital, those interviewed included one other syndicator – The Richman Group – and five investors – Bank of America, AEGON USA Realty Advisors, Inc., US Bancorp Community Development Corporation, Key Community Development Corporation, and John Hancock Realty Advisors, Inc.
Stephen Daley, of The Richman Group, Greenwich, CT, said his firm recently closed a $200 million national multi-investor housing credit fund, and has launched a new fund – size to be determined – that he hoped will close by year-end.
Goldstein said Boston Capital closed a $200 million national multi-investor fund in June and is now out with a new $200 million national multi-investor fund expected to close by year-end.
Hagan, interviewed on 9/17/08, said NEF closed a $150-$160 million national multi-investor fund in June, and expected to launch a new roughly $100 million national fund in two weeks. He anticipated that NEF, which has raised more than $375 million in equity this year so far, will raise between $575 million and $650 million in 2008 by year-end, down from $700 million in 2007.
Sindy Spivak, of Bank of America, in an email interview, said Bank of America (BofA) expects to invest more than $1 billion this year in housing credit developments, with about one-third of the bank’s equity delivered to developers on a direct basis. She noted BofA invests primarily in LIHTC transactions directly or indirectly through syndicators, with the majority of its investments through syndicators (national, state and local) made in proprietary funds. Spivak reported BofA invested more than $450 million in non-guaranteed tax credit product in 2007.
Spivak noted BofA’s direct LIHTC investments couple the bank’s equity with its construction and permanent financing products. She said, “We continue to make new equity investment commitments with a focus on targeting investments within the Bank’s geographic footprintÉ”
Christoph Gabler, of AEGON USA Realty Advisors, Inc., San Francisco, CA, interviewed on 9/11/08, said AEGON invested about $300 million in housing credits in 2007, has done about $200 million so far this year, and could end up between $300 million and $400 million for 2008 by year-end. He said AEGON historically has invested in housing credits both directly and in funds, but that the pattern has changed this year. “Recently we have migrated almost entirely to a direct platform,” he said. “We’re seeing a lot of direct product that’s keeping us busy.”
Roz Ciulla, of Key Community Development Corporation, Cleveland, OH, expects to invest perhaps 5% to 10% more in housing credits in 2008 than the roughly $135 million done in 2008. She said Key is primarily a direct investor but does invest in a few multi-investor funds, and primarily invests in projects in 13 states. “We’re pretty much at capacity because of the number of deals that we have in the pipeline, that we have letters of interest on, and that we want to ensure that we get underwritten,” said Ciulla. She noted, “A lot of our direct investments are small, maybe a couple million dollars. And we have some even smaller, under one million.”
Cynthia Lacasse, of John Hancock Realty Advisors, Boston, MA, expects John Hancock to invest about $100 million or perhaps a little more in 2008 by year-end, “double what we had done in the last couple of years.” She noted, “The changes in the market over the last several months have resulted in a significant increase in yields, and we are much more active nowÉ.We are a direct investor, and so we’re looking at lots and lots and lots and lots of deals, trying to sort through them and find the deals that are strong in all ways” and that work “in the new pricing environment.”
Beth Stohr, of US Bancorp Community Development Corporation, St. Louis, MO, expects her LIHTC investment volume this year to grow by about 30% over 2007, with direct investments accounting for the increase. Stohr, who declined to reveal the bank’s 2007 volume, said the bank is doing less investment now in multi-investor funds. “This year the opportunities are very good for us on the direct side, because of the lack of other investors, the lack of competition, and [because] we have the [tax and staff] capacity to take on those investments,” said Stohr.
Stohr, also the current president of the Affordable Housing Investors Council (AHIC), estimated that corporate investors investing today in housing credits directly or through a syndicator-established proprietary fund have “ramped up their investments to the tune of anywhere from an additional 30 to 100 percent” in 2008 over 2007. Still, she continued, “you’re still not talking about enough dollars to offset the absence of those [previously major but now inactive investors] that aren’t investing.”
Chicago attorney John Simon, a partner in Sidley Austin LLP and counsel to AHIC, estimated, as “moderate,” current corporate LIHTC investment activity. “There’s been an uptick in investors investing directly or proprietary funds for syndicators, and there’s been a reduction in multi-investor funds,” he said.
Active syndicators and corporate investors now can cherry pick from many strong potential deals coming across their desks from developers. “We’re seeing more opportunities than we could conceivably do,” said Gabler.
“We’re approached on a daily basis by developers with deals – some are in their early stages of planning, some have recently been left at the altar by the partners. And we’re saying no to perfectly good deals, just because we don’t have the time to look at everything.” He lamented that “some of these deals just won’t get done” even though they’re good investments and propose good housing.
Gabler said AEGON has asked for and been getting a higher yield on its new deals, and more favorable terms: greater cash flow and back end splits and “more robust” guarantees.
Credit Yields, Pricing
The interviewed investors didn’t disclose their minimum required return today, or the expected yields from their latest commitments. But they, and syndicators, concurred that yields to investors on LIHTC investments and funds are rising.
Daley said 7.5% is the quoted projected yield for The Richman Group’s new national multi-investor fund – about 100 basis points above the yield on its previous fund. Goldstein anticipated that the projected yield on Boston Capital’s current new national multi-investor fund – yet to be determined – will be higher than the 6.25% yield on its previous national fund. Hagan expected a projected return of 7.25% on NEF’s forthcoming new national fund, compared to 6.25% on its last fund. The previous NEF and Boston Capital national funds closed in June.
With yields to investors rising, credit prices to developers appear to continue slipping.
Daley said his current list of deals for potential inclusion in The Richman Group’s new national fund – deals his firm has provided firm commitments to and is negotiating to buy – reflects a mix of pricing in the upper 70s and in the 80s [in cents per dollar of housing credit], with the overall average in the “very low 80s.”
Hagan noted 87 cents was the average price paid for deals in NEF’s previous national fund that closed in June. But he said typical market pricing today for deals that will close by year-end is probably about 81 cents. Hagan noted NEF is now only looking at deals that will close within a quarter, because its pricing for deals is only good with its investors for three months.
Key CDC’s Ciulla felt that average credit pricing currently for 9% deals is in the low- to mid-80s. She and some other investors also said many investors today aren’t very interested in 4% bond deals, because of the negative impact of losses on their income statements.
Several syndicators felt that projected yields will need to go even higher to draw inactive prior corporate investors back into the housing credit market, and to attract in large numbers, with large amounts of capital, corporate investors that have never invested in housing credits, or chiefly “economic” rather than CRA- motivated investors. Financial institutions heavily motivated by the Community Reinvestment Act are now the predominant investors in housing credits.
Interviewed syndicators said they are pitching to prospective new investors, but noted it usually takes a long time between the initial conversation and when they sign an investment agreement. “We started visiting new investors earlier this year,” said Hagan. “We hope to see them start signing in and maybe closing in 2009 sometime.”
Still, with housing credit yields higher, syndicators are seeing some interest from prospective new investors. Hagan, for instance, noted one manufacturer firm perked up when informed of current LIHTC yield levels.
Another positive development was the Web seminar held on 9/10/08 by the U.S. Office of the Comptroller of the Currency, designed to educate national banks about, and interest them in making, LIHTC investments.
Developer Experiences
Meanwhile, the stockpile of proposed LIHTC projects with credit awards seeking equity grows.
Boston Capital reported that, as of 9/1/08, states so far had awarded roughly 78% of their total per capita 2008 housing credits. Many of these deals are in the hunt for equity, as well as some struggling deals with 2007 and 2006 credit awards, and deals with forward commitments of 2009 credits.
LIHTC developers are having varied experiences and success in seeking equity. A few shared their stories with TCA.
Tom Capp, of Gorman & Company, Inc., Oregon, WI, said his firm has one group of deals it is working on, with awarded or approved credits, “where we have equity or are fairly confident in the equity.” But he added he’s also struggling in some instances, like a 4% partnership deal with a housing authority and a fair sized credit award, where his firm, for the first time in its history, hasn’t been able to find an investor. “We’re up against some deadlines, and we’re stymied,” said Capp.
Capp said his firm, which has primarily developed projects in the Midwest, and has seen credit pricing and deal terms change, has also altered how it picks future LIHTC projects. He said his firm isn’t spending significant time or money on a potential new project unless it has a specific equity investor lined up or likely, is only putting in tax credit applications for projects virtually assured of an investor, and is focusing more on types and locations of projects that are most appealing to investors, such as 9% new construction projects located in strong growth markets, such as the Phoenix area, “where we are getting a positive reaction from multiple investors.”
Capp noted his firm, when unable to interest traditional equity investors, is also pursuing potential new sources. For example, he said his firm is now working out agreements with some regional banks.
Developer Mike Seltz, of Volunteers of America, Alexandria, VA, said VoA is “scrambling” to find equity in some cases as a result of today’s changed market conditions. For instance, he said VoA has one tax credit deal that was scheduled to close in October where the equity investor has backed out. He noted VoA is also nervous about some additional deals with scheduled closings further out. “In some cases the deals have to be postponed until you have an answer,” he said.
Michigan developer Rod Lockwood, Jr., of the Lockwood Companies, Bingham Farms, MI, said he’s now on the sidelines as far as new LIHTC projects go, due to the poor Michigan economy and sharply lower credit pricing that make it “very difficult to make deals pencil.”
Lockwood said his last LIHTC project was a 40-unit new construction senior project that closed about three to four months ago after a delay, where the syndicator renegotiated the deal to a lower price and after one of the syndicator’s two investors – both banks – pulled out of the tax credit market entirely. Fortunately, Lockwood noted, the remaining bank filled the equity gap.
For the time being, Lockwood said he’s focusing on managing his existing properties. “We’re pretty much concentrating on operations,” he said, “trying to keep our occupancy up, keep our rents where they need to be, and collect our rental money.”
