Syndicators Boost Yields on New Credit Funds; Some Positives Cited
By Caitlin Jones & A. J. Johnson
6 min read
Syndicators have bumped up projected yields on the new national multi-investor low-income housing tax credit funds they are offering, which appear to be in greater numbers than a few months ago.
Meanwhile, the volume of awarded 2008 credits continues to pile up. Boston syndicator Bob Moss, of Boston Capital, reported state agencies in the aggregate had awarded about 44% of their total 2008 housing credits by June 1, and will surpass 50% by month’s end. Developers with 2008 credits are competing for the limited amount of equity available not just with each other, but also with struggling 2007 credit deals still on the hunt for equity dollars.
For more than six months, the housing credit market has suffered from a sharp curtailment in new equity investment commitments by previous major investors, including Fannie Mae, Freddie Mac, and some large banks. This in turn has triggered a rise in yields on new corporate tax credit funds and a drop in pricing to developers for housing credits.
“At this time last year, credit prices we were seeing of north of a dollar were a fairly routine occurrence,” said syndicator Shawn Horwitz, Alliant Capital, Woodland Hills, CA. “Today, credit prices are probably in the mid-80 cent range, headed down in my opinion.”
Noted Columbus, OH-based syndicator Stephen Daley, of The Richman Group, “Equity continues to be hard to come by. Developers, even if they had an equity commitment, that commitment might have disappeared because there is just nobody to buy the credits.” He added, “[Fund] yields have got to go higher to attract additional capital.”
Crop of New Funds
Indeed, projected after-tax yields on new national multi-investor funds being offered by syndicators interviewed by TCA are higher. These current offerings include:
- A new $150 million national fund by Boston Capital expected to close by the end of June that Moss said will have a projected yield probably “somewhere in the high sixes, close to seven (percent).” Boston Capital’s previous national fund that closed last December had a yield in the “5.75% range,” he noted.
- A new $100 million national fund by New York City-based syndicator Centerline Capital Group expected to close by mid-August that Centerline executive Ryan Sfreddo said has a projected yield of 6.5%. This compares to a 5.35% yield on Centerline’s prior national fund, the final tranche of which closed in February.
- A new roughly $130 million national fund that Alliant Capital is about to close that Horwitz said will have an average projected yield of probably 6.5% [the fund actually has a range of yields that vary by investment size]. He said the projected yield on a subsequent new $120 million fund will be “close to 7%.”
- A new national fund of more than $100 million by The Richman Group expected to close by mid-July that Daley said has a range of projected yields from 6.25% to 6.5%, compared to a range around 5.25% on the firm’s prior national fund at year-end 2007.
Richard Floreani, of Ernst & Young LLP, said his firm is currently reviewing – for client investors – about 9 to 10 new national multi-investor tax credit funds, a few more than it was evaluating back in March. He noted the new funds have projected after-tax yields “clustered” in the 6.25%, 6.5% range. Floreani indicated the current funds are much smaller than the typical national funds of a year or so ago, with a “lot” in the $50 million to $100 million range. Reasons for the smaller funds, he explained, are lower demand from investors and the fact that “a lot of syndicators have been particularly cautious about what properties they buy and warehouse, given the uncertainty in the market.”
Some Positive Signs
Syndicators interviewed by TCA said they are being more much selective in the tax credit deals they choose to fund, in response to greater selectivity by the remaining active investors in the market. They noted investors are being ever more intensive in their due diligence of funds and of underlying projects. This is lengthening the time it is taking some syndicators to market and complete new national funds. Daley likened this to “fitting the pieces of the puzzle together, so it works for all of the multiple investors – from a CRA [Community Reinvestment Act] perspective, from a capital commitment perspective, and from a pricing perspective.”
In addition to lower credit pricing, some developers are also getting hit with tougher deal terms. Said Horwitz: “Deal terms have started to change – longer guarantees from developers, bigger share of residual interest at the back end, slightly larger asset management fees.”
On the positive side, syndicators said many state allocating agencies have taken various pro-active steps to respond to changed market conditions and to try to save proposed projects that now have funding gaps. In addition, some noted they are starting to see some positive signs as they aggressively communicate with past, now inactive investors and with prospective new first-time credit investors to try and generate much more equity investment in the market.
Horwitz, for instance, said the higher yields on new funds are starting to lure back some inactive investors, citing American Express as an example. “Yields are getting to the level where they’re starting to see it as an alternative investment,” he noted.
Said Sfreddo, “We’re starting to see some signs of recovery…I would hope that by late summer, early fall, things start to normalize and you see more of an equilibrium in supply and demand, and the pricing stabilizes, and that there’s more deals getting done.”
The jury is still out, however, on when the recovery will occur, and how high yields will have to go to make this happen. On 6/16/08, speaking outside Washington, DC at the Council of Affordable and Rural Housing’s 2008 Annual Conference, Irvine, CA syndicator David Shafer, of WNC & Associates, Inc., predicted fund yields will rise above 7%.
Said Moss, “Until we pull back and bring in the economic [-oriented, as opposed to CRA-motivated] investors, this year has a potential for supply and demand to have about half the equity supply we need to fund every transaction.”
One wild card is pending legislation in Congress that would make sweeping changes to the housing credit, including to permit housing credits to reduce alternative minimum tax (AMT) tax liability for both corporate and individual taxpayers, and to give state agencies greater flexibility to make larger credit awards. Enactment of this legislation near term might boost credit equity investment and salvage some struggling projects.
