Equity Market Challenges Rippling to Different Corners of Industry
By A. J. Johnson & Caitlin Jones
8 min read
THE TURMOIL AND UNCERTAINTIES rolling through the lowincome housing tax credit (LIHTC) equity market are impacting different corners of the affordable housing industry in various ways, according to participants interviewed by the Tax Credit Advisor.
Current conditions are due to a shortage of investors willing to make new LIHTC equity investment commitments, which has triggered a significant decline in credit prices being offered developers for new proposed credit projects.
“There’s not that much right now that we’re feeling very comfortable putting out new proposals on,” said Boston syndicator Bernie Husser, of MMA Financial LLC, referring to equity proposals for new housing credit deals. “We’re making changes to reflect the marketplace”¦.We’re being very cautious and bidding only for select opportunities and select places,” he added. Husser said these are solid projects in markets where MMA’s investors say they want to invest in because they have a need for Community Reinvestment Act (CRA) purposes, or feel they are underrepresented in investments or like and are “really comfortable” with such markets.
Husser said a “bunch” of proposed credit projects “don’t work anymore” at the lower current credit pricing. “They need 90 to 92 cents [per dollar of tax credit] to even pencil out, and at 82 cents those deals no longer pencil out — there’s a huge gap in the financing, and not enough time to fix that gap,” he noted. Husser added, “We think there’s going to be a lot of deals that this year won’t get done. Maybe the state allocating agencies can give them more credits, or maybe eventually those deals get done, but they’re not going to get done right away.”
Husser, when interviewed 2/12/08, felt current typical credit pricing is probably in the low- to mid-80s. “That kind of general pricing is about where the market is, we think, today,” he said. “But part of the problem is what do you call the market?”
Syndicator Hal Keller III, of the Ohio Capital Corporation for Housing (OCCH), nonprofit sponsor of Ohio’s tax credit equity fund, which invests in tax credit projects only in Ohio, identified the crux of the current problem — some credit investors “sitting on the sidelines.” A national shortfall in equity supply is expected due to anticipated curtailment in new LIHTC investment commitments this year by some major credit investors, such as Fannie Mae, Freddie Mac, and some financial institutions.
Keller said syndicators are “being very conservative about pricing” and are “being very cautious” in using their warehouse lines — if using them at all — to buy new deals for future funds.
In addition, he said, “There is a lot of re-trading going on as deal terms are being changed.” Keller explained that re-trading means that a syndicator that had agreed or was close to agreement with a developer on certain terms, “they are now going back and changing those terms, either in terms of price, length of guarantees, pay-in structures — just changing the terms of the deal generally.”
Keller noted OCCH isn’t having to engage in re-trading because it fortunately just closed its annual, 17th fund, of $178 million, “so we’re still deploying the capital we have at the old terms.” This fund — which was supplemented by separate “sideby- side” supplementary investments by some of the investors in the fund that raised another $56 million in equity — had a projected yield to investors in the 5.5% range, and average price to developers around 90, 91 cents, Keller said. “But for our new fund [later in 2008] we’re going to have to come out with a higher yield and a much lower pricing, probably in the mid-80s.”
Heller was hopeful LIHTC investment activity by investors generally will step up in the second, third quarters of 2008.
Impact for Developers
Many developers are already feeling the impact of the current changes rippling through the LIHTC equity market.
Mid-Atlantic nonprofit developer Nancy Rase, of Homes for America, Inc., Annapolis, MD, is trying to figure a way to close a $400,000 funding gap that opened up due to the recent drop in credit pricing, for a planned $17.8 million joint venture project in Baltimore. She said her organization in September 2007 underwrote the deal — the acquisition/rehabilitation of a 289-unit Section 236 property now called Har Sinai House — expecting credit pricing around 92 cents based on a letter proposal. However, today, of the proposals received so far recently from equity providers, the best price has been 89 cents, Rase said.
Rase said she’s looking at different possible ways to try to close the funding gap created by the likely reduction in equity amount, but suggested the options are limited. The project in November 2007 received the maximum permitted size of credit allocation, $1 million a year, from Maryland’s housing agency, and Rase doubted the property’s owner will agree to a cut in the already-negotiated sales price. She was hopeful the state allocating agency may be willing to make some adjustments, and noted it may be possible to get an approved state subordinate loan increased by 10%. Rase also indicated her organization may well have to increase the size of its deferred developer fee on the project. “We’re struggling to keep it all together,” she said.
Nonprofit developer Patrick Sheridan, of Volunteers of America, Alexandria, VA, said while his group has received “relatively good prices” for a few current “golden” projects, including one in Los Angeles, quoted pricing for a Milwaukee project is along the lines of 80, 85 cents. For a Delaware deal, he noted, “we’re looking at probably the midto high-80s, as opposed to 90 or something like that we would have gotten two years ago.”
Washington, DC attorney Shel Schreiberg, of the law firm of Pepper Hamilton LLP, said there’s “not much interest” from investors in a “blue-collar suburban” project his firm is now working on — the substantial rehabilitation of an 30-year old HUD Section 236 property that has a tax credit allocation. Schreiberg indicated talks are occurring with just two prospective investors, whereas in the past there might have been five. He said investors today want “clean product.”
Property Sales, Bond Financing
Seattle-based broker Robert Sheppard, of the National Tax Credit Property Advisors unit of Marcus & Millichap, reported that the drop in credit pricing is stalling sales of a number of existing LIHTC properties now on the market. Sheppard’s firm represents both owners trying to sell properties, and buyers trying to acquire properties. Sheppard said his firm is now handling about 100 LIHTC properties.
Sheppard indicated that the drop in credit pricing is prompting a number of prospective buyers to ask sellers to reduce their sales price for their property. Some sellers are agreeing and transactions are getting done, but most owners are refusing, with sales stalling as a result, he noted.
The turmoil in the capital and housing credit equity markets is also impacting tax-exempt bond financing — which brings the “automatic” 4% tax credit — for affordable rental housing projects.
“We’re seeing bond transactions postponed because of the inability to bring the tax credit investor to the table,” said investment banker John Rucker III, of Merchant Capital LLC, Montgomery, AL. He noted bond issues are getting held up as borrowers shop for equity; “You’ve got to get real creative now.”
He indicated some developers are reacting by tapping a bank line of credit to bridge the equity they hope to get later, while some are finding local banks to make a direct equity investment.
Rucker said interest rates have risen substantially for fixed-rate taxexempt multifamily housing bonds. He estimated the “all-in” fixed borrowing rate to a developer today with such an execution, with credit enhancement by Fannie Mae, Freddie Mac, or HUD, would probably be around 6.25%. He said this compares with a probable all-in rate of about 2.85% to 3% achieved through the issuance of tax-exempt variable-rate bonds paired with an interest rate cap or swap, with backing by Fannie Mae or Freddie Mac. Rucker said all the developers he is now working with using taxexempt financing are choosing the variable-rate execution.
