“Business as Usual”

Any outside observer may assume some unease amongst the low-income housing industry. Buffeted on the one hand by residual stressors from the COVID-19 pandemic and on the other by the uncertain prospects of an incoming federal administration keen on cutting spending and shrinking government programs, the affordable housing landscape is experiencing an inflection point.

However, at National Housing & Rehabilitation Association’s 2024 Fall Developer’s Forum, held at the sleek new Raffles Hotel in Boston’s Back Bay neighborhood, panelist after panelist revealed a common sense of general optimism and roll-up-your-sleeves grit, despite a potentially uncertain year ahead.

This sense of calm and faith in the future pervaded the much-anticipated panel on the State of the Equity Markets, which brought together four of today’s leading voices in equity production in a conversation moderated by Milton Pratt, the current NH&RA chair and executive vice president of development at the Michaels Organization.

The optimism expressed by the panelists was not rooted in blind faith, but rather in the history of the Low Income Housing Tax Credit program and its status as a critical tool in America’s push to provide high-quality affordable housing for all. As Pratt emphasized during his opening remarks, “Whether you’re a Republican or Democrat doesn’t matter – the tax program has got to survive.”

No matter what the next year holds, the panelists agreed that the LIHTC program has survived setbacks in the past and will likely remain a robust piece of America’s affordable housing landscape. As Peter Flynn, director of acquisitions for Red Stone Equity Partners, said in reflecting on the program’s future, LIHTC “is a good program. It’s got a lot of bipartisan support. It’s American jobs, building American housing. So, I think from that standpoint there’s good stories to tell and good support for the program.”

The Current State of the Market
In general, the panelists agreed that the equity landscape has stabilized somewhat as the tumult of the past few years continues to subside. “People are underwriting deals to reflect current market conditions,” said Kyle Wolff, executive vice president and director of acquisitions at Stratford Capital. Those current market conditions, he pointed out, are more stable than they have been since early 2020, so “we’re seeing fewer deals derail the mid-closing process. Everyone has taken their individual experiences and are reacting accordingly.”

That increased market certainty has, in some cases, led to heightened equity activity. “We’re having a strong year in terms of volume,” said Jay Segel, managing director at R4 Capital. This has allowed R4 and their equity partners to “build up our pipelines going into the next year. Deal activity has not shown any signs of slowing down thus, contributing to the build-up of the pipeline for 2025.”

Certainty is particularly attractive for banks motivated by Community Reinvestment Act (CRA) requirements, who must invest capital in local projects that primarily benefit low- to moderate-individuals. Bank regulators then evaluate these institutions in a periodic cycle, the frequency of which is determined by the total assets held by that bank. Thus, CRA investors who may be in the tail end of their regulatory review cycle “might pay a premium, because it’s not for their yield, it’s for hitting their CRA and their regulatory requirements,” said Flynn. Those CRA investors “need to know there’s certainty of a deal closing.”

Indeed, these CRA investors tend to drive the market, said Rob Charest, senior managing director of Equity Production at Boston Financial. “It’s really all about CRA demand right now.” Clear communication was key to working successfully with CRA investors, who generally work with “a very small staff,” Charest emphasized. “What we do all day is try to match these deals with the right buyer.”

Though the CRA market has remained robust, the panelists did describe some thinning amongst non-CRA-motivated investors, known in the industry as economic investors. This can be attributed to many factors, including increased competition for other similar investments, such as solar and renewable energy tax credits. The renewables market “is really taking a lot of the economic investors out of the LIHTC market and putting some pressure on where investors see that they can get a little bit more return,” Flynn noted. Banks may have competing investment strategies, “and renewables tend to have a much quicker return and less risk profile, and the returns are generally better.”

The competition from the renewables market affects pricing, which in the LIHTC world is defined by how many cents on the dollar a developer sponsor can get for their tax credit equity. The increased competition for the dollars of economic investors has lowered the prices they are willing to pay for LIHTCs compared to CRA investors, said Flynn. “Traditionally, the spread between an economic and a CRA investor might be about 200 to 250 basis points [two to 2.5 percent] of yield, which could be anywhere from five to eight pennies. That market’s kind of broken up a little bit because we’re competing with other investments, so that economic investor’s yield has gotten higher, and pricing could be ten or 11 cents” lower than what a CRA investor might be willing to pay.

Though the panelists agreed that the market has generally normalized, they said that the shockwaves of the pandemic have created permanent shifts in the equities industry, fundamentally altering the way that LIHTC partners can operate. One of the most significant changes has been a sharp increase in the size of LIHTC deals, a result of increased land and construction costs and a sustained high-interest rate environment. As Segel pointed out, since 2016, the average equity placements have roughly doubled. However, “the multi-funds haven’t grown in size by 100 percent,” he said, referring to a type of fund now popular within the industry where multiple funds wanting to invest in a large tax credit deal team up to provide the equity.

Because of this mismatch, it’s now “very seldom in which you’re going to find one investor to take down such a big deal,” said Wolff. “That ends up forcing you to look at potential club funds, or club-type transactions where you’re bringing two or three investors together in concert to be able to invest in 100 percent of the deal.”

In those situations, a lengthened communication timeline is key, Wolff noted. “For folks who have $40, $50 million equity deals, you want to start talking to people long before you’re really in that underwriting process because it’s going to take time.”

Optimism Towards the Future
Top of mind for most in attendance was what effect the second presidency of Donald Trump—bolstered by a unified government with a Republican House and Senate—might have on the affordable housing industry and the LIHTC equity market in particular.

The panelists agreed that, at least for the equity side of the market, there is far less anxiety today than there was at this point in 2016 after the first Trump election. Segel recalled that in 2016, investors were calling firms asking for various scenarios depending on which policies the new administration would pursue. “At this point,” Segel said, “we haven’t been approached by any investor yet to ask for alternate scenarios.” Even though they’ve done their homework and run a number of scenarios, “Investors don’t appear to be as nervous.”

Charest agreed. “It’s business as usual.”

Of course, no one has a crystal ball on what the new government will likely pursue, and the only certainty over the next few years will be unpredictability. Through those times, the panelists emphasized rock-solid relationships between stakeholders. “The one thing you do need to do, whenever there’s a shift with the government,” Flynn emphasized, “is to stay close to all your partners through the deal.”

The panelists did caution a few predictions of some potential impacts of the second Trump presidency.

One potentially significant impact could be on the CRA market and how those regulations are enforced, noted Charest. “I think the bank regulations will be one of the things that makes the biggest direct and indirect effects for us in this industry.” During his first term, President Trump did move to dilute CRA regulations, though those rules were later rescinded early in President Biden’s term.

Regarding corporate tax rates, Charest additionally predicted that they wouldn’t change as dramatically as they did in 2016 when they fell from 35 percent to 21 percent. Whatever happens now, he said, “won’t be that dramatic.” Though that initial change provided worry throughout the industry, Charest emphasized that deals survived, and housing was built. Still, another cut to corporate taxes will no doubt affect pricing. “Roughly every percentage point is about a penny in a deal, about 20 to 30 basis points on a yield. If there’s another cut, we’ll sustain it, and we’ll get through it. Fewer units will be built. So, we don’t want a cut in that way, but soft money will fill those gaps, and we’ll get through it again.”

The panelists also expressed some concern that the proposed foreign tariffs and domestic-industry policies from the Trump administration may kickstart a fresh cycle of inflation, just as the current inflationary pressures are beginning to subside. “I think as people start to evaluate some of the new administration’s policy initiatives, there’s a growing cry that perhaps some of those initiatives might be inflationary,” said Wolff. If anything, he predicted that the high-interest rate environment might persist in acting as a bulwark against the potential for severe inflation. “We might be in this for a while, where interest rates of five, six, seven percent are the norm.”

The predictions were not all gloomy, and there was a sense that the past election cycle might hold a silver lining for the LIHTC industry. “As we watched the run-up to the election, one thing that struck me was how many people were talking about affordable housing,” remarked Wolff. “Glass half full, maybe that’s telling, in that there will be a greater focus—and maybe even support—for expanding the program.”

No matter what the next year holds for the LIHTC industry, there was a general sense amongst the panelists that the work will—and must—continue. “We find ourselves at another inflection point,” said Wolff, “and we’ll have to deal with whatever comes.”