Changing Conditions: National Multi Fund Yields Head Downward as Deal Competition Gets Fiercer
By Glenn Petherick
10 min read
In many new national multi-investor funds closing later this year, projected after-tax returns to so-called economic investors are likely to dip below the once-sacrosanct 7% level, according to syndicators and other sources in the low-income housing tax credit (LIHTC) industry.
The causes: higher credit pricing to developers resulting from fierce competition for deals and continued strong demand from investors for LIHTC product.
One consolation is that most major syndicators have been able to successfully market and close hybrid multi-investor funds featuring multiple investment classes that target both CRA investors (i.e. banks) and economic investors (e.g., insurance companies, non-financial firms). These funds have one or more CRA classes, each of which has a bank investor that gets to claim credit under the Community Reinvestment Act for a specific investment by the fund in a specific geographic area (e.g., a particular project in Chicago). This class provides a lower yield than a separate class investing in the fund’s broad pool of properties – and reflecting lower national fund pricing to developers – that is targeted to economic investors.
Immense Pressure, Competitiveness
“There’s immense pressure and competitiveness for deals right now,” says Richard Floreani of Boston-based Carlisle Tax Credit Advisors, whose clients include investors and syndicators. “Acquisition folks at the syndicators don’t feel like they can sustain the same pricing that they were able to deliver in the first half of the year. The expectation is that we’re going to see some reductions in yields in these fall offerings. The informal discussions suggest we’re going to see yields clustering maybe more in the 6.75 to 7 percent range with a few outliers.”
Floreani indicated that a number of syndicators are informally “testing the waters” for new national funds before they roll them out by asking prospective investors if they would consider accepting a yield below 7%.
The shift, in fact, has already begun. The latest issue of Corporate Tax Credit Fund Watch, prepared by Ernst & Young LLP, shows four current national funds with yields of 6.75% (see pp. 20-21 for Fund Watch chart).
One example is a new $120 million national multi-investor fund that Boston Capital planned to launch by the end of July. “Due to structural and market dynamics, we are seeing increased pricing across the country and are expecting our fund to roll out at a 6.75% IRR,” said Boston Capital executive Tom Pereira. Boston Capital’s previous national fund, which closed in March, had a projected IRR of 7.25%.
Similarly, The Richman Group’s new national fund in the market, of about $200 million, has a targeted yield of 6.75%, though investors desiring CRA credit on certain properties may get a lower yield. Executive Stephen Daley noted his firm has seen “some initial pushback from economic investors as yields dipped below 7%, but we think there will be sufficient interest.”
Several other syndicators expected their company’s next national fund to offer sub-7% projected yields to economic investors – a lower return that their prior fund.
“The multi-fund market is highly competitive,” said Steve Kropf of Raymond James Tax Credit Funds. “National funds launched in the first half of 2014 were still at 7 to 7.25 percent, while funds launching later this year will likely be lower, in the 6.25 to 6.75 percent range.”
Because of strong demand for LIHTC investments, previous resistance to multi fund yields below 7% appears to be softening – at least among some investors.
“We’ve heard there are a few economic investors that had previously drawn a line in the sand and said, ‘If yields go below 7 percent in a multi fund we’re going to sit out,’ says Tammy Thiessen of RBC Capital Markets’ Tax Credit Equity Group. “Now we’ve heard a rumor that that won’t be the case. That a few will still invest, maybe to a lesser degree or a smaller piece. But it seems like even some of those folks that had drawn the line in the sand are revisiting that.”
Sources suggested that some companies may still invest even at sub-7 yields for fear that yields on future funds may be even lower. Industry officials said the question is whether economic investors will curtail their LIHTC investing if multi fund yields fall and stay below 7%.
“While demand for properties continues to be very competitive, it remains to be seen how far economic investors are willing to allow for yields to go down before they exit the market,” said Michael Gaber of WNC.
Strong Investor Demand
Syndicators said they are seeing very robust demand from investors for LIHTC product, both in their multi-investor and proprietary funds, as well as intense competition from banks making direct investments.
“There’s a lot of capital chasing deals,” says Sarah Laubinger of Boston Financial Investment Management.
Ryan Sfreddo said Red Stone Equity Partners is seeing “very strong” demand from investors. For instance, because of greater demand, Red Stone increased from $100 million to $130 million the size of its current national fund, which was fully circled with eight prospective investors within 30 days. The fund, expected to close in August, has three investor classes with projected yields of 6, 6.5, and 7 percent.
Similarly:
- Boston Financial Investment Management closed its latest national multi-investor fund at $166 million, compared to an initial expected size of $125 million.
- Enterprise was scheduled to close a multi-investor fund on July 11, raising $271 million in equity.
- WNC boosted the size of a recently closed national fund to $120 million, from an initial $105 million.
- National Equity Fund is marketing four regional multi-investor funds expected to raise a combined $227 million, and is in discussions with prospective investors about a new national fund that will be as large as $150 million. “Investor demand for regional funds has been strong,” says NEF’s Joe Hagan, “which is a major driver of our continued focus on bringing these funds to market.” NEF’s second Chicago area fund, for instance, has an expected size of $70 million.
Another example of the ravenous corporate LIHTC appetite occurred recently when R4 Capital, Inc. came out with a $150 million national multi-investor fund offering a 7.50% yield for investments of $20 million or more and 7.25% for smaller investments.
“We rolled out this new fund,” said R4 Capital’s Marc Schnitzer, “and one investor came to us and said, ‘We like this deal. Would you be willing to sell us the whole thing?’ And we said, ‘Yes.’”
Schnitzer, who characterized the current LIHTC equity market today as “pretty healthy,” said the investor, which he declined to name, will receive a yield of “at least a seven and a half.”
Year of the Hybrid Fund
The relatively good year so far for national multi-investor fund volume is largely because of successful offerings by many major syndicators of the hybrid multi-investor funds with “tiered pricing” on multiple investment classes targeting CRA and non-CRA investors. The first of these funds were rolled out in 2013. This year has seen an increase in the number of these, said Floreani. He noted that there are various reasons why a bank might invest in a CRA tranche of a national multi-investor fund. They might not be able to access the specific geographic CRA exposure that they want by other means, they might only have authority to invest in LIHTC through multi-investor funds, or they might have so much capital to invest in LIHTC during the year that they can’t reach the target through proprietary fund investing alone.
Enterprise is seeing a new twist in its latest hybrid funds, according to Amy Dickerson. In a change from their prior approach, some CRA investors in Enterprise’s latest multi-investor fund have chosen to take a mix of both CRA- and non-CRA investments. Enterprise’s latest offering is a national fund with regionally priced CRA pools targeting nine different geographic areas, offering yields from 5 to 7.25 percent.
Credit Pricing Remains Robust
Nearly all of the syndicators said that credit prices to developers on new deals are still very strong. Pricing is “creeping up,” said Tony Bertoldi of City Real Estate Advisors, who noted that “finding product has been very difficult.”
“We are seeing multi fund credit pricing to developers ranging from the mid-80 cents [per dollar of tax credit] to the low 90s, and CRA pricing ranging well over a dollar in most CRA markets,” said Ben Mottola of Stratford Capital Group.
Red Stone’s Sfreddo cited continued “eye-popping prices” for deals in high-CRA markets such as New York City, California, South Florida, and Washington, D.C.
Finding product for multi funds at reasonable prices is challenging, syndicators said, given the fierce competition for deals from other syndicators and direct investors.
“It’s been tough to win in every market, not just the hot CRA markets,” stated Thiessen. It’s not just in the hot CRA markets. It’s not even in the secondary CRA markets. It’s even in flyover states, some rural deals.”
Patrick Nash of JPMorgan Capital Corporation, a major LIHTC investor, similarly cited intense competition for deals. The company primarily invests in LIHTC through proprietary funds, but also invests in some multi-investor funds and does some direct investment. The company is on pace to invest around $1 billion in LIHTC in 2014, roughly the same as in 2013. “We certainly have more than we can handle,” says Nash.
FASB Ruling Impact
There doesn’t appear to be a substantial positive impact so far from the Financial Accounting Standard Board’s ratification last December of a rule change permitting public companies to use a new, more favorable ”proportional amortization” method of accounting for LIHTC investments.
A couple syndicators said they have seen a few existing investors invest more because of the accounting rule change; some investors switch from previously making guaranteed LIHTC investments to making non-guaranteed investments; and a few new investors that previously hadn’t invested in LIHTC.
Nash said JPMorgan Chase, which currently uses the equity method of accounting for its non-guaranteed LIHTC investments, hasn’t yet decided whether or not to switch to the new alternative method.
Still, syndicators are talking to prospective investors that would be new to LIHTC that have expressed interest in the asset class because of the accounting rule change. Schnitzer said his firm is talking to a variety of potential new entrants, including banks, insurance companies, high-tech firms, manufacturers, retailers, and service companies.
“While we expect the accounting change will bring more capital to the LIHTC equity market in the form of new investors and increased allocations,” says Raymond James’ Steve Kropf, “the immediate impact has been muted due to the lead time involved in getting new mandates and allocation increases approved, and also understanding how to implement the new methodology on existing portfolios. All of this is happening in a falling yield environment and complicated regulatory environment, which has caused some potential new investors to revisit the LIHTC space.”
Good Year Overall
All in all, though, while there are some worries about investor reaction to a drop in yields on multi-investor funds, and some outstanding loose ends for the market (e.g., whether Congress passes legislation to reauthorize the minimum 9% credit rate), there are no political headwinds for the time being roiling the LIHTC field and 2014 promises to finish as another strong year for the industry.
“Volume-wise I think it’ll be a great year for the equity market,” says Floreani.
