Hot Buttons for Investors in Market Studies for LIHTC Projects

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by Thom Amdur

Accurate and conservative underwriting is critical in planning new low-income housing tax credit (LIHTC) projects today. To do so, developers need to use a qualified market analyst and obtain a solid market study for their proposed project.

This topic was front and center at the recent 2008 Multifamily Demand Summit held by the National Council of Affordable Housing Market Analysts in Chicago. A panel of industry representatives – mostly from tax credit syndication firms – discussed evolving LIHTC investor concerns on market issues. Panel members included: Peter Dowd, MMA Financial, LLC, Boston, MA; Jeff Carl, RBC Capital Markets, Cleveland, OH; Larry Brattain, Red Stone Equity Partners, Cleveland, OH; and Doug Koch, Ernst & Young LLP, Boston, MA.

With the number of active, major LIHTC corporate investors smaller today, those investors still active can pick and choose among proposed projects and are much more carefully examining market issues to select deals for their equity dollars. Investors are highly focused on real estate performance issues and long-term asset value.

Once you (the developer) have hired a talented market analyst, what are the key “hot button” market issues among investors you need to know about? Consider the following:

  • Rent Issues. First is rent advantage. Are your project’s projected rents significantly lower than local conventional rents? Investors want achievable LIHTC rents notably below derived market rents. A second issue is rent growth. Investors want to see conservative future rent growth estimates. Recent changes in how the U.S. Department of Housing and Urban Development calculates area median income, paired with the economic downturn, can cause different rent growth trends than in the past. Third, aggressive assumptions about rent adjustments are a no-no. Be careful about charging increased rents for “larger” units; your units should be significantly bigger than the competition if you plan to charge a premium for extra square footage. Likewise, not all amenities create added value. For instance, having a small business center with a few computers in your project will generally add little if any perceived value. On the other hand, a free garage parking space or secure property entry may be a big plus in that market.

  • Operating, Utility Expenses. Operating costs are one of the biggest variables in the long-term financial performance of a property. Investors want realistic operating cost projections, and will compare your proposed project to other deals in your portfolio as well as to local comparable properties. On the utility cost side, rising energy prices are likely to remain an issue for the foreseeable future. If your project is in an area that has experienced large year-to-year increases in utility costs, investors will want to see how these hikes compare to historical growth trends for the local public housing authority’s utility allowances.

  • Expanded Comparables. In this tough environment, just picking nearby existing LIHTC and conventional apartment properties as “comps” isn’t enough. In many markets, single-family homes may compete with higher-income tax credit projects. In other markets, foreclosed homes may have been converted to affordable rentals. Finally, manufactured homes may also be a competitor of a LIHTC development. Investors want to see current and local analysis of both these alternative comps and traditional comparable multifamily properties.

  • Neighborhood, Site Issues. The condition and maintenance of other properties (e.g. apartment buildings, homes, commercial) in the neighborhood and surrounding your project is of paramount importance. With numerous investment opportunities, investors won’t take a risk on developments in neighborhoods perceived in decline. Also important is current adjacent land uses to your site. Investors look very closely at anything that might impede (e.g., train tracks) or encourage (e.g., transportation links) development on a site.

  • Drive Times. Investors want to see reasonable drive times from your property to major local employment centers. They will also look for analysis of comparable properties located between your property and these job centers. Today, with high gas prices and a soured economy, investors see long drive times as a big liability.

Thom Amdur is Associate Director of the National Council of Affordable Housing Market Analysts (NCAHMA) in Washington, DC. A Council within the National Housing & Rehabilitation Association, NCAHMA has developed industry standards for market analysts and market studies for affordable rental housing developments, as well as “best practices” and related resources. He may be reached at 202-939-1753, [email protected].