Investor Corner Patrick Nash: A Corporate Investor Discusses the Market

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Tax Credit Advisor, March 2009: (Patrick Nash, based in Chicago, is Managing Director of Housing Investments for JPMorgan Capital Corporation, an investor in low-income housing tax credits. He is also president for 2009 of the Affordable Housing Investors Council. In excerpts from an early February interview, Nash spoke about AHIC, his firm’s activities, and the housing credit market.)

Q. What is the Affordable Housing Investors Council and who are its members?

A. The Affordable Housing Investors Council is a group of investors that have been involved as investors in the LIHTC platform. It is primarily an educational organization to assist those investors as they make these investments.

Q. As its new president, what are your plans and objectives for AHIC in 2009?

A. One objective is to create some best practices for asset management; we think that’s going to be a priority going forward as we look at the stress being placed on syndicators, and the questionable viability of a couple. Asset management and how to approach that is going to be a priority. [In addition], the [LIHTC] legislative changes enacted in mid-’08, and those that are under discussion as we speak, are going to be a focus as well in educating our members about them as they are determined, and assisting them and the industry in the appropriate implementation of whatever those changes may be.

Q. With regard to investments in LIHTCs, what do you believe is foremost on the minds of corporate investors these days?

A. Foremost is the fact that there are too few investors for the supply of product….There [also] is concern on the part of investors about the stress being experienced by syndicators…. The viability of the underlying assets; given the economy, clearly there’s going to be stress experienced by the low-income housing communities that we all invest in. Therefore, underwriting has to be thorough and numbers have to be scrubbed and oversight over the life of the investment has to be even more rigorous, because we’re probably in a recession and a fairly significant recession for several years.

Q. What if any specific changes do you and other corporate investors feel should be made to the LIHTC program now, and why?

A. Care and caution has to be rendered by the states in the location of transactions, because we don’t want to cannibalize those that are already under development or that are existing. And underwriting has to be rigorous, in applying standards of vacancy and debt service coverage ratio and things of that nature….[And then] the gap financing sources and programs being considered as part of the stimulus bill, those are necessary because the pricing in today’s environment, given the few investors, is being reduced on a cents per credit basis, yields are rising, and gaps are being created.

Q. What do you believe it will take to attract new investors into the tax credit program, and to promote substantial renewed or increased investment by inactive and active corporate investors?

A. As an investor ourselves, the paramount importance to us would probably be the carryback provision that is being considered; the acceleration provision is probably next on the list. The one specific thing that probably limits the broadening of the investor base, in my view is…the length of the investment….It’s very difficult for firms to plan their tax position over a 10- to 15-year period. Because of that, it makes this investment less appealing, because the hold period is 15 years, the credits flow over 10….[And then] some would suggest we need a boost in yields.

Q. How long has JP Morgan been an investor in housing credits? And how have you invested?

A. We’ve invested consistently every year since 1994. We’ve invested through all four investment vehicles. Proprietary, where we’re the sole investor with a syndicator. Multi-investor funds, where we’re one of several investors with a syndicator. Direct, where we directly invest in the lower tier; there’s no syndicator. And we’ve been a substantial investor through the guaranteed housing investment vehicle, where you have a syndicator GP and we invest in the underlying same product, but you’re looking to the credit of the guarantor to guarantee your tax benefits.

Q. What was JP Morgan’s housing credit investment volume in 2008, and what is your volume target for 2009?

A. We were probably the largest investor in “˜08, close to a billion dollars. And our target in “˜09 is probably something slightly south of that.

Q. JP Morgan acquired Washington Mutual and its LIHTC portfolio. How large was that portfolio? And what impact will that have on your tax credit need and investment plans for 2009 and future years?

A. It’s hard to say [as far as] future years. It was a fairly substantial portfolio; not as large as ours, by any means….We’re just beginning to get our arms around that portfolio…That portfolio will be using tax capacity that otherwise, prior to that acquisition, was only going to be used by us. So obviously it stretches the demand side internally of the use of our tax positions.

Q. What is the size of your LIHTC portfolio?

A. Upwards of four billion [dollars] amortized. We write it down annually. Its original value was close to probably over nine billion, but now, over time as credits are received and the asset balance is written down, it’s probably closer to three and a half to four billion [excluding the WaMu portfolio].

Q. Does that acquisition expand your footprint of where you’ll be investing in housing credit deals?

A. Yes…though we’ve always been a national investor, not restricted to our footprint markets….But it expands our footprint from 17 states to 23 states. [Among the additions are California, Oregon, and Washington.]

Q. Are there particular types of tax credit projects that you prefer to invest in?

A. We invest in all product types, from new construction family, acquisition rehab family, and both older adult or senior, and we do preservation deals and deals with housing assistance payment contracts, and things of that nature. We prefer to do transactions in excess of five million [dollars, equity amount] on new construction, and rehab probably seven and a half or eight. We tend to look at each deal and analyze it for its merits, rather than a check-the-box kind of approach.

Q. What you expect to happen in the LIHTC market in 2009?

A. I think it’s going to continue to be challenged. There’s going to be much more supply of credits than there is buyers of credits. [In addition], there’ll probably continue to be stress among the syndication community, and some re-ordering or modification of the paradigm as to the approach to investing in this product.

Q. Any final comments on the LIHTC program or on your role in it?

A. It is a product that creates economic value to the firms, but also provides a great product for the country, and it’s [been] the linchpin of any housing policy historically over the last 10 to 15 years. In that sense, it has to be enhanced, and this kind of hiccup or blip that we’re having, shouldn’t be a basis to change the program in any dramatic way….So we have to be cautious as we try to tweak it that we maintain those fundamental elements [of public-private partnerships]. That’s going to guide AHIC, it’s going to guide our investing, and hopefully we’ll weather the storm and be a stronger industry when this is over, and be, in the meantime, providing housing for folks.