Is the Wind Shifting? Syndicators See More New, Returning Tax Credit Investors
By Caitlin Jones
7 min read
More and more corporations are saying “let’s make a deal” to investments in federal low-income housing tax credits, according to industry participants. Several suggest that housing credit investment yields may have peaked, and that greater investor demand may eventually boost credit pricing in certain markets.
“2010 is going to be a significantly better year for housing credit industry in terms of how much capital we raise,” said Fred Copeman, a Boston-based adviser to corporate housing credit investors with Reznick Group.
Copeman, syndicators, and a few major investors expect that the current active investors in housing credits – mostly major national banks, motivated in part by the federal Community Reinvestment Act (CRA) – will invest the same amount if not more in 2010. Add to this a stream of capital from new and returning investors that officials said began in 2009 and are continuing at a robust clip in 2010.
“Over the last two years, we [in the industry] have spent an enormous amount of time trying to attract new investment dollars into the marketplace,” said Corine Sheridan, of syndicator Boston Capital. And it’s finally paying off.”
Greg Judge, of syndicator Boston Financial Investment Management, said the most significant new capital is from insurance companies – drawn by the attractive after-tax yield levels offered on new tax credit investments. As an example, he noted that one insurer that “has been in the market and is out” is going through the internal approval process for a $200 million allocation for LIHTC investment.
“One of the reasons we’re seeing a lot of insurance companies come into the market is plain and simple: risk/return, risk and reward,” said Stephen Daley of The Richman Group. He estimated that insurance companies accounted for roughly 90% of a $120 million multi-investor “stimulus” fund that Richman closed the week of March 1st, which has a projected yield above 13%. The lofty yield was possible because Richman was able to pay lower credit prices for the projects acquired for the fund because of their location largely in “flyover” states (areas and markets generally out of favor with major CRA-motivated investors). The 18 projects are in 11 states and territories with heavy concentrations in Iowa, Mississippi, and Puerto Rico.
Copeman noted that the new wave of investors is broader than just insurers, though, with large amounts of capital coming or ready to come in, “for the first time in a long period of time,” from “a broad array of investor sectors” – insurance companies, high-tech firms, retail, and operations. “There’s a huge influx of capital in the process of being assembled. There are six companies who collectively have set investment objectives that would accumulate to more than three billion dollars,” he said but didn’t name publicly.
Officials noted that insurance companies and companies outside financial services are not subject to CRA, so may be willing to invest in projects outside of major “CRA” markets – like New York City and big metro areas on the East and West Coasts – provided the yield is high enough. This suggests that more equity may be available this year for deals in at least some flyover markets, such as the Midwest, where equity was scarce in 2009 and credit prices very low. “As a class, the new investors are going to be fairly agnostic people as to property location,” said Copeman.
Judge indicated that some insurers are interested in “market-rate appealing real estate in strong markets, so they end up getting to where the CRA investors are,” while
Several syndicators worried that the new and returning investors, though, could drop out of the market if tax yield levels drop to less attractive levels, say below 10%. Daley and syndicator Joe Hagan, of National Equity Fund, Inc., felt that tax credit yields have peaked and could decline in 2010 due to heavy investor demand. “By the fourth quarter of 2010 and the first quarter of 2011 I think you’re going to see some shift in yields,” said Hagan, who felt typical current fund yields have stabilized between 11% and 11.5%. In the latest edition of Corporate Tax Credit Fund Watch (see page 18), prepared by Ernst & Young LLP, participating syndicators reported yields on 11 current multi-investor funds ranging from 10% to 13.15%, with average prices for specified properties ranging from 58 to 82 cents.
Equity providers said current credit pricing continues to be in a wide range, shaped largely by geography.
“Pricing: I’d say 90 cents in New York City, 80 cents in South Florida and California, Texas probably in the 70s, and everywhere else between 65 and 75,” said Judge. St. Paul, Minn.-based Darrick Metz, of California-based syndicator WNC & Associates, Inc., added, “I’d say the sweet spot is around 65 to 67 cents – that’s where I’m seeing a lot of the stuff come in.”
“I think that prices are going to go up as more investors come into the market,” said Rick Davis, of Wachovia, which with parent Wells Fargo is a tax credit syndicator and investor. He expected the company’s tax credit volume in 2010 to be around $1 billion – the previous annual average. Mandy Kozminski, of US Bancorp, a direct and fund investor in housing credits, said the bank’s 2010 investment target is generally “north of” $400 million. “This year we’re really ramping up,” she said. Brian Tracey of major investor Bank of America Merrill Lynch indicated the bank will continue to be active in housing credit investment this year as it has always been. “We’re optimistic for 2010,” he said.
There are already signs that new investor-driven equity may be spilling out to some of the non-CRA markets. “There were times,” said Hagan, “when we’d go out and put a letter of intent out on a deal and there’d be no one [else] within 20 miles looking at that deal. Now we’re finding more competition, which is good for everybody.” Some of the areas he cited as having greater interest are Minnesota, Arizona, Virginia, and Maryland.
Syndicators and investors, though, reiterated that they will continue to focus on risk avoidance in 2010 as they select and underwrite new tax credit projects. This includes sticking to well-capitalized developers with a strong track record that have proved themselves in the past in successfully addressing deal issues that have come up; investing in healthy real estate markets; and applying conservative underwriting standards.
Judge, for instance, indicated that Boston Financial has invested over the years in projects by 600-plus
general partners and rates its GPs. “We’re going to work with the highest-rated GPs in our system,” he said, “who have proven themselves to us, had issues and they performed when that issue came along.”
Equity providers also indicated that they are looking to invest in projects in strong real estate markets. Areas cited as examples of soft markets included the Atlanta area.
As for types of projects, several of the equity providers noted that, in addition to 9% new construction projects, they have invested in and will consider other types, including certain acquisition/rehabilitation projects (e.g. HUD Section 8 properties) and certain supportive housing deals. They stressed that each deal is assessed case-by-case based on the sponsor, market, and merits of the project.
The outlook for the LIHTC equity market in 2010 is far from certain, though. Copeman said one “wild card” is whether one or more pending LIHTC legislative proposals are enacted. These include extending the Section 1602 exchange program and extending the carryback period for LIHTC investments to five years. The latter in particular, according to LIHTC advocates, is needed to restore corporate investment in housing credits to a healthy level. (See legislation article.)
