LIHTC Industry Sees Some Signs for Hope as Yields Keep Rising
By Caitlin Jones
6 min read
Tax Credit Advisor, October 2009: Syndicator Joe Hagan, CEO of National Equity Fund Inc. (NEF), believes the hurricane that has rattled the low-income housing tax credit industry is beginning to move offshore. But that doesn’t mean the industry won’t still be paddling to reach calmer seas.
“I think we’ve seen the worst; I think we’re digging out of it,” he says. “Everybody is much more positive now.”
“Last year I couldn’t get a phone call returned” from prospective investors. “This year, I’m getting phone calls returned, and I’ve actually signed up new investors.”
NEF has added four proprietary fund investors this year, including two non-financial institutions new to housing credits.
The LIHTC market is still a vessel short on fuel. There isn’t enough equity for all the proposed projects with credits; one new estimate, in fact, is that the total equity raised in 2009 will be even less than the $5.5 billion raised in 2008.
The equity shortage is primarily due to the economic downturn and financial crisis that have trimmed the profits and thus the tax shelter need of major banks, which are the predominant LIHTC investors. Banks are largely driven in where they invest geographically by the federal Community Reinvestment Act (CRA). The industry has been trying for more than a year to persuade “non-CRA” companies to begin purchasing housing credit investments, particularly “economic” investors whose primary interest is the return (i.e. yield) they can receive from LIHTC deals. Syndicators, including NEF, are seeing signs that the talks are starting to pay off.
Jeffrey Goldstein, of Boston Capital, anticipates possibly one to two new investors in a new $150 million national, multi-investor fund now on the street, and said new investors might account for half of his company’s next fund. “We’re having tremendous success in terms of generating interest, and having investors listen and ask for additional meetings and follow-up and information,” he said. “All of which is the classic planting the seeds today for the harvest in six months.”
Stephen Daley, of The Richman Group, expects his firm to attract a number of non-bank investors to its current multi-investor fund of $100 million to $150 million. “Our intent in putting this [new fund] together was not to seek CRA-motivated investors, but to seek economic investors,” he says.
The new fund will have a higher after-tax yield than Richman’s previous multi-investor funds, at 13% to 14% compared to 9% on a previous, $115 million fund that closed in June and was targeted toward CRA investors with a concentration of projects in the New York City area.
The properties identified for potential inclusion in the new fund are located in Iowa, Mississippi, Wyoming, and Puerto Rico à “areas that aren’t on the radar screen for the major players that continue to invest in the market,” says Daley.
Daley said Richman anticipates taking no acquisition fee for properties in the fund and a stake of around 10% in the general partner of the fund, compared to its usual interest of 0.001%.
Daley said investors have been “circled” for more than half the new fund, mostly banks so far. But he’s also seeing strong interest in the fund from non-banks. “We’re seeing insurance companies, manufacturers that two years ago wouldn’t give you the time of day,” when housing credit investment yields were around 5%, he said. “Now, at 13 or 14 percent, there’s a lot more interest.”
JPMorgan Activity
With a bevy of good projects to pick from, and less competition, active corporate investors are having a banner time.
“We will probably equal or surpass our production of 2008 this year,” which was $750 million, said Patrick Nash, of major investor JPMorgan Capital Corporation. Nash was referring to volume through the three types of LIHTC investment execution that he oversees – direct, proprietary funds, and multi-investor funds. The bank also invests in guaranteed tax credit product.
Nash said he’s done more proprietary investment volume this year than in 2008, about the same in direct investment, and slightly less in multi-investor funds.
“We are an active investor, and intend to remain active,” said Nash. “Our primary restriction on our ability to invest is people resources…We only have X number of folks that we devote to this effort….We don’t have any capital constraints or tax liability constraints at the moment.”
Yields, Pricing
Industry reports are that projected yields to investors on housing credit investments continue to rise, while credit pricing to developers continues to decline.
Hagan estimated that the market after-tax yield to investors today is probably around 10.5%.
In the latest version of Corporate Tax Credit Fund Watch, prepared by Ernst & Young LLP for the Tax Credit Advisor, syndicators reported projected yields on seven current multi-investor funds (cash needs basis IRR) that range from 10% to 13.4%. (See p. 8 for chart.)
The projected yield on Boston Capital’s current multi-investor fund is 10%.
NEF’s $76 million multi-investor fund that closed in August had a projected yield of 9.5%. But Hagan noted that about 60% of the projects purchased for it were inventory properties bought in 2008 at prices in the lower to mid 70s (cents per dollar of credit), and that NEF took a “very low fee” on the fund. Investors in the fund included JPMorgan Chase, U.S. Bank, Wells Fargo, KeyBank, Comerica, and Harris Bank. The fund is expected to invest in 13 projects in Arizona, California, Illinois, Iowa, Missouri, New Mexico, New York, Oregon, Texas and Wisconsin.
Credit pricing levels are still strongly predicated by project type and location (i.e. whether in a strong CRA demand area) and by the track record and financial strength of the developer.
Goldstein said the highest pricing is probably 70 to 75 cents, for good deals with CRA-motivated buyers. Moving further away from these CRA markets, pricing probably drops into the 60s and maybe even less in some parts, he added.
Hagan said NEF’s current typical pricing is 62 to 68 cents.
Sources suggested that the rate of decline in credit pricing and the rise in yields is being tempered somewhat by the new federal subsidy dollars being put by state credit agencies into stalled LIHTC projects under the new Tax Credit Assistance Program (TCAP) and credit exchange program. The addition of these funds to deals can temporarily support higher investor yields and credit prices than would otherwise be the case.
Hagan suggested the two programs will work best where the state agency is flexible and open to an adjustment, if necessary, of the original TCAP or exchange program award amount for a project, in order to make the deal viable and acceptable to all parties.
Meanwhile, the LIHTC market is currently facing other headwinds.
Hagan said “permanent debt is extremely expensive – we’ve heard quotes north of 9% on a forward rate lock.”
He also noted equity underwriting is more stringent. “Everybody has tightened up the underwriting to a large degree, making the deals tougher,” said Hagan. “We’ve gone from a typical 1.15 debt coverage to 1.20; from three months’ operating reserve to six; and we’ve really narrowed down the amount of hard debt on a per-property basis.”
