Pricing Update: Investors
By Mark Fogarty
6 min read
The attraction remains
Tax credit pricing has taken a hit, but not a mortal one, with the new 21 percent corporate tax rate, according to investors attending a recent affordable housing summit held by market analysts.
Panelists at the Philadelphia meeting held by the National Council of Housing Market Analysts were pretty much in agreement on what recent changes in the business have meant for pricing of deals.
“Pricing fell ten percent to 15 percent and the industry lost $1.7 billion in equity,” said Paul Connolly, executive vice president with R4 Capital LLC, New York, NY.
Connolly said that was “a big hit—200,000 units” but that the allocation increase in nine percent Low Income Housing Tax Credits from the appropriations bill “helps a little bit.”
With pricing down and not a lot of soft money around, deals are seeing an increase in debt. “To be competitive, you need a 30 to 35 percent capital stack as hard debt,” said Connolly. That puts pressure on four percent LIHTC deals. “You’re going to see a lot of those deals that don’t work very well,” he added.
Abhisek Mitra, vice president and senior project manager for U.S. Bancorp Community Development Corp., Washington, DC agreed. “We’re seeing deals get tighter on pricing,” Mitra said. But he discouraged the alarm bells going off. “We’re all still here,” he confirmed.
“Deals are getting done. We’re not seeing the huge expected slowdown.”
He added “It’s good there is still a need for us. The program has stood the test of time.” But he is seeing projects with much higher leverage. “Within multi-funds we are seeing single projects take up a larger portion of funds.”
Mitra also said there was a bit of a panic after the election because the industry was looking at a 25 percent tax rate as a safe zone rather than the 21 percent rate that has been implemented.
“We’ve corrected ourselves and adjusted to 21 percent. It would be a different story if we didn’t prepare ourselves.”
“Our market in general has responded to the changes,” said Corine Sheridan, vice president, director of origination national region at Boston Capital Corp., Boston. “Let’s move forward and get some deals done.”
Originally Boston Capital thought three of its investors might be negatively impacted by the new rate. Two of them, however, are still in the marketplace while the third, a smaller investor, is on the sidelines.
Gayle Manganello Ellis, senior vice president, manager of originations at PNC Real Estate, Chelmsford, MA, said her firm hasn’t seen a lot of defections either. Just one investor “has taken a step back,” she said. Others are waiting and seeing.
“We’re still moving forward with business as is,” she said.
With the volatility in the market caused by tax reform, the role of housing market analysts has become even more important than it was to prevent “fake underwriting,” according to NCHMA panelists.
An analysis done at a desk in front of a computer screen isn’t going to be anywhere near as valuable as boots on the ground, the annual affordable housing summit heard.
Bob Landis, senior vice president, syndication at Raleighbased nonprofit syndicator CAHEC, told the Philadelphia attendees, “We don’t rely on developers’ market studies because the gestation of deals is so long that the market study is dated and we have to order a new study. And that makes market analysts a really important component now. Your precise work is going to make a difference.”
“We commission our own studies on the direct side,” said Mitra. “It’s a crucial point for analysts to actually go to the site. We expect boots on the ground. Barriers to entry can’t be seen from a desk review.”
Mitra also advised housing analysts to go to the site and talk with property managers to see what barriers to entry might be present.
“We do our own market studies as well,” said Sheridan.
Sheridan pointed out one project where their analyst wanted fewer three-bedroom units than originally proposed, and more one- and two-bedroom units instead. “We had to talk about that,” she said. “It was a very good discussion with the developer, who defended the three-bedroom number.”
Manganello Ellis agreed with the other investors on the NCHMA panel. “We need trending information in the market studies,” she said. “It’s hard to assume two percent growth rates without more studies.”
The investors also took note of the re-entrance of Fannie Mae and Freddie Mac into the tax credit market, giving it a generally positive spin.
Moderator Roger Yorkshaitis, chief financial officer of Gatehouse Group Inc., Mansfield, MA, noted the swift decline of prices when the government sponsored enterprises, which had a 40 percent share, left the market in 2008 after being placed in government conservatorship. “The price went from $1.05 to $.75 to $.72 to $.65,” he remembered. “It was not pretty.”
Now, though, “They’re back in targeted areas they’re going after.”
Landis said the agencies’ $1 billlion authority is “welcome news.” He noted the GSEs have a “duty to serve” provision targeting rural areas and that CAHER does business in rural areas.
“We’re looking at it as a very positive impact,” he said.
Sheridan said Boston Capital too has a big portfolio in rural America. “Fannie and Freddie are going to step in to fill a pocket of investment,” she said. “It’s going to be interesting to have an extra $1 billion of capital in the market.”
Landis said he expected the two to be working again with “who they have worked with in the past.” He wondered if they have an adequate staff now, noting, “they’ve been out of the market for a long time.”
He asked whether the authority to re-enter the market had come more quickly than they had anticipated and “caught them a little flatfooted.”
But Sheridan said, “they stepped up pretty quickly,” noting that Fannie has already closed its first fund. Freddie has yet to announce anything, though they are believed to be close to returning to the market.
Manganello Ellis said PNC was “excited to have them back in the industry.”
