Stability at Last: LIHTC Multi-Investor Fund Yields, Credit Pricing to Developers, Hold Steady

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The low-income housing tax credit (LIHTC) market appears to have stabilized, with yields on national multi-investor funds and tax credit pricing to developers generally the same as in April.

Richard Floreani of Carlisle Tax Credit Advisors, which reviews LIHTC funds for client institutional investors, says projected after-tax yields on current national multi-investor LIHTC funds “are pretty tightly clustered” around 7.25 to 7.50 percent.

Indeed, the latest edition of Corporate Tax Credit Fund Watch, prepared for Tax Credit Advisor by Ernst & Young LLP, shows nine national funds with yields ranging from 7.25% to 7.50% and two outliers at 7.0% and 7.70%, for an average yield of 7.314% (see p. 30 for chart). The previous version of Corporate Tax Credit Fund Watch, published in the April issue of the magazine, showed 10 national funds with yields ranging from 7.0% to 7.70% for an average yield of 7.335%.

“CRA (bank) investors continue to remain very active and economic investors are re-visiting the asset class given the improving yield environment,” says Sarah Laubinger of Boston Financial Investment Management. “However, the capital market generally remains limited and the syndicator space is crowded so competition among sponsors is very high.”

“Investor demand among banks is good,” says Marc Schnitzer of syndicator R4 Capital, Inc. “Among insurance companies, the demand’s okay; it’s not great.”

“On the CRA side,” says Steve Kropf of Raymond James Tax Credit Funds, Inc., “demand from major banks continues to be strong, and midsize and large regional banks are also coming off the sidelines as capacity increases.”

Tony Bertoldi, of City Real Estate Advisors, Inc., cited a “slight uptick in demand from investors, both banks and insurance companies,” suggesting that some may have felt they needed to begin allocating their investment dollars after holding off at the beginning of the year to see where yields on funds settled out.

Syndicators generally reported that a resurgence of insurance company investors back into the LIHTC market that some expected when multi-investor yields rose to 7% and above really hasn’t materialized. In 2011, when yields on such funds ranged upwards of 10%, many insurance companies were active investors in housing credits.

Schnitzer noted that insurance companies don’t have an imperative to make LIHTC investments because, unlike banks, they are not subject to the Community Reinvestment Act (CRA) and therefore are not motivated by CRA to make such investments.

“There are a few returning investors (primarily insurers) that we’ve seen come into the market in the first half,” says Floreani. “But there hasn’t been a dramatic shift…There are still quite a few investors that remain on the sidelines.”

Ben Mottola of Stratford Capital Group suggested that since the beginning of the year the yield expectations of economic/multi-fund investors has increased by about 50 basis points.

 

Deal Supply, Credit Pricing

The apparent end to the rise in yields on national multi-investor funds has been one positive for syndicators, whose margins have been squeezed due to little compensating decline in pricing to developers.

Another is a larger supply of new deals with recent 9% credit reservations; a number of states have made such awards, including California. “With the recent awards, there is a large and growing amount of credit in the market,” says Jeff Goldstein of Boston Capital.

The old relationship between greater supply and lower pricing doesn’t appear to be holding true, though. “We have yet to see much of an impact in terms of lower credit pricing due to the increased supply of deals,” says Raymond James’ Steve Kropf.

Sources said the competition for new 9% deals, both in “hot CRA” markets and in non-CRA markets, continues to be heated.

Beth Stohr, of U.S. Bancorp Community Development Corporation (USBCDC), a major LIHTC investor, reported that oftentimes a deal will get bid on by direct investors and syndicators trying to fill proprietary and/or multi-investor funds. USBCDC, which currently invests in housing credits about 70% through direct investments and 30% in multi-investor funds, is on track for 2013 LIHTC investment volume of the same or slightly higher than in 2012, said Stohr, who declined to provide a figure. However, she said that the expected total 2013 volume by USBCDC from housing, historic, new markets, and renewable energy tax credit investments should exceed $1.5 billion. Parent U.S. Bancorp is mid-way through its three-year CRA cycle, Stohr said.

Tammy Thiessen and Craig Wagner of RBC Capital Markets’ Tax Credit Equity Group reported that they have been successful finding investors for their multi-investor funds. “The biggest challenge,” Wagner says, “is finding good quality product that is priced right for multi funds.”

“We’re seeing pricing range from the mid-80s [cents per dollar of tax credit] to over one dollar, based on the deal’s size and location” says Boston Capital’s Jeff Goldstein. “We haven’t seen any significant shift in pricing over the past three months.”

According to Raoul Moore of Enterprise Community Investment, Inc., “There’s a large disparity between pricing in CRA markets versus non-CRA markets, resulting in pricing ranging from the low 80s up to $1.10.”

 

Steps to Boost, Maintain Yields

Syndicators are trying a few things to try to produce sufficiently high yields on multi-investor funds to attract insurance companies and other “economic” investors motivated primarily by financial return.

A number of current multi-investor funds have two classes: one offering a higher yield to investors making large investments, generally of at least $20 million or $25 million, and a second offering a lower yield for smaller amounts. Insurance companies investing in the large annual regional fund of Great Lakes Capital Fund, for example, “generally like to invest at the twenty to twenty-five million dollar level,” says GLCF executive Marge Novak. GLCF’s current $100 million fund, which will invest in properties in five states, offers a 7.75% yield for investments of $25 million or more and 7.50% for smaller investments. Separately, GLCF also sponsors “state community funds” which invest in properties in one state, target community banks, and feature a lower minimum investment amount. GLCF has done two of these funds each so far in Michigan and Indiana.

Another step taken by many to offer attractive multi-investor fund yields is to try to acquire properties mostly or entirely in non-CRA markets where credit prices are lower, and largely avoid the “hot CRA” markets such as New York, Los Angeles, and San Francisco where new deals can fetch well over a dollar per dollar of tax credit as banks – or syndicators looking to fill proprietary funds for banks – aggressively bid up prices.

For example, The Richman Group will be targeting projects in Hawaii, Puerto Rico, Mississippi, West Virginia, and Michigan for a new $125 million national multi-investor fund that it is pre-marketing, said executive Stephen Daley.

Finally, some sponsors are blending a bit of existing LIHTC investments – “secondary” product – into their new national multi-investor funds. “In our last two multi-investor funds we’ve had a small amount of secondary product to blend in with primary market product,” says executive Ryan Sfreddo of Red Stone Equity Partners. Mixing in secondary product can sometimes boost the overall yield and reduce construction and lease-up risk for investors, and provides for some immediate credit flow.

 

Potential Accounting Rule Change

Industry participants are eagerly hoping for approval in the near future of an accounting rule change that many syndicators believe could boost corporate investment in housing credits.

In mid-April, the Financial Accounting Standards Board Emerging Issues Task Force issued an “exposure draft” for public comment proposing changes to accounting rules to expand the ability of public companies to utilize the effective yield method to account for non-guaranteed LIHTC investments. At present this method is allowed for guaranteed LIHTC investments but not for non-guaranteed investments. FASB received 73 comment letters, which it has posted online (go to http://tinyurl.com/ooo6r6y). FASB’s EITF next meets September 13 when it might discuss the issue further.

Syndicators generally feel that adoption of the accounting rule change would benefit the LIHTC equity market by both attracting new or returning corporate investors and by prompting some current investors to invest more.

“Investors are reacting favorably” to the proposed change, says R4 Capital’s Marc Schnitzer. “We’ve spoken to a number of investors who have not historically invested in housing tax credits that are looking at getting into the market once the accounting treatment changes. We’ve also spoken to a number of investors who are considering increasing what they’re doing in response to that.”

Schnitzer suggested that adoption of the accounting change, by boosting investment demand, could potentially cause a decline in LIHTC multi fund yields. “If demand grows, you’d expect yields to go down,” he says. “We’re suggesting to investors that current yields might present a pretty attractive opportunity based on where things might be at the end of the year or the beginning of next year.”

Sfreddo said another issue the industry is focusing on is potential CRA reform, which could possibly liberalize the current rules and make it easier for banks to get CRA credit for LIHTC investments in projects outside their service areas. Several months ago federal banking regulators solicited comments and suggestions from the public for changes to enhance CRA requirements.