The Right Direction LIHTC Market Appears to Be on the Upswing
By Caitlin Jones
5 min read
Tax Credit Advisor, February 2010: Will 2010 be a better year for the LIHTC industry than 2009?
At an early January conference in Washington, D.C. sponsored by the National Council of State Housing Agencies, multiple speakers à syndicators, investors, and others à predicted that the LIHTC equity picture will be much improved in 2010. Some suggested that the rebound has already begun.
“This year is going to be better than last year,” said Boston syndicator Bob Moss, of Boston Capital, expressing hope that $7 billion or so in total housing credit equity will be raised in 2010. Fred Copeman, of Reznick Group, estimated that perhaps close to $6 billion in equity was raised in 2009. This amount was significantly above the $4.5 billion projected in an Ernst & Young LLP study issued last year.
Moss and Copeman reported that in the second half of 2009, particularly in the fourth quarter, corporate investment in housing credits picked up significantly.
“We started to see more interest from investors,” said Moss. “And if you look at the projected ticket orders for both proprietary investors and multi-fund investors you’re starting to see an uptick by about 20 percent.”
“People are feeling a little bit better for 2010,” said syndicator Charles Werhane, of Enterprise Community Investment, Inc.
Copeman said the market is starting to see some new kinds of investors beyond the traditional banks and financial institutions, generally attracted by the higher yields currently available on housing credit investments. “We’re seeing some insurance companies back, some grocery market chains, some manufacturing companies, and a few high-tech companies. It’s been a long time since we’ve seen a diversity of base of investors.”
Copeman, though, warned that when yields on new LIHTC investments drop, as he expects they will as the market stabilizes, that many of the new yield-driven investors may fall away. Moss noted that the projected yield on a current Boston Capital multi-investor fund is around 10.5%.
Busy Year Ahead
Two major corporate investors in housing credits anticipated a lot of activity in 2010.
“We’re looking at increasing our [equity investment] volume a smidge” in 2010, said Beth Stohr, of US Bancorp Community Development Corporation, which invests directly in housing credits and also in some multi-investor funds. Similarly, Sindy Spivak, of Bank of America Merrill Lynch, indicated that her bank will continue to actively invest in housing credits in 2010.
Syndicator Joe Hagan, of National Equity Fund, Inc., said NEF’s goal is to raise about $600 million in equity in 2010, compared to the $385 million it raised in 2009. “It’s hard to tell where the market’s going to go, but I think we’re in a very positive swing right now.”
Syndicator Ronne Thielen, of Centerline Capital Group, said her firm expects to fully return to the market raising equity by the second quarter of 2010. Centerline raised $150 million in equity in 2009, a year in which it focused on asset management and recapitalizing the firm.
Spivak, who is also the current president of the Affordable Housing Investors Council, said her bank has a significant pipeline of deals to close going into 2010, and expected January to be as busy for closings as December was.
Industry participants noted that the year-end flurry and spillover of closings into 2010 is largely due to the federal Tax Credit Assistance Program (TCAP) and federal Section 1602 credit exchange program. After the programs were enacted last February, it took months for federal agencies to release implementing guidance and for state housing agencies to access the funds, set up their procedures and selection policies, and begins picking projects for funding awards. It wasn’t until the fourth quarter that most states were heavy into the award phase, especially of exchange funds.
Stohr said US Bank closed 15 direct investment deals that had TCAP and/or exchange funds in 2009; 13 were TCAP only. Eleven closed in December.
Elizabeth Van Benschoten, of Bank of America Merrill Lynch, said the bank funded 11 TCAP-assisted deals and two exchange-assisted deals in 2009. “Looking forward to 2010, I see a lot more deals in our pipeline [with] exchange funds.
Continuing Major Role
Speakers predicted that the exchange program will continue to play a significant role in the LIHTC market in 2010, whether or not it is extended.
Investors and syndicators implored state agencies to use their remaining exchange funds as “gap fillers” for projects in 2010. This could provide partial awards of exchange funds to projects, rather than 100% awards, and thus spread the exchange funds around to assist a greater number. “Think about it as equity, not a loan or debt,” Hagan said.
Gap financing will be particularly critical to getting LIHTC deals done in 2010, a year in which there won’t be any additional TCAP dollars, and in which stringent underwriting criteria will continue to be applied by both equity and debt providers.
Speakers asserted that the public-private partnership that has been the heart of the success of the LIHTC program needs to be maintained, and that partial exchange deals is one way to do this.
Disparities to Persist
Industry officials cautioned, however, that even if more tax credit equity is raised in 2010, certain “flyover” markets in the country and certain kinds of deals à rural, special needs, etc. à are likely to continue to have a tough time finding equity. Credit pricing disparity is likely to continue, unless Congress enacts pending proposed tax law changes to make the program more attractive to investors.
Several speakers also suggested that changes to the current accounting rules for housing credit investments, as well as some modifications to the federal Community Reinvestment Act, would likely help attract more investors to the LIHTC and get equity to places where it is now scarce.
