What’s Ahead for the LIHTC Market in 2010? Answer Rests on Key Outcomes But There Are Encouraging Signs
By Caitlin Jones
7 min read
Tax Credit Advisor, January 2010: The outlook for the low-income housing tax credit (LIHTC) market in 2010 is difficult to predict because of two key questions.
Nonetheless, there are some encouraging signs. Two major corporate investors expect to invest the same if not more in housing credits in 2010 as in 2009. And some industry participants believe that LIHTC investment yields to investors and credit pricing to developers may already have stabilized in some areas.
The year 2009 was arguably the most volatile and toughest for the LIHTC industry since the program’s inception in 1987. Credit prices continued a free fall, yields jumped, and there was a severe shortage of equity as many investors scaled back their investing or left the market entirely. Many developers were unable to get any or sufficient equity, and many projects stalled.
In the spring, Congress provided a lifeline, enacting the Tax Credit Assistance Program (TCAP) and Section 1602 credit exchange program, providing billions of federal dollars for stalled LIHTC projects to enable them to move forward. It took months for federal agencies to issue full guidance for the programs and for state housing credit agencies (HCAs) to issue their own guidelines and procedures for selecting projects for assistance. But in the past couple months, state agencies have been making awards to projects in droves and getting the dollars out the door. A November survey by the Tax Credit Advisor found that 44 responding agencies so far had awarded nearly $4.2 billion in TCAP and exchange funds for 1,195 projects.
Two Key Questions
So what’s ahead in 2010?
The answer will depend heavily on the answers to two questions. First, what if any proposed tax law changes affecting the LIHTC and housing bonds that are now before Congress will be enacted? And second, what will be the strength and timing of the economic recovery?
At press time, it appeared highly likely that Congress will extend the exchange program for another year for at least “9%” housing credits. Advocates, though, hope that lawmakers, by no later than early 2010, also approve other pending proposed tax law changes designed to significantly boost LIHTC equity invest and bring new investors into the market. These include an extension of the carryback period for existing and future LIHTC investments to five years, and modification of the passive loss rules to enable owners of additional types of business entities to benefit from housing credit investments. The full carryback change as proposed would enable current investors to fully utilize their existing LIHTC investments and require them to make new investments, and provide another carrot to entice first-time investors (see p. 1 for legislative article.)
The pace and strength of the economic recovery is another key factor. If the recovery becomes robust in the first part of the year, including for the financial services sector, increased corporate profits would likely mean greater demand for LIHTC investments.
LIHTC syndicator Joe Hagan, of Chicago-based National Equity Fund, Inc. (NEF), expects that, assuming the exchange program is extended, there will be greater investor demand for housing credits in 2010. He felt that, in general, investment yields to investors will not rise any further and will start to fall. “I think that next year there’s more investors coming in, and we’re going to have equilibrium back [in] supply and demand,” he said.
Hagan estimated that the typical current yield to investors is about 10.5%, and typical credit pricing to developers somewhere between 62 and 70 cents (per dollar of credit), for “normal” markets, areas outside high CRA demand markets like New York City and parts of California. In high CRA markets typical prices are higher and yields lower.
Action by Major Investors
Meanwhile, two of the largest active LIHTC investors expect to do the same if not more volume in 2010.
Patrick Nash, of JPMorgan Capital Corporation, Chicago, anticipated that JP Morgan will make between $650 million and $750 million in LIHTC equity investments in 2010, compared to the $650 million expected for 2009 by year-end.
Beth Stohr, of US Bancorp Community Development Corporation, St. Louis, was hopeful for an increase in the amount that US Bank invests in housing credits in 2010 compared to 2009. She didn’t give a dollar figure for a 2010 budget target, noting US Bank’s budget figures relate to the amount of tax credits needed and purchased, rather than the dollar amount of equity investment. Still, Stohr said US Bank each year typically makes about $1 billion in equity investments in transactions utilizing federal housing, historic rehabilitation, new markets, and renewable energy tax credits.
Stohr expected US Bank’s 2009 LIHTC investment volume by year-end to be “flat” compared with 2008.
Equity providers said they are extremely busy in December trying to close additional LIHTC investments. They noted that closings have been delayed this year for several reasons. One is the considerable time it took to get the TCAP and exchange programs fully operational after they were enacted. The second is delays caused by the increased complexity in structuring deals that have economic stimulus funds, particularly TCAP dollars, because of tax, control, and other issues that need to be resolved.
As a consequence, Nash said JP Morgan’s 2009 LIHTC investment total would be less than the roughly $750 million invested in 2008. But he noted the company’s closing schedule is extremely busy for January and February.
Nash expected that the pattern (i.e. execution methods) by which JP Morgan invests in housing credits will remain about the same in 2010 as in 2009. This is roughly 85% through direct investments in projects and though investments in proprietary funds run by syndicators, and about 15% in syndicators’ multi-investor funds. Similarly, Stohr expected US Bank’s current pattern to continue in 2010, about two-thirds through direct investments and one-third in multi-investor funds – a reversal of the breakdown in 2007. Stohr noted that US Bank is exploring the possibility of also investing in proprietary funds, “but we’re not there yet.”
Multi-Investor Funds
Even though their market share is smaller now, there are still national and regional multi-investor funds on the street. Richard Floreani, of Carlisle Tax Credit Advisors LLC, Boston, said the company is reviewing six of nine current multi-investor funds for client investors. These six funds range in size from $40 million to $170 million, with projected yields from 10% to 13%.
The most recent edition of Corporate Tax Credit Fund Watch, prepared by Ernst & Young LLP, shows seven current multi-investor funds (six national, one regional) with projected yields from 10% to 13% and average credit pricing for specified properties from 58 to 80 cents (see p. 8 for chart). A year ago, the Corporate Fund Watch chart had data for 10 multi-investor funds with projected yields from 7.5% to 8.95% and average credit pricing from 77 to 87 cents.
Hagan, who expected NEF’s total LIHTC equity raise for 2009 by December 31st to be between $400 million and $450 million, said NEF’s business model has changed this year. “We’re doing strictly proprietary funds right now.” NEF has closed only one national multi-investor fund in 2009, down from the several a year in the past.
Hagan said NEF has had four new investors in 2009, including three – all insurance companies – new to housing credits.
Separately, Goldman Sachs announced a $61 million investment in a proprietary LIHTC fund managed by the New York Equity Fund, which is run jointly by NEF’s parent, the Local Initiatives Support Corporation, and by Enterprise Community Investment, Inc.
Goldman’s investment, made through its Urban Investment Group, will help finance LIHTC projects containing about 500 units in Harlem, Brooklyn, and the Bronx. The city is also providing funds through the New York City Department of Housing Preservation and Development.
