Difficult Time for Debt Market, Agree Panelists at LIHTC Conference in New Orleans

Participants on the Debt Insights and Troubleshooting in a Tough Environment panel that I moderated at the Novogradac 2023 Housing Tax Credit and Bonds Conference in New Orleans on Sept. 28-29 agreed that the title of the discussion was appropriate.

The panelists discussed various challenges and the trends they are seeing from professionals in the industry as to how they navigate the difficulties of a debt market that is experiencing intense volatility.

Jon Killough, executive vice president with Bellwether Enterprise and one of the four panelists, pointed to the U.S. Department of the Treasury’s 10-year interest rate hitting a 15-year high as proof of the volatility. Killough said transactions closing now are ones that must, ones that carried their allocations of low-income housing tax credits (LIHTCs) forward as long as they could.

Suzie Cope, managing director with Lument and one of the panelists, echoed this. Cope said many of the transactions closing this fall started nine months to a year ago and have such a large amount of pre-debt financing that it makes more financial sense to move forward. Cope said acquisitions–often involving debt assumptions–are less frequent and, even less frequent have been refinancings. Cope said she’s seeing more equity into transactions at the acquisition point than before.

4% LIHTC, Workforce Housing Filling the Gap

Cope said 4% LIHTC transactions and workforce housing have risen to fill some of the gaps in the market that a decrease in debt-financing affordable housing created. Killough agreed, saying workforce housing is on the rise, as is market-rate housing. Evan Blau, a partner with the law firm Cassin & Cassin LLP and another of the panelists, concurred, saying he’s seeing a lot of investment in the 80% to 120% of the area median income range.

Chris Eisenzimmer, president of North Carolina-based developer Blue Ridge Atlantic and conference panelist, said both 4% and 9% LIHTC transactions are needing high per-door amounts of soft loans and subsidies in order to pencil. Eisenzimmer said Blue Ridge Atlantic has experienced market-rate developers offering to sell portions of a larger chunk of land to affordable housing developers. Blau echoed these sentiments.

Impact of Fannie and Freddie

When it comes to debt possibilities from the federal government, Cope said when evaluating Fannie Mae and Freddie Mac transactions, she has seen Fannie delivering strong pricing on market-rate transactions while Freddie has come up with creative structuring solutions for more complex affordable housing transactions.

Freddie’s options provide stability. Eisenzimmer supported Cope’s statement, saying that every transaction Blue Ridge Atlantic has done in the past two years involved Freddie due to the need to remove as many variables from the transaction as possible. Freddie’s index lock, which allows borrowers to freeze the Treasury index and therefore alleviate the complications of interest rate volatility, and spread lock takes the first mortgage rate risk off the table. Eisenzimmer said buying construction materials in advance and index locking the debt sizing is beneficial. Killough said index locks have increased in frequency over the past five years.

Creative Solutions

Cope noted that for U.S. Department of Housing and Urban Development (HUD) loan transactions, the interest-rate reduction option is appealing. The option gives developers the chance to lower their rates if interest levels fall from the current rates. Eisenzimmer said while the interest rates of HUD are appealing, the market volatility has made HUD transactions less appealing due to the tight timelines of some state housing finance agencies to close transactions.

Killough said instability in interest rates has forced creativity in transactions. On one acquisition-rehabilitation, Killough reported a rate drop of half a million dollars for one borrower. He encouraged the developer to reconvene with the state housing finance agency to see if a valuation allowed for an increase in the amount of tax credits and, further, contacting the syndicator to gauge interest in the additional tax credits.

When the discussion moved to rising insurance premiums, Eisenzimmer said Blue Ridge Atlantic has explored several insurance policy structures, as a way to offset the recent increases owners have seen. Another tool is incorporating renters’ or tenant insurance programs within the transaction with the goal of addressing smaller claims at levels below the primary policy.

In closing, the panelists agreed that proactivity and building a reliable team are two helpful methods to combat volatility in the debt market.

“Get in front of everything and, I always say to my team, don’t sit back on transactions,” Blau said. “Be proactive.”

Continue Learning

The Novogradac 2023 Housing Tax Credit Finance Conference in Las Vegas on Nov. 30 to Dec. 1 is fast approaching. Network with industry leaders by registering here. You can also stay up to date on affordable housing trends by subscribing to the Novogradac Journal of Tax Credits.