LIHTC Equity Market Stabilizing Four Months into COVID-19 Pandemic 

Published by H. Blair Kincer on Tuesday, July 28, 2020 - 12:00am

Claude Debussy, among the most influential composers of the late 19th and early 20th centuries, famously said that music is the silence between notes.

The same can be said for low-income housing tax credit (LIHTC) analysis. While the first of the significant pandemic-related factors have resonated throughout the sector, we await the next round of indications for further clarity.

Four months into the COVID-19 pandemic and notes of data show a stabilizing tax credit equity market.

“The equity market certainly has settled down. There is more certainty in the market,” said Tom Pereira, senior vice president of structured finance at Boston Capital, a LIHTC syndicator. “On average, pricing moved downward about 2 to 4 cents on a per credit basis.” Pereira elaborated and said that there is still demand for Community Reinvestment Act (CRA) considerations. 

Vihar Sheth, director of business development for equity at U.S. Bancorp Community Development Corporation (USBCDC), is seeing a similar trend.

“In some ways, pricing appears more stable today than it did at the start of the pandemic,” said Sheth. “The price per credit was dropping 1 cent about every two weeks. That has stopped and should hold for the summer. The question now is about investor demand.” Sheth added that investor yields have increased since the start of the pandemic.

“We are still somewhat assessing the market,” said Anil Advani, executive vice president of originations and finance at WNC & Associates. “Things are moving forward with both [of our] property closings and fund closings occurring.  That’s a positive. We can get business accomplished.”

Advani said that pricing is about the same as it was in April. “We saw a little dip in pricing before COVID-19 that continued through the start of the pandemic. That has now leveled off and there has been no further dip in pricing.” In terms of yields, Advani is seeing yields increase by 50 basis points.

Recent Novogradac data supports these observations. The price per credit (weighted average) was 94 cents in March and 93 cents in April and May. This indicates that the LIHTC equity market is stabilizing.

Pereira said that Boston Capital remains active in the equity market despite the disruption of COVID-19. “We are actively bidding on deals, putting together our Fund 50 now,” said Pereira.  “We are happy with our portfolio’s performance through the pandemic.” He said that yields have increased in order to keep investors active in the equity market. Pereira is seeing 5 percent yields for CRA investors and 6-plus percent yields for economic investors.

But, are yields high enough to attract new investors to the equity market?

“I don’t know if yields are high enough to attract new investors,” said Sheth. 

“Yields and prices are not high enough to get new investors coming to the market,” said Pereira.

Therefore, we are in a period between data points as the market processes this answer.

Presidential Election

Industry participants are anticipating how November’s presidential election may affect the LIHTC equity market.

“If we transition to a new president or have Trump for a second term, I could see yields going back down,” said Sheth. If Trump is elected to a second term, Sheth doesn’t anticipate another shock to the LIHTC equity market like the one we saw as a result of tax reform. “It could be volatile in the short-term—three to nine months—but I don’t anticipate a two-to-three year malaise,” said Sheth.

Advani and Pereira have similar expectations.

“There will be no dramatic adverse impact to the LIHTC [after the November elections],” said Advani. “It’ll be different this time [compared to when Trump was first elected and began tax reform]. The industry will not suffer the same overnight LIHTC drop. If anything, the credit value will be enhanced.”

“We are not anticipating any major structural changes to the credit,” said Pereira.

Sheth sees ample support for the LIHTC incentive.

“The LIHTC has bipartisan support and continues to be the favorable way to finance affordable housing,” said Sheth. “With a Democrat or Republican president, at some point the corporate tax rate will have to go back up. This means people will need more credits.”

Contrary to other impacting factors, this data point will not unfold until November.

Rent Collections Continue to be Strong

At the beginning of the COVID-19 pandemic, affordable housing practitioners were worried about rent collections.

Four months later and rent collections remain strong.

“I am happy to report that things are going well in that regard,” said Advani. “Rents are being collected at basically the same levels as the pre-COVID-19 environment. Similar numbers are being reported and things look good.”

“In general, rent collections were good through the first four months of the pandemic. No projects in our portfolio are at risk of default but we are starting to see some deterioration, and there are some pockets with double digit drops in rent collections,” said Sheth. “This is a slow moving tsunami; does government subsidy run out before the economy stabilizes?” 

Pereira said that Boston Capital’s portfolio is operating well. In March Boston Capital collected 95 percent of its rents, then just under 94 percent in April, just over 94 percent in May and Pereira expects Boston Capital’s June numbers to look the same as they did last year.

Conclusion

These notes of data show that the LIHTC is a resilient incentive.

“Things are moving forward in a positive fashion, projects are getting done and funds are closing,” said Advani. “We continue to raise investor capital.”

For several of the impacting trends we are between data points and await to see the full impact of the notes of data. Novogradac will revisit the state of the market in future blog posts.