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Affordable Housing Experts Expect LIHTC Equity Pricing Increase into 2022
Although the pandemic and supply-chain issues have presented certain challenges for development in general, the affordable housing world continues to persevere and stay active, said a group of panelists at the April 29 equity marketplace trends session of the Novogradac 2021 Affordable Housing Virtual Conference.
Novogradac partner and panel moderator, Rachel Denton, MAI, led a discussion that covered everything from the state of the low-income housing tax credit (LIHTC) investor marketplace to current developer challenges.
Panelists reported that affordable housing development has been largely stable during the pandemic.
“It’s a really good sign that the market is still really active and our clients are all really actively looking at deals and closing deals,” said panelist Alisa Kennedy, a partner with Dentons in the tax advantage investing group, who frequently represents LIHTC investors. “I think deals took a little longer to close and certainly there were times when some of our clients had a longer investment committee approval process and maybe additional layers of review and approval. With the exception of maybe one deal, everything got closed.”
Panelist Cat Vielma, senior vice president of acquisition for Red Stone Equity Partners, said 2020 was similarly a solid year for her organization, with $780 million of LIHTC equity raised for 73 affordable housing properties in 26 states, which were on track with Red Stone’s growth goals. “Pretty much every deal that we bid on in 2020 did not close the way it started, but they did close,” said Vielma. “Most of us will see a little bit of growth this year, mostly due to the 4% [LIHTC] rate lock that happened. … Interest rates helped deal feasibility, too, especially with the fact that equity pricing did slide a little bit in 2020.”
Tax Credit Equity Trends, Pricing and Yields
Pricing for the 4% LIHTC equity is largely being affected by the minimum credit rate established as part of year-end spending legislation in December 2020. “I think right now there’s just a surplus of credits in the marketplace, but I think investors are working through that,” said panelist Cory Bannister, a senior vice president in charge of acquisitions for national syndicator R4 Capital. “I think calendar year 2021, once we get through the slug of credits and people get their funds out to the marketplace, I do think pricing will tend to increase moving into 2022 just because the current supply would have been worked through.”
Two looming, potential changes that could affect LIHTC pricing in the long-term future are Community Reinvestment Act (CRA) reform and corporate tax reform. However, panelists say that while they frequently get asked about CRA reform and corporate tax reform, they caution that the mere possibility of reform will not affect pricing. “Until something is signed into law, investors aren’t going to price differently,” said Vielma.
Panelists also noted a change in transaction size. “These 4% deals are huge now,” said Bannister. “It used to be you would do a $20 million equity deal once a year and it would be a party, and now, it seems just the way regulations are structured, the way the allocating agencies are allocating credits, there are $20 million equity deals all over the place now.”
In terms of investor yield, panelists say multi-investor funds are generally in the 7% to 8% yield range, but there are many variants. The upper tier is somewhere between 5% to 6.25%, depending on the size of the investment in the fund.
“Yields were pretty constant and a lot of our clients were at the end of their [CRA] cycle, so that causes the yield to go up slightly at times and for pricing to go down a little bit in CRA deals when there’s not as much need,” said Kennedy. “So now we’re starting fresh and we’ll see what happens.”
In addition to discussing financing trends, panelists covered other key issues and challenges facing the affordable housing community. One particular challenge in the pandemic era has been educating first-time LIHTC participants. “The one delta that has been hard is when you’re working with first-time developers who are new to the tax credit world or pivoting from other kinds of properties to the tax credit, there’s a whole lot of trust in this process,” said Vielma. She said building trust with new LIHTC participants while conveying the intricacies of the LIHTC process, documents and risks through virtual meetings can be difficult.
Bannister agreed. “The fundraising side of the business was great for repeat investors, but bringing in new investors into the marketplace where there’s a tremendous amount of supply has been tough,” said Bannister.
Developers also face the challenge of increasing construction and material costs, as well as other supply-chain obstacles. For example, Bannister said the skyrocketing cost of lumber puts “a lot of pressure on getting deals closed,” with some developers possibly seeing lumber costs increase as much as $500,000 to $1 million per development.
These construction issues are now commonly factored into partnership agreements. “Negotiating partnership agreements with lower tiers, I don’t think we negotiate one deal where we don’t talk about change order authority, contingency and how all of that gets handled–trying to increase the limits so that developers have more authority on an individual basis, on an aggregate basis, on changing materials,” said Kennedy. “That seems to be consistent on every single deal I’ve seen in the last couple of months.”
Panelists warn that even as the economy starts to recover, building costs will likely stay high and the industry might have to reevaluate what building methods and materials can be used.
Overall, panelists were optimistic that affordable housing developments will continue to get done. “Be bullish on affordable housing,” said Bannister. “I think the end of 2021 and into 2022 is going to be a great year for everyone in the industry.” He cited proposals to increase affordable housing funds at the federal level, a potential increase in LIHTC equity pricing, a likely increase in tenant rents and other factors as reasons developers should position themselves in the next 12-24 months for the upside and make transactions work.
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