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High Demand, Split Market Create More Competition for Low-Income Housing Tax Credits

Published by Mark O’Meara on Friday, November 1, 2013

Journal cover November 2013   Download PDF

Investors and syndicators have described today’s low-income housing tax credit (LIHTC) market as “thriving” and “hot.” A limited number of available credits has Community Reinvestment Act (CRA)-motivated investors and economic investors competing among themselves and with each other. This competition is, once again, pushing credit prices above the dollar mark and lowering yields. Investors also voiced concerns that competition, along with policy uncertainty, may be preventing potential new investors from entering the marketplace and that the differing goals of the CRA-motivated and economically motivated investors may be creating two distinct markets.

These conditions may seem familiar to affordable housing veterans. Investors at U.S. Bank and syndicators at Stratford Capital have seen very few changes in the marketplace during the past six-to-12 months.

“There is no shortage of good projects to invest in,” said Marc Schnitzer, president of R4 Capital Inc. “There is always a strong market for deals that have good developers, are well underwritten and located in markets with a solid rental advantage.”

Two Distinct Markets
Investors report that the market is divided into a CRA market and an economic investor market, and credit prices are the main difference between the two. Investors have described the split market as “erratic,” “bifurcated” and “mottled.” Beth Stohr, director of affordable housing tax credit investments at U.S. Bank, referenced the now widely used industry phrases “CRA hot” and “CRA not.”

“The market is divided by frenzied CRA investors and non-CRA investors,” said Stohr. “The main differential is in the [tax credit] pricing.” Stohr says economic investors are paying in the high 80s for LIHTCs and CRA-motivated investors are paying more than $1.

While CRA-motivated investors and economic investors occasionally compete for the same deals, they typically have different standards and compete in different markets. Big city markets such as New York, Chicago, Boston, Los Angeles and San Francisco have CRA investors bidding up the credit price to about $1 to $1.10, said Christine Cormier, WNC’s senior vice president. R4’s Schnitzer says LIHTCs in high CRA-motivated areas go for the high 90s to more than $1 per credit. In non-CRA markets, he has seen credit prices in the low- to mid-80s. Michael Lavine, executive vice president of tax credit equity at Wells Fargo Community Lending and Investment, reports that CRA-motivated investors are spending as much as $1.15 per credit. In non-CRA markets, Lavine has seen LIHTCs sell for as low as 80 cents per credit.

“There has always existed a bifurcation of demand between projects located in core CRA markets and those in secondary or tertiary locations,” said Terce Sandifer, senior vice president and director of originations at Union Bank. “We have found that pricing for projects in secondary/tertiary markets, or for projects where a bank is structurally constrained (i.e., most bond deals) from participating in the debt as well as the equity financing, are yielding better returns and commanding lower pricing per credit.” Sandifer added that most CRA investors are interested in projects where they can maximize their CRA return, and that this drives demand for 9 percent deals in core markets where the investor can provide both debt and equity.

Higher tax credit prices translate to lower yields. Cormier and Stohr say yields have been shrinking during the past few years. They report that CRA-investors are receiving yields at roughly 4.5 percent in highly sought-after CRA markets. Conversely, economic investors and syndicators of multifund deals report yields of approximately 7.5 percent. Economic investors are buying LITHCs at a substantially lower rate than CRA-investors. Steve Kropf, president and CEO of Raymond James, says LIHTC prices for some multifund deals are as low as the low 80s.

“[Tax credit pricing] really is dependent on where the property is located and what motivates the investors,” said Lynn Ambrosy, vice president of community investments at Aegon USA Realty Advisors, who is seeing multi-investor funds receive yields in the mid-7 percent range. “Acquisition yields have slowly increased in response to investor demand, but appear to be leveling off.”

As the LIHTC equity market began to recover from the recent recession, high yields and lower tax credit prices attracted economically motivated investors from outside the financial industry. Stohr has seen these investors back off. “There are not a ton of new investors,” she said. “There was a big burst of investors when the market crashed, who were very opportunistic. They have filled up their buckets and now they are waiting on the sideline.”

“In multi-investor funds, syndicators are getting squeezed in the middle. This can’t go on forever,” said Ben Mottola, president at Stratford Capital. “Economic investors have specific yield requirements. They are dictating the yield. If you can’t meet their yield, they will go somewhere else. If economic investors start asking for 8 percent yields then there will be a ripple effect through to the pricing side.”

With the 2013 calendar year winding down, Mottola anticipates very little change in the market as CRA-motivated investors have used up their annual budgets and economic investors close up their allocated capital.

The Future of the Marketplace
At Novogradac & Company LLP’s Affordable Housing Conference last month, Ronne Thielen, R4’s executive vice president, said that the future of the LIHTC marketplace depends on a few key factors including the looming possibility of tax reform. Thielen said another key factor will be how the accounting changes being considered by the Financial Accounting Standards Board’s (FASB’s) Emerging Issues Task Force (EITF) in Issue No. 13-B “Accounting for Investments in Qualified Affordable Housing Projects” will be interpreted. “Hopefully, soon the accounting issue will be resolved. This keeps other investors out of the market. It’s sort of a ‘wait and see,’” said Thielen. “When that is resolved, smaller regional banks and other corporate investors may re-enter or enter the market.”

When asked about the LIHTC market’s future Ambrosy said, “I think yields will stay relatively stable, possibly decline in the next six to 12 months, but this is very hard to predict due to the various other factors in play ... The FASB ruling could, among other things, bring new investors into the market and push some of the traditional non-bank investors to the sideline. Investors want to know when (and how) FASB will rule on EITF No. 13-B regarding accounting for qualified affordable housing projects.” The next meeting where the EITF could approve this measure is Nov. 14. (For more information on this topic, see page 9.)

Kropf, of Raymond James, says that many investors who have not returned to the market may be waiting for these issues to be resolved before actively participating again. That said, as investors and syndicators await answers to these questions, they anticipate that 2014 won’t look much different from 2013. [The equity market will look] largely the same in 6 months based on pricing we are seeing and funds currently launching,” said Kropf. “Where it will be in a year will largely depend on how the events [mentioned] above may play out and how they ultimately affect credit demand.”

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