Improved LIHTC Equity Information Can Lead to Better Decisions

Published by H. Blair Kincer on Friday, February 2, 2018
Journal cover thumb February 2018

Legendary detective Sherlock Holmes said it best in Sir Arthur Conan Doyle’s novel “The Adventure of the Copper Beeches.”

“Data! Data! Data! I can’t make bricks without clay.”

What was true for a 19th-century fictional detective is true for affordable housing: Data is all-important. When it comes to measuring the equity pricing for low-income housing tax credits (LIHTCs), better data leads to better understanding.

Novogradac & Company LLP provides that. To improve the way Novogradac tracks and reports on LIHTC equity prices, the LIHTC equity pricing information published in the Novogradac Journal of Tax Credits and online at www.novoco.com will now come from a voluntary monthly survey of syndicator and investor tax credit pricing. The information will provide even better industry insight and demonstrate the marketplace trends, both at the micro and macro levels.

The understanding of equity and equity pricing can help guide understanding and effects of policy, as well as a glimpse at what proposed changes could mean for affordable housing production.

We already know many issues concerning equity prices, based on our longtime efforts to understand the marketplace. This change is simply an improvement.

Previously, we learned that location, Community Reinvestment Act (CRA) eligibility and the Great Recession were significant to pricing. 

In recent topsy-turvy months, more factors became evident: The mere threat of tax reform dropped the value of tax credit equity immediately following the election and then again during the months of Republican-led tax reform legislation as some investors went to the sidelines and others cut back on their business. Interestingly, while most markets were affected, those covered by the CRA–the federal requirement that banks invest in underserved areas where they operate–were less so.

There are obviously other ongoing factors, many of which we will measure even better in coming months. Some are dependent on policy and tax burden, while others relate to more specific issues.

Risk is obviously a key determinant of value of any investment. In the LIHTC world, the risk of recapture is a common concern. Recapture includes several other factors that affect the perception of risk for the investor–specifically the experience and financial strength of the developer and the market where the property is located. Strong developers attract more investor interest and a strong track record provides comfort to investors that the property will be properly leased and maintained.

While evaluating a specific market, investors often analyze such things as the local economic environment, the attributes of the specific site and the advantage compared to the market-rate rents in the region. The understanding of a local market–including whether the property is specialized affordable housing (such as veteran or senior properties) can help evaluate the potential risk.

In addition to geographic considerations, other LIHTC equity price considerations are in play. One is whether the housing gains preference under a state’s qualified allocation plan (QAP), a factor that may come into play for investors with specific priorities or appetite for a type of property. And as said earlier, properties in desirable CRA markets are more attractive to investors.

Perhaps the most obvious factor in demand for tax credits is the investor’s tax obligation. The drop in the top federal corporate rate from 35 percent to 21 percent due to the recently passed tax bill clearly has an impact on the appetite for federal credits, for instance, although we have yet to see how much. The legislation created a new tax: the Base Erosion and Anti-abuse Tax (BEAT), which is likely to lead many multinational companies to reconsider investing in tax credits–potentially remarketing all or a portion of their existing tax credit investment portfolio. 

“We have seen a few deals blow up because the investor pulled out at the last minute over concerns of the impact of BEAT on the LIHTC,” said David Salzman, president of Richman Real Estate Investments Inc. “There are likely to be other investors who will pull back from the market because of the BEAT.” 

The BEAT is a complex issue and how it will affect equity pricing is undetermined. It is expected to require taxpayer- and situation-specific analysis and therefore may not affect entire classes of investors uniformly. Many investors are evaluating this issue, which we will watch closely.

Equity prices matter because they affect the amount of equity in a specific development. That affects how much debt a developer must assume. More equity can provide funding for more apartment units, more features and/or greater services.

Information is king in decision-making.

With Novogradac & Company’s expanded and improved LIHTC equity-price-tracking effort, we will provide more and improved information to help guide investments and to understand what affects the market and how much it does so.