LIHTC Equity Market is Active in COVID-19 Environment

Published by Mark O’Meara on Tuesday, June 2, 2020
Journal Cover Thumb June 2020

While COVID-19 is affecting the global economy, low-income housing tax credit (LIHTC) investors and syndicators say the tax credit equity market is still active.

“Investors are continuing the course. They are moving forward on projects and continuing their business plans,” said David Salzman, president at Richman Real Estate Investments Inc. “There has been no knee-jerk reactions from investors. … We have seen no difference [in activity] from proprietary and multi-fund investors. Both have the same amount of activity as they did in the pre-COVID-19 market.”

“The majority of investors are business as usual,” said Christine Cormier, senior vice president of investor relations at WNC. “New construction, senior and Section 8 developments are becoming more popular. There is also a heightened focus on rehab properties with an attention to a need for detailed plans for completion amidst the pandemic. ”

“Our proprietary investors are continuing to move forward with their 2020 pipelines. Proprietary investors are as close to business as usual as you can say,” said Tom Pereira, senior vice president and director of sales and structured finance at Boston Capital. “This speaks to the resiliency of the industry.”

However, Pereira noted that a few multi-fund investors have taken a pause in the market.

Tammy Thiessen, managing director of equity sales at RBC Community Investments, is seeing a little of everything in the tax credit equity market.

“Community Reinvestment Act [CRA] investors are very much in the market. In some cases there is no difference at all [in their investor activity],” said Thiessen. “In other cases, some investors have cooled off a little and are being more targeted on specific markets with acute need while others are taking a pause.”

“We have a strong pipeline and we’re closing deals at a good pace,” said Scott Hoekman, president and CEO of Enterprise Housing Credit Investment LLC. “So far, we haven’t seen deals hit insurmountable obstacles to closing despite the new challenges in pulling together all the elements of underwriting and due diligence. Our investors continue to be active.”

LIHTC investors and syndicators continue to launch new funds.

Pereira said Boston Capital recently launched its national fund, which is CRA-focused, and is getting interest from investors. Boston Capital closed a California fund during the pandemic with no change to deal terms or tax credit equity pricing. “We are moving forward with revised processes and closing deals that have been signed,” said Pereira, who expects the market will pick up in the third and fourth quarters of 2020.

WNC recently closed a $90 million California fund as well as a $130 million national fund. “We are still seeing demand,” said Cormier. “We have plenty of investors who want to invest in affordable housing because it’s so important at a time like this.” However, Cormier said that WNC is looking to close another fund this summer and said that fund will be more telling in terms of how the market is recovering from the pandemic.

Richman Capital expects to close a national multi-investor fund in June. “We are moving forward with our pipeline and closing investments weekly,” said Salzman.

“We just closed a proprietary fund and we have a national multi-investor fund out now that is fully specified with deals and investors,” said Hoekman. “We even had a couple of additional investors come in, so it looks like that fund will be bigger than we initially expected.”

RBC Community Investments remains very active in the market, with about 10 funds in the process of closing. “All of our investors are standing by their commitments,” said Thiessen. “There has been no change to pricing or deal terms.”

While Boston Capital continues to close investments, it is also assessing its portfolio of existing developments. “We are stress testing deals with delayed construction and lower occupancy rates,” said Pereira. “On new deals, we are favoring new construction and subsidized deals. We are putting more emphasis on deals with stronger operating reserves.”

Hoekman is optimistic the LIHTC equity market will bounce back from the pandemic.

“Our market is not immune to economic change,” said Hoekman. “But we are in a very resilient and creative industry that is able to adapt to change. It has shown the ability to keep moving and get affordable housing built.”

LIHTC Equity Pricing during Pandemic

While the LIHTC equity market remains active, affordable housing practitioners have seen a drop in tax credit equity pricing.

“We are expecting pricing to drop, but really by only a few pennies [per dollar of credit]. These applications were filed pre-pandemic so they won’t support a huge drop in pricing,” said Pereira. “[But] investors will have higher yield expectations.”

Cormier agreed. “A slight yield increase will help keep business going,” said Cormier.

“CRA locations are continuing to see strong pricing and lower yields,” said Salzman. “There has been no pull back on CRA pricing.”

“Banks still have CRA needs,” said Hoekman. “There is always a distinction between CRA investors and yield/economic investors. We might see the spread widen on the economic side.”

“Pricing this summer is going to be a mixed bag. Some markets with CRA investors will have banks competing for some deals and might see no changes in pricing at all,” said Thiessen. “While in other areas, you could definitely see a cooling off in pricing.”

Rent Collections

While the affordable housing industry feared the COVID-19 pandemic would drastically affect rent collections, that hasn’t been the case so far.

Pereira said Boston Capital’s affordable housing investments collected 89 percent of rents in April. “We were thrilled,” said Pereira. “Our portfolio has been resilient.” However, Pereira added that the next couple of months will be more telling of COVID-19’s impact.

Cormier agrees. “April rent collections were on par with January, February and March,” said Cormier. “There has been no significant drop in rent collections.”

“On the rent-collection side, March and April were strong. And from May 1 through May 4, collections have been the same as March and April,” said Salzman. “We are very pleased and we are optimistic about the rest of the month [of May].”

“We are trending toward what we saw in April–a modest decline of low single digits,” said Brian Myers, president of Richman Asset Management Inc.

How COVID-19 Compares to the Great Recession

“Any time there is a major disruption to the system, people want a chance to assess the market,” said Pereira. “The falloff from COVID-19 is much steeper [than the Great Recession], but should be shorter. … We are working on how to move forward and best to protect our investments.”

“In terms of the equity market, there is a big difference between the two crises. The Great Recession was a banking crisis. This is a macro-economic crisis,” said Salzman. “Investors were dropping out of the market in 2008. The subprime mortgage market was a who’s who of tax credit investors.”

“This feels quite different from the Great Recession,” said Hoekman. “That was a financial market meltdown. … The [government-sponsored enterprises] GSEs were put in conservatorship and 40 percent of the market evaporated. Banks are stronger now than they were in 2008.”

“This came on so quickly and hit hard, but it will be shorter lived than the Great Recession. I don’t expect to see a mass exodus of LIHTC investors as a result of this,” said Cormier.

“The GSEs exited the market in the early 2000s. Then there was the Great Recession, tax reform, a government shutdown and now this [the COVID-19 pandemic],” said Thiessen. “The industry managed to get through all of these challenges. Our industry has always been resilient.”

Conclusion

As the economic consequences of the global pandemic create a greater need for affordable housing, LIHTC investors remain dedicated to the incentive.