Presidential Election, Impending Tax Reform Create Uncertainty Among LIHTC Participants

Published by Mark O’Meara on Wednesday, January 4, 2017
Journal thumb January 2017

Comprehensive tax reform is on the minds of low-income housing tax credit (LIHTC) industry participants now more than ever. With President-elect Donald Trump to take office Jan. 20, the industry is waiting to see what tax reform may look like, creating a level of uncertainty in the LIHTC market. 
 
“The election of Donald Trump, with Republican control of both houses of Congress, raises the probability of significant tax reform,” said Todd Crow, executive vice president, manager of tax credit capital at PNC Bank. Crow said the uncertainty surrounding tax reform has been a bit disruptive to the market since the election. 

“I believe there is broad bipartisan support of the credit. It will survive in some form,” said Michael Lavine, executive vice president at Wells Fargo. “How will tax rates get adjusted? … All the traditional things that we think and worry about are dwarfed by tax reform.”

Christine Cormier, senior vice president of investor relations at WNC & Associates, agreed, saying, “The low-income housing tax credit is a permanent part of the tax code. The election won’t make the program go away, but how will it be affected?” 

Lowering the Corporate Tax Rate

With impending comprehensive tax reform, industry experts expect the corporate tax rate to potentially lower from 35 percent to 15 percent over a period of time. “For tax credit investors, [lowering the corporate tax rate] has significant implications. To offset the effects of lower rates, the price paid for tax credits must be reduced,” said Crow. “The lower the marginal tax rate, the greater the impact to tax credit pricing. Many LIHTC developments will require new funding sources to offset the reduction in equity proceeds. Sadly, those that are unable to identify new sources may not go forward.”   

Crow said that just the uncertainty regarding tax reform is having real implications on the industry. “In the current pricing of projects, investors seem to be pricing a significant reduction in marginal tax rates from tax reform,” said Crow. “We may look back on this period and conclude that the uncertainty surrounding possible tax reform was worse for the LIHTC equity market than the actual results.” 

Cormier worries that if the corporate tax rate drops too low, “then alternative investments may start to look more favorable, which would pull money away from the market.” With this uncertainty, Cormier said some investors question whether they should invest now or wait until there is more certainty in the market. 

Strong Market in 2016 

While the election results brought questions about tax reform, the LIHTC industry had a strong 2016. “Up until six weeks ago, this was probably the strongest equity market for the tax credit I’ve seen in 20 years,” said Crow. “But for the market’s reaction to possible tax reform, this is one of the most robust LIHTC markets ever.” Crow added that 2016 was one of PNC Bank’s best years as well. 

Vihar Sheth, director, business development at U.S. Bancorp Community Development Corporation (USBCDC), called the market “very robust.” “As long as the credit exists, we will continue to see more demand,” said Sheth. 

Lavine said, “There was strong demand across the entire market in 2016.” In 2016, Lavine saw credits go for between the mid-$0.90s up to $1.25 per credit, depending on the sponsor and location of the development. And, he saw yields vary from development to development, from 3.5 percent up to 6.5 percent. But due to the implications of impending tax reform, Lavine said, “this feels like ancient history at this point.” 

“There is still extremely competitive investor demand for credits,” said Jeffrey Goldstein, executive vice president, chief operating officer at Boston Capital. “Demand still outpaces available credits.” Goldstein sees credits go from the high 90-cents per credit up to $1.20 in the hot Community Reinvestment Act (CRA) markets. In terms of yields, he said investments in CRA markets can be as low as 3 percent, while Boston Capital’s multi-investor funds have yields ranging from 4 to the mid-5s. He added that yields have increased a bit in the last six months, which is bringing some economic investors back in to the market. He is seeing less disparity between CRA and non-CRA markets. Boston Capital is a syndicator that raises about $850 million in LIHTC equity annually. 

“Before the election, there was a strong market,” said Cormier. “Developers were getting good pricing for credits.” WNC, a syndication firm that runs two national funds and one California fund each year, raises $400 million in equity annually. Cormier sees credit prices range from the mid-$0.90s to $1.08 per credit in WNC’s multi-investor funds. “The gap between CRA and non-CRA markets has really shrunk. There is not a lot of price differentiation except for really hot CRA markets,” said Cormier. “There is no such thing as a fly-over state now.” Cormier added that yields leveled off. In WNC’s national funds, yields range from 5 percent to 5.25 percent, while the yields in its California fund range from 4.25 percent to 4.5 percent. Cormier said that WNC just finished the best year in the company’s 45-year history.

“Until the election sparked increased discussion of tax reform, tax credit pricing was more than $1 in almost every market,” said Crow. In strong CRA markets, Crow sees credits go for $1.10 or higher. He sees yields at around 5 percent. However, Crow isn’t certain what pricing will be moving forward. “The market hasn’t found its footing yet. We haven’t seen a lot of new equity commitments since the election. I can’t say what the current market value is,” said Crow. 

Crow calls the uncertainty created by potential tax reform a “curve ball.” Still, Crow has found that, “most investors want to continue to participate in the market. They want to support affordable housing and they understand the urgent need across the country. ” 

Sheth said, “Pricing is still very aggressive.” U.S. Bank has a national footprint, but focuses on the western 25 states where it has CRA needs. Sheth said that U.S. Bank invests in more 9 percent LIHTC developments, but the growth is happening in the 4 percent sector. In terms of pricing, “every deal is above $1 per credit,” said Sheth. “Huge CRA markets are high, but everything else is all close (in terms of pricing).” 

“In 95 percent of the country, prices are the same,” said Sheth, “We are in this equilibrium of low-interest rates and high pricing. Construction costs are high, but not too high. This is the perfect storm.” In terms of yields, Sheth is seeing them in the low-to-mid 4s. In order to make up for these smaller yields, Sheth said, “Volume allows people to make up for lack of yield.” 

While yields are low, Sheth hasn’t seen investors losing interest in the LIHTC program. “People keep saying they have a floor of when they will leave from a yield standpoint, but no one leaves and we keep breaking through these floors,” said Sheth. 

Conclusion

With a strong 2016 in the books, industry experts hope that momentum will carry forward. But the implication of potential tax reform is still the question on everyone’s minds. While the industry waits to find answers, Goldstein said, “We need to ensure the incoming administration continues to value the [low-income housing tax] credit.”