On a Roll: Syndicators Continue Closing LIHTC Funds as Investor Demand Stays Strong

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Many low-income housing tax credit syndicators, large and small, appear to be having a banner year in terms of raising equity through their multi-investor and proprietary funds.

“Everybody I’m talking to has raised more money,” says Jack Casey of Meridian Investments, describing the LIHTC equity market as “very healthy.” He said the total housing credit equity raised this year will exceed 2012 and likely surpass $10 billion including primary and secondary market sales. “The market appears to be in balance,” he says, “where demand for credits matches supply and almost all deals find a home.”

Numerous national syndicators have closed national multi-investor funds in the past few months or are about to close funds. (See p. 27.)

Joe Hagan of National Equity Fund said there is “ample demand” from investors, adding, “We have seen an increase in investor demand from insurance companies.” Still, he indicated that the lower return thresholds of proprietary and direct investors are making it very competitive to acquire properties for multi funds.

“We continue to be encouraged by the level of investor demand,” said Ben Mottola of Stratford Capital Group.” “We’ve actually seen demand increasing a bit over the past three months.”

Boston Financial Investment Management, experiencing strong demand from investors and blessed by a healthy pipeline of deals, has increased the size of its current national multi-investor fund from $100 million to $145 million and expects the company to raise around $400 million in total LIHTC equity in 2013 by year-end, said executive Sarah Laubinger.

Even small syndicators are prospering.

The St. Louis Equity Fund will raise about $26 million in total equity in 2013, an annual record, said President and CEO John Wuest. This includes money raised in its 2013 multi-investor fund – in which investors are mostly community banks – and from a few “side-by-side” investments by banks. The St. Louis Equity Fund, together with its subsidiary Kansas City Equity Fund, raises equity for LIHTC projects in Missouri, southern Illinois, and extreme eastern Kansas.

“We do the deals that the national people for the most part find as too small,” says Wuest. Our typical size deal is somewhere between $4.5 million and $8 million in total development costs – $8 million would be a big deal for us. Our niche is 18 to 30 units; that’s our sweet spot.”

Bank of America Merrill Lynch, a major LIHTC investor, is having a very productive year, too. “We project we will end the year at over a billion dollars in total LIHTC investments, which is what we had anticipated,” says Senior Vice President David Leopold. He said the volume “will be about 20% growth over last year,” noting that “the primary driver of the growth is really [developer] client demand…Our focus is to be the most stable capital provider in affordable housing debt and equity.”

Bank of America Merrill Lynch’s LIHTC investment is about 70% direct and 30% proprietary, with a very small amount in multi-investor funds.

 

Stable Yields, Credit Pricing

Virtually all the syndicators and observers said that the range of typical yields to investors on current national multi-investor funds and the range of typical credit pricing to developers are generally the same as three months ago.

Projected after-tax yields on new national multi-investor funds are mostly clustered between 7.25% and 7.5%, something confirmed by the latest version of CohnReznick’s Housing Tax Credit Monitor (see p. 28). The yield range is much wider among regional multi-investor funds. For example, Great Lakes Capital Fund recently closed a $109 million regional fund – financing properties in Illinois, Indiana, Michigan, and Wisconsin – that offered investors a projected yield of 7.5% or 7.75%, depending on investment size, according to Marge Novak. By contrast, current California multi-investor funds offer yields of 6.15% or less, reflecting the intense competition for properties in the Golden State.

At least on national funds, investor yields generally aren’t moving, and upward pressure seems to have abated.

“The yield trend appears to have stabilized for the time being, and funds launched in 2013 have generally been in the range [of 7.25%-7.5%],” said Steve Kropf of Raymond James Tax Credit Funds, Inc.

“I wouldn’t necessarily say it’s a trend yet, because there’s not enough information, but it seems like the pressure to increase yields is no longer there,” said Jeff Goldstein of Boston Capital.

As for credit pricing to developers, NEF’s Joe Hagan said the current range is generally from the mid-80s in cents per credit dollar to “well over a dollar.” He said if the deal is in a CRA “hot spot” outside the coasts the price is typically in the range of 93-97 cents, and in New York City or San Francisco “north” of $1.05.

Several syndicators reported that there has been an increase in the last couple of months in the volume of deals with new credit reservations. “The supply of 9 percent deals is higher than it was three months ago because a number of large states have recently awarded credits,” said Raoul Moore of Enterprise Community Investment, Inc.

 

More Tiered Funds

More syndicators are offering multi-investor funds with multiple investment classes offering different projected yields to try to attract both banks and insurance companies in the same fund. A number of syndicators for some time have been marketing multi funds offering different yields based on the size of investment. However, some are now also marketing multi funds with multiple classes with different yields that include one or more classes with a lower yield funding deals in high-demand CRA areas especially attractive to banks.

“Perhaps the biggest trend in multi-investor funds is tier pricing,” said Stephen Daley of The Richman Group. He said insurance company investors – typically investors in multi funds – are holding firm on yield, requiring a return above 7%. But he said “we are seeing bank investors accepting lower tiered pricing in national multi’s.”

The Richman Group, for instance, is marketing a new $100-150 million national fund with a projected yield of 7.25% that is expected to include a component that has “a CRA tier in pricing,” Daley said.

Similarly, City Real Estate Investors is out with a national fund, fully circled to $135 million with five investors, which has four investment classes: a Premium Class with a projected yield of 7.6%; Class A (7.35%); California Class (6.4%); and New York Class (6.15%). One investor is taking the New York class for a portion of its investment, and one investor taking the California class for part of its investment. “We have been successful so far in using this class structure to offer CRA properties in certain states to investors while maintaining an economic yield in the Premium and Class A structure,” said CREA executive Tony Bertoldi.

 

Accounting Rules

Industry participants, meanwhile, hope that the Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) will soon approve an accounting rule change that would allow more public companies to use the more favorable effective yield method of accounting for non-guaranteed LIHTC investments. The EITF deferred a vote September 12 but could act at its upcoming meeting on November 14.

Many LIHTC industry participants believe that the change, if approved, would attract new investors to housing credits, and might cause some current LIHTC investors to increase their volume.

“If we’re able at the November meeting to get the accounting change I think you’re going to see a number of new players enter the market,” said Meridian’s Jack Casey.

A number of sources, though, were uncertain about what the reaction might be or the impact on different aspects of the LIHTC market.

“If anything is going to drive prices up and yields down a bit it’s going to be the change in accounting treatment,” said Marc Schnitzer of R4 Capital, Inc. But he added, “It’s not clear to me, based on the feedback I’ve gotten from investors, how many banks, for example, are going to increase their budgets as a result of the different accounting treatment.”