Developers, Agencies Counseled on Coping with Price Decline, Uncertainties
By Caitlin Jones & A. J. Johnson
6 min read
SYNDICATORS OFFERED ADVICE to developers and state housing credit agencies on how to cope with changing low-income housing tax credit (LIHTC) equity market conditions as they work on new deals in 2008, in comments 1/15/08 at a Washington, DC conference.
The equity providers spoke at the National Council of State Housing Agencies’ HFA Institute conference, on an industry panel on the outlook for 2008.
The syndicators said prices to developers for housing credits have fallen significantly recently, and generally expressed uncertainty about where credit prices will be later this year. They explained the large pricing drop, and uncertain outlook, is due to an expected sharp cutback by some major corporate investors in their new LIHTC equity investment commitments in 2008, and the resulting expectation that projected yields to investors on new housing credit funds will have to be boosted — causing further declines in pricing — to entice new investors to the market.
Fannie Mae and Freddie Mac, two of the largest investors in housing credits, are expected to commit little or no additional new money this year for further LIHTC investments. Curtailment in new investment is also expected by some major banks and financial institutions, due to eroding profits caused by the subprime loan crisis and other reasons, falling share prices, and other factors. As a result, some syndicators expressed concern about whether the market will be able to raise enough equity this year to be able to fund all new projects receiving housing credits.
“This is going to be a very, very strange year, and it’s going to be very difficult to predict what’s going to happen,” said Chicago syndicator Joe Hagan, of National Equity Fund, Inc.
“We’re now experiencing an historic shift in pricing,” said Boston syndicator Greg Judge, of MMA Financial LLC. He estimated credit prices have fallen perhaps 5-6 cents per dollar of housing credit month in the past “couple” months. Meanwhile, Judge said projected percentage yields to investors have risen to the “6s,” though he added there’s “not a lot of demand” from investors now.
Hagan alluded to uncertainty among a number of investors about how much they will invest in housing credits in 2008. He said he recently visited five of NEF’s major investors, and “none have been able to say what their number is” for 2008.
Hagan said NEF will be first looking to provide equity to developers with which it already has a strong relationship. Second, he said NEF will check the location of each proposed project to make sure it’s in an area where NEF has a “CRA investor” — a financial institution that would get credit under the federal Community Reinvestment Act for an equity investment in a project in that area.
Hagan predicted there will be regional differences in credit pricing in 2008, with strong pricing for projects in areas with multiple CRA investors. He also predicted it will be tougher to get equity for small and rural projects this year.
Conservative Assumptions
The syndicators recommended that developers and state housing credit agencies (HCAs) assume a much lower credit price in putting together or reviewing applications for tax credits for new LIHTC projects. “Pricing is not going to be where it was,” warned Boston syndicator Bob Moss, of Boston Capital Partners.
Irvine, CA-based syndicator Ronne Thielen, of Centerline Capital Group, said she has been advising developers not to assume credit pricing of greater than 85 to 88 cents in planning new projects, a range she noted these developers are also hearing from other syndicators.
Along these lines, Moss offered a series of suggestion that he urged state credit agencies to follow “unless you want to work weekends.” His advice:
Do:
- Allow add-on credits for deals that need additional credit.
- “Consider raising your per-deal credit cap.”
- “Underwrite at 85 cents, maximum.”
- Examine each sponsor’s strengthen and development capacity.
- “Prepare to take back deals.”
- “Know who your investors are in your back yard.”
Don’t:
- Abandon flexibility.
- Be surprised at pricing.
- Allow more than 50% of the developer fee to be deferred.
Other Recommendations
Hagan urged state HCAs to re-examine their current LIHTC program qualified allocation plans (QAPs) and make any necessary adjustments so that new projects will be viable at lower prevailing credit prices. He indicated the LIHTC program was originally designed to finance projects serving residents between 50% and 60% of area median income, but that rises in credit prices over time have enabled HCAs to modify their LIHTC programs to encourage or require deeper income targeting, energy efficiency, and other extra features in projects that probably can’t be fully supported at sharply lower credit prices.
Thielen advised HCAs not to layer many additional requirements — such as 40% deeper income-targeting — on tax-exempt bondfinanced credit projects. “Don’t overstress those kinds of deals,” she said, explaining bond projects provide an important, different type of housing developments from 9% credit deals.
Some syndicators suggested state HCAs not worry so much this year about trying to allocate all of their available 2008 housing credit authority, but instead make sure they make awards to sound projects and perhaps hold back some credits to be able to provide extra credits later to challenged deals. “Flexibility is going to be a big issue this year with everybody,” said Judge, calling it critical for all program participants to stay in close and constant communication with each other this year to stay current on credit pricing trends and other developments.
Also on the panel was Alexandria, VA-based developer Patrick Sheridan, of the national nonprofit Volunteers of America, Inc. He urged developers to make sure in 2008 to select equity and debt providers they are confident will be able to follow through and actually close on the financing they have committed to the developer for his or her project.
