Freddie Mac’s Investment In LIHTCs Levels Off in 2005, Had Been Rising Since 1992
By Caitlin Jones & A. J. Johnson
4 min read
Tax Credit Advisor January, 2006: After 13 straight years of annual increases in purchases of Low Income Housing Tax Credits (LIHTC), Freddie Mac’s investments in these credits finally leveled off in 2005.
According to a preliminary tally of Freddie’s 2005 LIHTC investments, for the first time since 1992, tax credit equity investment did not exceed the previous year’s total. Freddie expects to have invested $1.3 billion of LIHTCs in 2005, the same amount as 2004. In 2004, by comparison, Freddie increased its investment in LIHTCs by about $350 million, or 36 percent, from $958 million in 2003.
Any decline in Freddie’s investment in LIHTCs could have a huge effect on overall demand for these credits, given Freddie’ substantial portion of the total LIHTC marketplace in recent years.
Freddie Mac invests in LIHTCs primarily by purchasing shares in corporate tax credit funds, although it also makes some direct investments. The tax credit funds are put together by syndicators who purchase the LIHTCs from developers. Investors in the funds receive a specified yield, in addition to the tax benefits of the LIHTCs.
In 2005, Freddie Mac invested in 26 different tax credit funds, about the same number as in 2004, according to Christine Hobbs, a director in Freddie Mac’s Community Development Investment Group.
“We invest in a variety of funds, national, state, and local,” she said, “but the bulk of the investments are in national funds.”
Freddie Mac invests in funds from both for-profit and non-profit syndicators, searching for four key attributes, Hobbs continued.
“We are looking for sponsor syndicates who have the capacity to find strong deals, and who can asset-manage strong deals, who can conform to our quarterly reporting requirements, and who deliver affordable housing,” she said.
Hobbs declined to provide further details about specific funds that Freddie Mac has invested in.
Uncertainty About Commitment to LIHTCs
Looking forward to 2006, Hobbs expressed uncertainty about the agency’s level of commitment to LIHTCs.
“We haven’t determined out appetite for credits in 2006,” she said. “We have some concern about the pricing per credit.”
Like other investors, Freddie is worried about the unpredictability of tax credit equity prices, and has closely monitored the skyrocketing tax credit equity prices paid to the developers awarded LIHTCs. After rapid price increases in early and mid-2005, tax credit equity prices showed signs of falling off late last year.
As tax credit equity prices rise, the yield generated by tax credit funds declines. Prices are calculated as a percentage on the dollar for each dollar of credit, have in some cases risen above $1.00. In November 2005, Ernst & Young said that a sampling of tax credit equity funds reported average priced paid for LIHTCs in the low $.90s per $1.00 of credit.
Hobbs said Freddie Mac also has concerns about the “slippage” in the deals reached between the tax credit syndicators, who purchase tax credits, and developers who sell them. She noted that “the terms of the investment at the project level, whether it is the extent of the developer guaranty or some other terms having to do with the project they are all softer than we were seeing a few years ago.”
Despite these concerns, Hobbs emphasized that Freddie expects to continue to vigorously compete for LIHTC investments, particularly those in areas damaged by Hurricane’s Katrina and Rita. She said that Freddie Mac is “already talking to a couple of different syndicators to participate there.”
In December, Congress approved a tax package that includes substantial increases in LIHTC authority for the Gulf Opportunity Zone in Louisiana, Mississippi, and Alabama, as well as smaller increases in LIHTCs for Texas and Florida.
Although the price for tax credits is higher, Hobbs says that she does see interesting projects being developed and syndicators establishing new niche areas of focus.
“We’re seeing the specialization of certain funds around such as things as green building,” she said.
Freddie Mac’s 18 Year Investment in LIHTCs
Freddie Mac first entered the LIHTC marketplace in 1988. Since then, the company has invested more than $6 billion in these credits. It really increased its investing in 2001, when it chalked up $410 million in investments, up sharply from $272 million the year before.
The company’s investments soared in 2002, however, when it more than doubled its yearly LIHTC investment to $880 million. In 2004, it broke through the $1 billion level. But Hobbs sees a potential for another flat year, or even fewer investments in 2006.
Since its first project investment in 1988, through November 2005, Freddie Mac LIHTC investments have financed over 4400 different projects that have included 328,000 units of affordable housing.
-Douglas Robinson
