Economic Uncertainty and Other Factors Create a Challenging Environment for LIHTC Deals

Economic uncertainty, a shift toward larger transactions, and alternative Community Reinvestment Act (CRA) options have created a challenging environment for Low Income Housing Tax Credit (LIHTC) deals, pushing down the price of the credits in some parts of the country, some syndicators report.

Tax Credit Advisor (TCA) spoke with four syndicators about the current state of the affordable housing market. The overarching perspective is that, although the potential impact of tariffs and other uncertainties in the overall economy has made some deals more challenging to pull together, new deals are still emerging and will likely continue to do so if syndicators and investors remain adaptable.

“If I had to describe the tax credit market in one word, it would be uncertainty,” says Josh Ghena, senior vice president of equity management at Cinnaire. “That uncertainty has led to a noticeable softening in the market. Still, despite the challenges, the market remains active. There is movement and demand – but it’s clear the dynamics are shifting.”

Boston Financial’s Rob Charest, senior managing director of equity originations, housing, and community investments, describes the current market as “a difficult landscape.”

“The deals are much larger now, driven by an increase in hard costs, soft costs, and construction loan interest. The banks, for various additional reasons, are filling up for their three-year cycles more quickly than normal,” explains Charest. “Even in markets that used to be pretty heavily driven by CRA—Boston, New York, LA—they no longer have insatiable appetites. They only have a certain CRA need…and it’s getting eaten up more quickly than usual, partly because of the larger deal size and partly because there are more attractive alternative investments (such as energy).

Bigger Deals, Fewer Investors
All the syndicators contacted by TCA note that affordable housing deals, whether made by economic or CRA investors, have increased in size in recent years. This growth has led banks to meet their CRA requirements more quickly, effectively sidelining some investors.

“Let’s say someone has a $100 million need in Boston,” explains Charest, “that used to be ten deals. Now it’s four or five. Those other deals that used to get filled up by $100 million are now in need of capital…You are finding parts of the market without buyers for very important, perfectly good transactions. It all stems from the fact that there aren’t enough investors in the market, CRA, or economically driven. The deals are bigger, and they are getting filled up more quickly.”

With CRA investors fulfilling their statutory requirements more quickly, the demand for LIHTC dropped, as did the credits’ price.

“For the CRA investors, the deals got bigger, and they filled their needs in those markets sooner, so they started falling out of the need to invest,” says Darren Swanson, managing director of acquisitions for Red Stone Equity. “So, pricing (for LIHTC) goes down as the competition wanes.”

Swanson says the option to invest in solar credits authorized through the Inflation Reduction Act under former President Joe Biden also lowered demand for LIHTC.

“I think over the last 12 months, the impact of the amount of solar credits that hit the market was felt meaningfully,” says Swanson. “It’s impacting all investors, even insurance companies…Solar credit is straightforward compared to investing in LIHTC. It’s faster. It’s easier. It’s on an open piece of land. You put some panels on it and ensure it. It’s a five-year risk period, recapture period. LIHTC is 15 years, and it’s real estate, so there is more risk there.”

“We can’t ignore that solar definitely played into what is currently happening,” Swanson adds.

Uncertainty Impacting LIHTC Pricing
According to syndicators contacted for this story, the price of LIHTCs is dropping in some markets, although they differ in how significant the drop is. Lower demand impacts the price of the credits, as there is general uncertainty over the economy’s future because of proposed tariffs and other economic changes.

“There’s a lot of uncertainty about how the tariffs will impact construction costs, which has led to increased scrutiny and due diligence,” explains Ghena. “That said, we’re still seeing projects able to secure materials at the price expected, but the uncertainty adds complications.”

Ghena says there are more deals than capital in the market, which has led to some softening in the pricing of LIHTC.

“Whenever you have more deals chasing capital, that pushes pricing down. At the end of the day, it is a supply and demand issue. But pricing is always going to be local. You might see aggressive buyers driving up prices in one county, while there may be little to no demand in another.”

Ghena says the drop may be larger in some markets, but “they’re dropping in all markets.”

“We operate in the Upper Midwest to the MidAtlantic…pricing is definitely coming down across all of our markets,” he says. “There are always going to be outliers, but generally we are seeing pricing move across our entire footprint.”

Charest says he also sees LIHTC price drops, but the price is still high in “hot CRA markets with high-end sponsors.”

“When you get out of those markets, it has dramatically dropped because those economic buyers can wait for a well-structured, sizeable deal, at the price they want,” says Charest.

Charest says the drop is close to ten cents in some areas, moving from the mid to high 80s to the high 70s in “a lot of markets.” None of the syndicators contacted by TCA describe pricing levels in specific markets.

Swanson says the drop in the price of LIHTC for economic investors, who often invest based on a spread over treasuries, is also linked to the rise in interest rates.

“If interest rates rise, they need to increase their yields in order for that same investment to make sense from a risk-reward perspective…,” explains Swanson. “When yields increase, pricing goes down.”

Jason Gershwin, managing director and director of fund management at R4 Capital, says net pricing across their national funds has been “within a penny from a couple of years ago.”

“There are individual deals here and there where there is change in pricing, but fund-wide within our large national funds, it is within a penny or two,” Gershwin says. “I don’t know that there has been material movement.”

Gershwin adds that there are some markets where they are pricing deals lower and “some markets where there are more banks chasing CRA and they can command a higher price.”

Cautious Optimism
Gershwin says that while the overall economy is uncertain, he remains “cautiously optimistic” about the industry.

“The reason I come back to cautiously optimistic is that I think all of us in this industry realize that the underlying fundamentals of the affordable housing industry and the efficiency of the housing tax credit program do tremendous good,” Gershwin says. “It is sad that there is such insatiable demand for affordable housing in almost every market, but the demand is there, unfortunately.”

Gershwin adds that LIHTC “has been highly efficient and is supported by both sides of the aisle.”

He acknowledges that his company and others in the “financial services world sleep with one eye open in terms of watching what comes out of Washington.”

“You never know what could come out of Washington that could negatively impact not just our industry, but every industry,” Gershwin says.

Swanson remains optimistic, despite describing the market as somewhat volatile.

“We continue to see a tremendous amount of investor appetite to want to continue to do what they have always done, which is to invest in this asset class and support the development and creation of affordable housing,” says Swanson.

Ghena says, “Everyone has a choice in how they deal with uncertainty.”

“The shops that are successful right now understand how uncertain the market is but are still operating and finding pathways to success and not allowing the uncertainty to unintentionally freeze their decision-making,” Ghena says.