LIHTC Industry Participants Discuss Market, Plans, Outlook for 2009
By Caitlin Jones & A. J. Johnson
7 min read
Tax Credit Advisor, February 2009: Different participants in the low-income housing tax credit (LIHTC) discussed the current state of the industry, the steps they are have taken or are taking, and their expectations and hopes for 2009, in comments at a recent conference in Washington, DC.
The comments – from syndicators, state allocating agencies, investors, developers, and practitioners – were made January 11-13 at the HFA Institute conference sponsored by the National Council of State Housing Agencies.
In the one year since the prior HFA Institute, the LIHTC industry has seen a sharp curtailment in the volume of new housing credit investment by Fannie Mae, Freddie Mac, and certain major banks; a plunge in housing credit pricing that had been 90 cents and higher; the onset of a national financial crisis and economic meltdown; and extra housing credits provided to state agencies along with favorable LIHTC program amendments from legislation enacted by Congress in 2008.
Equity the Issue
During the conference, panel speakers made no bones about the fact that the LIHTC industry and program is in the midst of tough times.
“We’ve got basically half the equity we need,” said Mark Shelburne of the North Carolina Housing Finance Agency, in opening comments as moderator of one panel.
Syndicators and corporate investors noted there are fewer companies actively investing in housing credits today, and that yields to investors on new housing credit investments – much higher now than a year ago – almost certainly will need to rise even more to entice more companies to invest in housing credits in substantial amounts, including companies that have never invested in housing credits that syndicators have been pitching for more than a year.
“We have to find new investors,” said syndicator Joe Hagan of Chicago-based National Equity Fund. “We have to get beyond the banks.” Hagan indicated that some inactive investors NEF has called have said the current level of LIHTC yields still aren’t high enough for them to return. He also predicted that insurance companies will be the “next wave” of investors in the housing credit program, as a result of pressure from regulators and because they understand bonds. Syndicator Bob Moss, of Boston Capital, reported his firm is working with three or four insurance companies it expects to put into one of its tax credit funds.
Several syndicators described how the tougher tax credit market has affected their organizations. Both Ronne Thielen, of Centerline Capital Group, and Scott Hoekman, of Enterprise Community Investment, Inc., said their organizations made staff reductions in 2008. Thielen said Centerline will still be acquiring tax credit properties in 2009, and will focus more on asset management of its existing properties in its portfolio. She anticipated that more existing LIHTC projects generally will come under stress this year and need to helped, as more people lose jobs, as project vacancy rates rise, etc.
Hoekman indicated that one change Enterprise is making in response to current conditions is to require that nonprofit sponsors planning to do their first LIHTC project team up with an experienced partner.
Investor Comments
Several corporate investors reported on their LIHTC investment activity in 2008 and expectations for 2009.
Patrick Nash of JPMorgan Capital Corporation, and current president of the Affordable Housing Investors Council, spoke on several panels and was interviewed by TCA along with fellow JPMorgan Capital Corporation executive William Pelletier. They noted their firm made about $770 million in LIHTC investments in 2008 ($620 million in proprietary funds and direct investments, $150 million in multi-investor funds), and said the firm’s target for 2009 is to do about the same total volume.
Nash, in comments on one panel, reported JPMorgan now has a much larger LIHTC portfolio as a result of its acquisition last fall of Washington Mutual, which he said had its own LIHTC portfolio of more than $1 billion. Nash and Pelletier indicated that JPMorgan in 2009 will continue to be thorough and conservative in its underwriting of new tax credit deals – a common industry practice for 2009 expected by investors, syndicators, and practitioners alike.
Beth Stohr, of US Bancorp Community Development Corporation, expected her firm to invest as much in LIHTCs in 2009 as in 2008. She said US Bank has a roughly $3 billion LIHTC portfolio plus another $2 billion in other federal tax credits (i.e. historic, new markets, solar).
Rick Gonzales, of Wells Fargo Community Development Corpor-ation, said Wells Fargo invested a record annual volume of about $325 million in LIHTCs in 2008, largely to fulfill its Community Reinvestment Act needs, compared to roughly $195 million in 2007. But he indicated that Wells Fargo may well be out of the market for at least the first half of 2009 because it inherited a lot of tax losses from its 2008 acquisition of Wachovia.
Developer Viewpoint
Speakers also discussed the adverse impact that current market conditions are having on LIHTC developers, who in many cases are struggling to secure equity for new deals, or who have funding gaps in their projects they’re trying to close in order to move forward.
Sacramento, CA-based Jeanne Peterson, of the Reznick Group, an accounting and consulting firm, said it’s a new “paradigm” today for developers compared to the recent past, when a developer immediately after winning a LIHTC award was immediately swamped with calls from multiple syndicators and direct investors seeking their business. “The developers’ phones have been very silent in “˜08, and may be for the beginning of “˜09,” Peterson said.
LIHTC developer Bob Greer, whose firm, Michaels Development Co., is submitting tax credit applications in 29 states, described the present period as a “tough, tough climate,” and added, “As developers, we are required to make changes in our operations.”
He said one change made by his firm, albeit reluctantly, has been to syndicate its tax credits itself, raising equity directly from large financial institutions for its own LIHTC projects, and for some other developers’ projects. Greer said before his firm traditionally obtained equity through a stable of major syndicators. By raising equity directly, Greer said his firm is still able to achieve pricing in the high 80s (cents per credit dollar). However, he added that it’s still tough to make new projects pencil out. “Even with our syndication entity,” Greer said, “it’s not always easy to establish feasibility. In what used to be three or four layers of financing now is turning into six and seven.”
Comments at panel and roundtable sessions revealed that state housing credit agencies have taken numerous and varied actions to respond to the adverse market changes and try to restore or assure, to the greatest extent possible, the feasibility of proposed tax credit projects to which they’ve awarded credits. A number of states indicated they’ve implemented various amendments made by the Housing and Economic Recovery Act to boost the credit amount to projects, including boosting up to 30% the eligible basis of certain projects, and allowing a flat 9% credit percentage. Some also have revised their qualified allocation plans or program rules to eliminate minimum credit prices for deals, to permit the return of awarded credits without penalty to facilitate their reallocation, and other steps.
Making Deals Succeed
Various speakers offered advice to state credit agencies on the types of projects they should probably be trying to award credits to today given current market conditions.
Thielen, for example, advised favoring projects that can most quickly get a firm equity commitment; are ready to begin construction soon; are located in stable and growing markets; are not complicated in structure; are sponsored by well-capitalized developers; are 9% tax credit deals rather than 4%; have strong guarantees and reserves; have a conservative coverage ratio and conservative income and expense growth assumptions; and are sufficiently large in size. She also indicated that points or preferences for deep income targeting in projects, such as setting aside units for households at or below 30% of area median income, may disadvantage deals in obtaining equity.
Thielen noted that not every deal will meet all of the preceding parameters, but said that the more that a deal does, the quicker it will find an equity investor.
Panelists anticipated that the LIHTC equity market will continue to be tough in 2009, at least in the first half. But they were also hopeful that Congress may enact favorable changes to assist the LIHTC program to make more deals viable and spur increased equity investment, such as through provisions included in the pending economic stimulus bill. (See p. 1 for article on stimulus bill.)
