New Paper Recommends Steps for Enhancing LIHTC Program of Massachusetts, Other States in Tough Current Market

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Tax Credit Advisor, February 2009: A new white paper identifies how the current equity crisis is impacting the low-income housing tax credit program in Massachusetts and other states, and recommends 10 steps for making Massachusetts’ program most effective given the current challenges.

The recommendations, which can be applied in other states as well, are contained in a white paper prepared by the Boston, MA-based firm of Recap Advisors. The paper, entitled “How Should States Best Use Their 2009 Affordability Resources?”, was commissioned by the Massachusetts Housing Partnership. MHP a state housing agency that provides long-term financing for rental housing, said it commissioned the report “in reaction to the recent tumult in the financial markets and its ripple effect on properties that have an allocation of tax credits, but cannot move forward due to an inability to find investors.”

The paper notes that a sharp curtailment in corporate investment in housing credits in 2008 accompanied by a sharp decline in pricing for housing credits has left state housing credit agencies and many developers in a bind. The problem is a reduced supply of equity available for proposed LIHTC projects with new credit awards and an oversupply of deals Ñ the opposite picture of what characterized the program in pre-2008. As a result, many projects today that have credit awards can’t secure equity at all or in sufficient amounts.

In Massachusetts, for example, the paper notes that of 39 pipeline properties allocated housing credits in the two funding rounds in 2007 and the first round in 2008, only eight have closed (as of Dec. 2008) with firm equity. “That means roughly 80% of pipeline properties are still lacking in solid equity,” the paper says, “with a whole new round of allocations coming up in 2009.”

Nationwide, the paper continues, “For the first time in the LIHTC’s history, not only will there be a substantial pool of unused credits to be redistributed nationally, but there will be $2-4 billion of 2008 LIHTC without an equity investor, even as another $8 billion or so of new LIHTC will be allocated to states.”

The paper predicts credit pricing to settle out in 2009 in the range of 80 to 60 cents per credit dollar, forecasting a wider range of pricing than before. It estimates that with the pricing adjustment Massachusetts’ allotment of credits “will go only 77% as far as it did last year.”

The paper suggests that Massachusetts – and other states – must overhaul their LIHTC programs and procedures and focus on awarding housing credits to deals most likely to secure equity and close, and remove current impediments or deterrents to this objective. In doing so it suggests the state agency will be able to successfully award more of its available credits, and lose fewer credits if any to the national pool.

The report notes, “Procedures and approaches that worked when LIHTC equity investors could be found for virtually any award of credits have led to an imbalance that fails miserably when LIHTC equity is undersubscribed.”

The 10 strategic recommendations that the white paper advises to be taken to best position Massachusetts’ LIHTC program are to:

  • Participate with stakeholders in a collective response to the crisis. Shared interests should trump parochial or competitive interests.
  • Allow strong, equity-backed applicants to apply and win. Viability is key, as is reliable execution.
  • Make non-critical transaction features optional, for points. Thresholds can be counterproductive when demand is less than supply.
  • Keep the competitive process. It harnesses market forces, even in weaker markets.
  • Collect and disseminate reliable data on LIHTC markets: allocations, awards, pricing.
  • Break the equity bottleneck using QAP criteria. Give substantial extra points for reliable and ready equity.
  • Provide an underwriting cushion to handle equity price drops. Stress-test applications with lower-than-expected equity prices.
  • Have resources available to assist pipeline properties to close. They represent a sunk cost (by somebody) and an affordability opportunity.
  • Avoid incentives that align against equity markets. Rather than lose credits to a national pool, spend your resource in your state.
  • Maximize flexibility with gap- filler resources. Plus-up any other LIHTC compatible resources available to you.

(Report: http://www.mhp.net)