Pricing Update: State Allocators

6 min read

Is the Golden Age Over?

State tax credit allocators had a glass-half-empty message for housing market analysts at their recent affordable housing summit. But in describing their current robust allocation rounds, the glass seemed half full as well.

Moderator Beth Beckett, senior vice president of Real Estate Strategies, Paoli, PA, asked a panel of state regulators at the National Council of Housing Markets Analysts’ (NCHMA) Philadelphia meeting how they thought the recent tax reform would change the market.

“What do you think the impact is going to be?” she asked. “What did you fear it was going to be and if that’s coming true? What kind of strategies have you taken in the agency, if any, to deal with our new environment?”

With the new tax reforms reducing tax rates for businesses and potentially lessening their needs for tax offsets, the industry is no longer in the golden age, said Matt Heckles, assistant secretary and director of the Community Development Administration and the Division of Development Finance at the Maryland Department of Housing and Community Development.

“We have a strong pipeline of four percent deals but they’ve kind of gone into a quiet period,” he said. “We’re projecting our four percent numbers will be down this fiscal year. All are still in the pipeline, but we will take them past the end of the fiscal year instead of this year.”

In addition, pricing has been weakening, “$.15 cents on top of that. We’re seeing construction costs going really, really high.”

Natural disasters don’t help either, he noted. One of the cabinet makers on one of their projects was in Houston,  which was badly hit by Hurricane Harvey last year.

On top of that, “interest rates are creeping up. I don’t know that we are in bad times. I think we are no longer in the Golden Age, which ended about a year or so ago.

We look at each individual deal. We haven’t changed our policies. We will do what we can to get our pipeline deals done.”

Cindy Deakyne, housing asset manager of the Delaware State Housing Authority, told the NCHMA meeting (the group is an affiliate of the National Housing & Rehabilitation Association) that she agreed with Heckles.

“We are seeing a difference in the price. Fifteen cents is pretty accurate. I think you’re right, Matt. The Golden Age is over,” she said.

Anne Hamlin, director of tax credit services at the New Jersey Housing and Mortgage Finance Agency, chimed in next after Deakyne with the same formulation.

New Jersey most recently awarded 30 nine percent projects, she said. The agency assumed the corporate tax rate would hover around 25 percent. “In New Jersey, we thought that would mean about $.95. The Golden Age is definitely gone. In Jersey City, we were pricing $1.15 or $1.20. No longer. Some pricing is going all the way down to $.85,” she noted.

“We were going to underwrite all the deals at $.95. We did not want very unrealistic pricing. We forced everyone to underwrite at $.96. We awarded our tax credits. Now the pricing is not $.95. For nonprofits it’s $.91, $.92, $.93. We took 11 projects to the committee to award additional tax credits, another $500,000 to those 11 projects to keep them moving. The Golden Age is over.”

Hamlin called attention to a development that was a little frightening for the agency. “We actually had one project we thought might not get a bid from an equity investor. That hasn’t happened since 2008-2009. New Jersey is generally a pretty good market. We luckily did get one, but it’s not coming as easily as it was previously.”

With the reduction in corporate tax rates reducing the number of investors, “we are seeing a little bit of a shrinking market,” she said.

Dave Doray, manager of multifamily underwriting at the Pennsylvania Housing Finance Authority, was more sanguine about the market. “We don’t think the effect will be a large one,” he said. “The agency is reaching out to its developers to make sure they can do their financing. We’re not going to allow any changes in their budget or anything like that.”

Kelen Craig, director of planning, preservation and development at Ohio Housing Finance agency said, “We were relatively generous with 2017 deals. We forward allocated and gave a ten to 15 percent boost. This time we’re all going to share the pain.”

The regulators also shared details of their most recent LIHTC funding rounds, featuring healthy volumes for both four percent and nine percent deals. They were also buoyed by the additional 12.5 percent allocation called for in the appropriations bill.

Craig said Ohio used allocations of $27.8 million to fund 30 to 35 projects. That included some assisted living projects, a new category for them. At first, the four percent credit got zero applications, he said, but that didn’t continue.

Heckles said Maryland’s allocation of $14 million per year has been 40 percent forward committed, with a goal of 3,500-4,000 units per year, with the ratio being close to 50-50 between four percent and nine percent deals. “This past year, we settled a fair housing complaint. We made a deal to produce 1,500 units in Baltimore communities of opportunity.” More than 1,000 units involve new construction.

Hamlin gave New Jersey’s tally as 28 four percent projects and 30 nine percent projects, involving $24 million in the four percent category and $41 million in nine percent deals.

“It was a huge round,” she said. “We had 60 applications, a new record,” and 6,000 units. “This is going to be very, very interesting,” she predicted.

Doray said Pennsylvania had $30 million in credits to fund 30 to 35 projects and got 90-plus applications.

Deakyne pointed out that, as a small state, Delaware’s programs weren’t as big as the other states’. But she said Delaware had “a generous state legislature” for soft financings. With $2.71 million in tax credits, they fund two to three properties a year at nine percent and have quite a few tax-exempt bond projects under way.

“Though we’re small we have a pretty big impact in our state,” she said.

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.