What Do Higher LIHTC Prices Mean for Syndicators?
The following was distributed as part of the Affordable Housing News & Views - Spring 2014 newsletter.
The market for low-income housing tax credit investments operates in a manner that cannot be compared with any other real estate capital market. This proceeds in part from the fact that the supply of housing credits is fixed by statute and in part by the fact that the demand for housing credits is heavily influenced by the Community Reinvestment Act (CRA).
Roughly 85% of the equity for LIHTC investments comes from banks subject to the CRA. The CRA requires, among other things, that banks subject to its jurisdiction make community development investments in those geographical areas in which they take deposits. Since bank CRA investment targets are ultimately a function of the volume of bank deposits in a given MSA, not all CRA-qualified investments are equal. The CRA investment test value of a LIHTC project in a major urban center where major bank assessment areas often overlap one another is very different from a housing credit project located in an exurban or rural area. Since the demand for housing credit investments in markets that have the highest “CRA value,” such as New York and San Francisco, outstrips their supply, investors are paying as much as $1.20 for $1 of housing credit and accepting after-tax IRR’s in the 3-4% range. In less sought-after markets, an otherwise identical project might see pricing of $.85 for $1 of housing credit and generate an 8% yield. These are not the hallmarks of an efficient capital market.
While the demand for housing credit investments comes principally from the largest national banks, the market also includes smaller banks, life insurance firms, technology companies and other corporate investors, a group sometimes referred to as “economic” investors. This segment of the market is characterized by companies that are seeking yields of 7% or higher. However, finding housing credit projects that generate yields in that range has become increasingly difficult for syndication firms.
CohnReznick recently analyzed the movement of tax credit prices in properties acquired by so-called “multi-investor funds” and the yields which those funds were offering. Over an approximately 12-month period, the median price for a dollar of housing tax credit in such projects increased by seven cents from .88/$1 to .95/$1. Since housing credit prices and yields move in inverse relationship to one another, the jump in tax credit prices should have caused housing credit yields to fall to the 6 to 6.5% range, all else being equal. However, based on CohnReznick’s data, the average yield in multi-investor funds only decreased by ten basis points during the period, from an average of 7.2% to 7.1%. The economic investors, for their part, have made it known that they have drawn an invisible “line in the sand” at 7%. As a result, no syndication firm has offered a multi-investor fund at a yield below 7% since 2008.
Obviously the syndication community is not passing along higher tax credit prices to their investors. Syndicators are instead employing a number of tactics designed to maintain a 7% yield in this elevated pricing environment. The most common method is syndicators reducing the fees that they charge to investors for acquiring properties and organizing funds. Referred to as “load,” syndicators have slimmed their profits in order to hold the line at 7%. Rather than cutting load, other syndicators have chosen to offer smaller funds comprised of properties they feel are at market standard pricing. Either strategy allows syndicators to arrive at 7%, but clearly not all multi-investor funds are created equal.
Spurred on by the Accounting Standards Update, which changed the accounting treatment for LIHTC investments, syndicators continue to seek out potential new investors and continue the education process about the housing credit program. Prior to the accounting change, the effect of losses generated from housing credit investments impacted the pre-tax earnings of publicly traded corporations. However, the accounting change allows publicly-traded corporations to invest in housing credits without impacting their pre-tax earnings. In theory, the change presents a possible windfall of new economic investors. However experts and housing credit advocates were disappointed that the accounting change did not, at least initially, appear to have motivated as many potential investors to commit to investment.
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