Article from: Tax Credit Advisor Magazine - May 2013 issue
The low-income housing tax credit (LIHTC) equity market continues to hum along with rising yields on new multi-investor funds and softening credit prices in some areas.
Current national multi-investor LIHTC funds generally have projected after-tax yields to investors ranging from 7.0% to 7.5% – with many clustered around 7.25%.
“We’ve seen multi-investor yields rise over the last six to eight months,” says Kristen Walsh of Ernst & Young LLP. She indicated that with the yield increase to 7.0% to 7.5% “we’ve seen renewed interest from insurance companies, which is great.”
There are several reasons for the rise in multiinvestor fund yields. “The economic investors, the insurance companies, want higher yields,” says Ben Mottola of Stratford Capital Group. Numerous insurance companies that had invested in LIHTC left the market or scaled back their volume when fund yields fell to levels they felt were too low.
A second reason for the higher yields, said some sources, is some major investors shifting to do more LIHTC investing through proprietary funds or direct investment. A third reason is competition from more secondary LIHTC product. Jack Casey of Meridian Investments, for example, said his company is helping three major corporations remarket $196 million in existing LIHTC investments to other corporations.
Strengthening Investor Demand
Casey characterized overall corporate demand for LIHTC investments currently as “very robust” and “getting a little stronger. People are looking for yield. And a lot of companies have built a lot of cash up.”
“At this rate – north of 7% – there seems to be good interest and good demand,” said Jeff Goldstein of Boston Capital.
While some insurers have continued to invest in housing credits all along, sources said the higher yields on new multi-investor funds have prompted some insurance companies to resume or expand their LIHTC investing.
“Insurance companies are investing again, but primarily in funds that include only economic investors,” said Raoul Moore of Enterprise Community Investment, Inc.
“Demand has been marginally higher in the multi-investor fund space as some insurers begin to return to the LIHTC market this year due to more favorable yield trends,” said Steve Kropf of Raymond James Tax Credit Funds, Inc. “On the CRA side, demand from major banks continues to be strong, and midsize and large regional banks are also coming off the sidelines as capacity increases.”
Rob Golden of Capital One, which invests in multi-investor and proprietary LIHTC funds, said the company had a “big year” in terms of housing credit investment volume in 2012 and expects “to have a good year in 2013. We’ll do as much good business as we can.”
Sources said banks are still investing heavily in housing credits. But some said a few major banks appear to be tapering back a bit so far in 2013, noting that they’ve recently completed their three-year CRA exam cycle and therefore aren’t under pressure to make new investments right away to maintain a high CRA rating.
David Leopold of Bank of America Merrill Lynch, which invested just over $800 million in housing credits in 2012, said there seems to “some moderating of the extreme competition” of LIHTC deals in CRA markets that are also strong real estate markets. BAML invests in LIHTC about 70% through direct investments and 30% through proprietary funds with a tiny share in multi-investor funds.
Tony Alfieri of RBC Capital Markets Tax Credit Equity Group felt that yields on multi-investor funds will remain in the 7.25% to 7.50% range, a range he said is currently not attracting more economic investors.
“I’ve heard from a lot of the insurance companies that they’re waiting for yields to hit 7.5% and north before they get back in the market in a bigger way,” says Stratford Capital Group’s Ben Mottola.
Fred Copeman of CohnReznick LLP characterized the LIHTC equity market currently as one that’s “moving along at a measured pace. It’s not racing for the front door to write the check.”
Industry officials differed in their views about the current level and trend in credit pricing to developers. Some felt prices have softened a little for projects in high CRA demand markets while others said they have generally held steady. Most, though, felt that pricing has fallen in non-CRA markets in recent months.
“Credit pricing has been going down a bit” in both CRA and non-CRA markets, said Marc Schnitzer of R4 Capital, Inc.
“With regard to credit pricing,” said Victor Sostar of First Sterling, “we have noticed pronounced bifurcation and perhaps the widest historical spreads between primary, CRA-driven markets and secondary and tertiary non-CRA markets. Prices generally range from the mid-80s [cents per dollar of tax credit] to as high as $1.10 plus in the high-demand CRA markets of the coasts.”
Sources said there has been a relatively small number of new 9% tax credit deals available in the first quarter but that this would be changing soon. “There’s not a tremendous amount of credit out there now,” said Boston Capital’s Jeff Goldstein.
“But we project that by June 30 almost 50% of the credits will be allocated.”
Potential Accounting Rule Change
Industry officials are excited about a possible accounting rule change. The Financial Accounting Standard Board’s Emerging Issues Tax Force just issued for comment a proposed change that would allow more public companies to use the more favorable effective method of accounting for non-guaranteed LIHTC investments.
“This has the potential,” says Tony Bertoldi of City Real Estate Advisors, Inc., “to attract a significant amount of new capital into the [LIHTC] market from some large household names that have been shying away from the asset class because of the [currently required] accounting method.”
I have worked with the principals of the Stratford Capital Group for several years and have invested in a number of their multifamily offerings as an economic joint venture partner, for tax credits and also as a bridge loan participant. They are disciplined, know what the objectives are and detailed from an asset management perspective. Our relationship has been rewarding, and throughout it, they have treated us like partners.