Can anybody in the industry comment on how they forecast the LIHTC market during the next recession. I feel like the last recession isn't the best comparison because banks' financial structures are stronger now. Any insights?
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From a developer's perspective or from an investors perspective?
I'm more interested in investor but any perspective is valuable
Fairly safe asset considering the upside of the lower tax-liability or the subsidized rental income from Uncle Sam. Depends on what the asset is....senior-oriented, HAP, and what percentage of the area median income is being utilized for rental rates. In terms of the next recession, there will be sufficient demand and somewhat limited supply for LIHTC properties. Class A and urban assets will be hit the hardest while the suburban Class B/C deals will be safe and ready for the exodus from the urban centers.
I've come across some LIHTC deals which are performing similar to conventional (non-affordable) properties with slightly higher overhead due to the administrative burden but significant upside in term of income and taxes.
So my concern is regarding demand during a recession, that tax liabilities drop and the pricing for the tax credits gets slammed so no new deals get made until the economy picks up. The asset itself is stable but I'm not sure how volatile the tax credit pricing/demand is
It depends. But here is a quick investor snapshot or at least how I would look at it:
If you have a LURA with a 5 year period remaining - maybe not the best idea during a recession, but you have the option of letting the LURA lapse and converting the asset into a conventional market rate deal. Given that the property is probably a Class B/C quality of construction, you have upside in value-add opportunities.
BUT if you have a LURA with a 15 year period remaining with an automatic extension for an additional 15 years - you are pretty safe during a recession. But downside is you are locked into the LIHTC and cannot convert to a conventional market rate deal if the market makes it more desirable post-recession (ie you're locked in for 30 years).
You are correct, that's what would happen. If you're a tax credit investor but due to a recession don't have a tax liability, then you're not buying credits. So TC pricing would take a hit in the short term. Bank CRA needs would provide a floor in certain markets, so you'd probably see the biggest impact to TC pricing in secondary/tertiary markets. But yes, less new syndications would get done.
Right, because you can pick and choose where you're going to be in the next recession. And it's so easy to get into one of the most complicated development sectors in a short period of time.
LIHTC is always a relatively safe bet. As a developer you make almost all your money up front on fees (limited lease up risk.) As an owner/investor your tenants are on the dole paying lower than market rents in most/all cases. Last time I checked the welfare machine didn't stop in 2008/9. It got bigger.
Almost all new lihtc deals froze in 08, there were no tax credit investors because banks were collapsing.
That's a valid point and one that i didn't initially consider. Banana for you.
Can only speak for the tri-state market but that isn't true. Plenty of LIHTC deals got done in 2008/2009. And besides, banks are not the only buyers for tax credits - you get better pricing on the bank side because of the CRA credit, but there are plenty of other investors out there (oil & gas companies come to mind as previous large-scale buyers of LIHTCs) who want the tax breaks and the depreciation.
Volume probably slowed down a little bit but deals were still getting done. I believe that the federal government intervened with capital subsidy to help close deals that had financing gaps.
"Under law, the only investors eligible for Low-Income Housing Tax Credit (LIHTC) investments are large C corporations. As the financial markets deteriorated in the second half of 2008, so did the C corporations’ profits that are typically offset by tax credits, like the LIHTC. As a result, the market for LIHTCs was decimated. The development of new tax credit properties and rehabilitation activities for older affordable housing properties froze completely.
Congress took action in February 2009 to help restart the LIHTC market. The American Recovery and Reinvestment Act of 2009 created two gap-financing programs to help tax credit properties, which were ready to begin construction, get additional financing."
With the new corporate income tax rate cut it should be a poor business to be in going forward. I turned down a pretty big pay raise a few months ago to move into that sector; opted against it since I expected the tax cut.
I saw forecasts that the tax cuts would only reduce LIHTC units by 10% over the next ten years, you feel like this is enough to avoid the asset class entirely?
The tax rate equates to a savings of 14% on marginal taxes. That, added with my belief that the affordable housing industry is predicated on bad economics (and is grossly wasteful), yeah, that’s enough for me. I’d also much rather be in an expansionary business rather than one that is contracting.
I don't understand your comment? Yes, lower taxes = lower value of the credit, so there will be a slight decline in new syndications. But its not like production will drastically fall as the credits come from the Fed gov't and banks have a CRA need in certain markets. Plus, affordable housing is a hot topic right now and its hard to see that changing in the near term. I don't see how you could write it off as poor business moving forward? If anything the market is getting more efficient as more capital pours in searching for yield.
How is it a hot topic now?
Not just an indirect "lowering value of the credit"--literally, less actual need for the credit. We saw this happen in 2008/2009 when bank profits declined. When their profits declined their purchases of LIHTCs declined markedly.
LIHTCs aren't going away, but it's a contracting market with the lowering corporate income tax rate. Add in the fact that LIHTCs are very much cyclical with the economy (i.e. recession = much less demand) and I see it as a contracting market--less demand in a strong market (with lower tax rates) and markedly less demand during a recession.
Also, LIHTCs are an incredibly inefficient--and even immoral--way of developing housing (my boss is on the board of directors of a senior AH housing complex, which is getting LIHTCs to renovate their space; the developer is taking zero risk and is walking away with a $4M developer fee, paid for by the tax payers of the United States--it's grotesque). So I've got an economic problem with the industry and a moral problem with it.
Is there a distinct difference between Low Income and Affordable?
IMO, Affordable is for the recent grad, Working Class, and Low Middle Class Family that can't compete with the rising tide beneficiaries.
Low Income to me is section 8 or minimal financial prospects.
Correct me if I'm wrong, not my area of expertise by any stretch.
Based on those definitions, affordable housing is a huge concern, especially in the northeast, going forward.
Good night, everybody!!
Since it often gets discussed by people with vast experience within the sector, could any ELI5 (Explain it like I'm 5) how LIHTC works?
PS - If someone's willing, just explain how the whole damn thing works.
BTW - Great discussion so far Ozymandia & @Troll - Aged 18 Years"
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