Are there any other LIHTC developers or syndicators out there? Where have you seen equity pricing go in the last few months since the election? I have heard that many syndicators are in trouble as they haven't been able to find investors to replace them on deals they bought into at the top of the market. I've heard developers are also having problems due to funding gaps and HFAs dragging their feet.
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I'd say .90-1.10 before the election, depending on CRA need in that market. Not seeing anything getting done right now though. Everyone seems to be on the sideline waiting to see what Trump does on the tax reform. Bridge lenders are busy as many guys buying deals to acq/rehab are waiting it out. But your last couple sentences are accurate as well
Not pricing, perhaps, but my LIHTC buddy got laid off because of Trump-based uncertainty.
Is he in syndication or development? It seems that syndicators have gotten fat dumb and happy over the last few years. The developers we deal with have always run lean. We are a niche syndicator that has been conservative and has a strong balance sheet, but I can easily see how we could have gotten in trouble.
Did development for a company that did both. He was 20-30 hours a week after being full time last summer AND he had a full time offer for after graduation and they both pulled the offer and laid him off his Internship.
I work on the development side and we have several 9% deals in different markets; pricing tanked "postTrump" from $1.14 to $1.08 and $1.08 to $0.98 (2 examples). There a couple LIHTC linkedin groups where developers are discussing pricing changes across specific markets. If you are syndicating your capital with a bank that has CRA needs than you should be less affected compared to the groups that are syndicating their credits with groups that buy based on real economics.
Our 9% deals seem to be having the most trouble right now. The HFAs seem to have overextended their resources and now that pricing has fallen out they don't have any tools left in the tool box to make these deals happen unless they want to issue debt at cost or reach into next years credit pools.
The whole LIHTC industry has been extremely overpriced recently. It was time for prices to come back to reality a little bit. I know some markets where the average TC price historically hovered in the ~$0.85 range had seen TC prices well above $1.00 for a few years. This correction in TC prices has been in the making for awhile.
When credits traded at $1.10 - $1.15 you could make good money and build nice projects. The current prices will result in the shitty affordable housing that everyone thinks of when you hear the word "affordable"
I guess I would ask who made good money? The developers did well, but their upside was still limited by the cap on their developer fee and minimal property level cash flow (if any) thanks to extremely limited rental increases in most markets. The companies buying $1.00 worth of tax credits for $1.10 - $1.15 weren't making much at all. That environment wasn't sustainable.
A lot of the banks that bought LIHTC's did so to meet CRA requirements not to generate any kind of meaningful returns. Even if you were buying the LIHTC's directly $1.10 - $1.15 LIHTC pricing meant returns of
Not necessarily. Depending on the financial engineering and operations of the property, losses, debt amount and structuring, etc can push returns after tax above 5%.. below 10 tho
Regarding quality, I don't think that will be the case. The capital stacks will just include more soft debt. Developers will likely be deferring more fee to compensate for lower equity pricing and higher interest rates though.
I can tell you right now that all of our developments and all of our competitors developments are going through HUGE value engineering exercises and will be substantially reducing budgets. This means reducing the percentage of masonry on the exterior facade, lower level finishes, less landscaping, etc..
Why would someone take on more debt for a property that has capped rents? All of these properties will lease-up in 6-10 months no matter how big they are...
this is new to me, why would someone pay more than 1.00?
Banks have CRA needs that they have to meet. If they dont, the feds will fuck them.
https://en.wikipedia.org/wiki/Community_Reinvestment_Act
https://www.occ.treas.gov/topics/community-affairs/publications/fact-sh…
If multiple investors have CRA needs in the same market they could bid eachother up over a dollar.
The highest I've seen for federal credits is $1.21 for a deal just outside of Miami. The return penciled out to ~3% for a direct buyer. The risk return profile on that investment makes absolutely no sense.
CRA is certainly the primary motivator, but you do get the tax losses as well.
The CRA markets will be OK, the non-CRA markets have problems. If you can focus on a state with state credits like Georgia that helps the deal bigly. We will see what happens but I think most syndicators are basing their yield on a 20% corp tax rate while most of the industry thinks the rate will shake out around 25%-28%. There is a bill in the house and the senate to increase credits, etc. I work mostly on acq/rehab deals and a fixed 4% credit would really make these deals work well.
According to some industry folks who have met with Paul Ryan he's assured them the credit will be fine and he wants to improve the program. There are several things they can do- fixing the 4% credit, reducing the number of years credits are taken over, accelerated depreciation, etc.
I went to an industry conference recently. There was a panel of lobbyists and they stated that the chances of tax reform actually happening are near zero. Our investors are still playing it safe. The spread on the LIHTC yield and 10 year treasury are so tight that I can't really blame them for padding their yield (a 4.5% IRR underwritten at a 25% corp tax rate is like a 6.5% IRR with a 35% corp tax rate).
Like you said, even if itax reform does happen there is enough happening to bolster the program that aggregate equity should remain relatively flat even if the price per credit drops (4% floor, shortened credit period, etc). They also said that the Cantwell Hatch and the nearly identical bill in the house are likely to pass sand the 50% boost to the 9% credits phased in over 5 years.
The biggest problem I see is HOME and CDBG going away. This will impact developers more than syndicators and investors, but a lack of soft debt also hurts yields by reducing "free" depreciation for LPs.
Coming from a large LIHTC syndicator, pricing is now in the mid-to-low $0.80s. Our investors have settled on assuming a 25% corporate tax rate and some like protection down to 20%. The Trump 15% tweet made them nervous, but they are going to stick with those assumptions. We are feeling the pain due to lower acq fees and a lot less deal flow.
Hadn't even thought of the great fringe benefit of lower corporate tax rates--less of this shit affordable housing in my town.
There will definitely be less affordable housing. Investors have taken most of their chips off of the table for now. Also, NPR is turning against us and that is never a good sign.
http://www.npr.org/2017/05/09/527046451/affordable-housing-program-cost…
http://www.pbs.org/wgbh/frontline/film/poverty-politics-and-profit/
I wish those fees were better reflected in my annual bonus...
Pricing at the big banks is back up around a buck (I cover CA and the Southeast). Where we have huge CRA need, we will go slightly above a buck to maybe $1.02-1.04. But those cases are rare right now. No idea where you guys are seeing low $0.80's...maybe in like Montana or Alabama lol.
Also, no-one is buying the 15% talk. They are projection 25/28/30%ish. At this rate, if tax reform doesn't get pushed through this year, it likely won't happen (a drastic change, that is). Next year marks a new election cycle for House+Senate I believe, so politicians will be focused on re-election campaigns in 2018. Then, balance of power will likely shift to the left in one of those branches (politics are cyclical), and then we will be at a stand-still. That's what I've been hearing at a bunch of affordable housing conferences across the country.
Virginia RD deals are in the low to mid-$0.80s. I know California prices are always above-market, but east coast deals are around the $0.90 - $0.98 range. It's still a buyer's market, but prices are starting to rebound because (as mentioned above) investors are realizing the corporate tax rate might not even change.
Low 80s was the lowest bids went. In rural areas we are seeing 85-87 for 9% deals and 90-95 for 4% deals (earlier credit delivery and more losses).
I'm interested in if anyone has an update on this since tax reform is pushing through
Bump
I will say our LIHTC group is still getting some 4% rehab deals done in today's market but most don't pencil without seller carry or some other soft debt without deferring a good chunk of the dev fee. Nationwide pricing really varies (0.85 to 1.05) right now based on the market
Does anyone know if the 4% tax credit floor was kept in the Senate's bill? Nobody seems to know what was actually passed. That could really change the landscape
It has a lot of bipartisan support and is unlikely to go away.
Not in either version of the tax bill but there is another bill making its way through the senate that would set a 4% floor and do a few other things to strengthen the credit. I haven't heard anything regarding house republicans view on this.
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