Affordable housing developers expect 2009 to be even tougher than last year as the lowincome housing tax credit (LIHTC) market struggles to find equity investors.

“I think it is going to be 2010 before we come out of this uncertain time,” says Robert Greer, president of Michaels Development Co., a leading developer and owner of affordable housing.

One of the moves he is making is to syndicate tax credits himself, meaning that he plans to go to banks and other LIHTC investors directly to sell his tax credits and raise equity for deals.

R. Lee Harris, president of Cohen- Esrey Real Estate Services, calls 2008 the toughest year he has seen in recent memory and expects the new year to be equally difficult for developers.

In response, his Kansas City-based firm will focus on small projects in small communities. The deals will likely be seniors housing or have a historic component. “We want to be as self-sufficient as possible,” Harris says. He also is launching his own federal LIHTC fund to raise equity.

Why equity has dropped

The LIHTC market has been reeling from a drop in investor demand. A roughly $8 billion industry was likely going to see only about $4 billion or $5 billion in equity in 2008, according to some estimates. The tax credit program is the nation's most important tool in developing affordable apartments. After competing to receive the credits, developers often use a tax credit syndicator to sell them to a bank or other investors who can use the credits to offset their federal tax liability and fulfill their Community Reinvestment Act (CRA) obligations.

Economic troubles have pushed many usually reliable investors to the sidelines because, without profits, they do not need the credits. Fannie Mae and Freddie Mac have been the program's biggest investors, but they have stepped out of the market, leaving a huge gap. As a result, many projects have not been able to find an investor, and many deals have stalled.

The deals that are happening are those that meet a bank's CRA needs, according to Bob Moss, senior vice president at Boston Capital, a tax credit syndicator.

Developers who are struggling to secure tax credit equity should try to scope out investors who have a CRA need where their deals are located, according to Alex Viorst, a principal with Prudential Mortgage Capital Co., who spoke at a developers' conference sponsored by Affordable Housing Finance magazine.

Developers should also try to give investors multiple reasons for doing their deal. Bundling tax credit equity with debt products is one strategy, he says, explaining that a firm may be tempted to buy a project's tax credits if it also provides a loan to the same deal.

To help the LIHTC market recover, industry leaders are looking at several ideas. The Affordable Housing Tax Credit Coalition has proposed reducing the tax credit period from 10 years to five on a temporary basis. This could bring in new investors who prefer the shorter period.