After a topsy-turvy 2006, syndicators of low-income housing tax credits want some balance. “The market will have to find an equilibrium,” says Andrew Weil, executive managing director of Centerline Capital Group's (formerly CharterMac) Affordable Housing Group. “Going into 2007, there is uncertainty about where yields will stabilize. Developers and state agencies will have to adjust to already reduced pricing and must be prepared in case pricing continues to drop.”
Others agree. “The market is still correcting,” says David Robbins, senior vice president at MMA Financial. “It will be sometime into 2007 until we have a better sense of demand and where yields will be.”
A few hope that much of those corrections have already taken place.
“Credit prices have already dropped considerably,” says Todd Crow, executive vice president and director of institutional sales and portfolio management at PNC MultiFamily Capital. “We are projecting internal rates of return for large national syndicated funds of 5.25 percent to 5.5 percent for the first half of 2007. It's possible that yields could go higher in the second half of the year, but I doubt they go up much more. In my opinion, absent an external shock (interest rates, et cetera), most of the correction is behind us, and I wouldn't expect any dramatic change between now and the end of the year.”
Stephen B. Smith, executive vice president of The Richman Group Affordable Housing Corp., would agree. Overall, he believes the market is healthier so far in 2007 than last year because prices to developers and yields to investors are more in sync.
Still, challenges will remain.
The market for low-income housing tax credits may encounter a slow start in 2007 because of investor uncertainty about the direction of yields and some “holdover” product in the market from 2006, says Carl Wise, senior vice president of Alliant Capital, Ltd.
After all, there have been rumors about unsold, low-yielding inventory. “It is unclear what impact, if any, it will have on 2007 fund pricing and pricing for new deals,” says Crow, noting that PNC had almost no unsold product from last year.
Tight deals continue to be a big worry for syndicators. “These are tough times for developers, a perfect storm of sorts,” Crow says. “Construction costs are up. In some regions, they are up considerably. Operating expenses are up, and in coastal communities, up considerably due to increased insurance costs.”
In addition, tax credit prices have declined, reducing equity while short-term interest rates have increased. “All of these have placed additional stress on development budgets for new deals,” Crow says. “We are seeing deals that are very tight from a budget perspective.”
This is a concern for many. After a year of margin compression, syndicators are going to want to see increased margins in 2007. “Strong margins and funds with strong reserves have always been helpful in deals with troubled assets and have helped to provide consistent returns to investors,” Weil says. “If the syndicators or funds are not sufficiently capitalized to deal with problems, this may not be the case in the future.”
Michael Costa, president of Simpson Housing Solutions, an affordable housing developer that also does LIHTC syndication, says he is concerned that developers will continue to base decisions on 2006 credit prices. “This is going to cause a rude awakening when they realize they are going to have significant gaps between their projected sources and uses.”
Writer Donna Kimura is the deputy editor of AFFORDABLE HOUSING FINANCE, a sister magazine to MULTIFAMILY EXECUTIVE. A longer version of this story was first published in AHF.