While the market for low-income housing tax credits remains depressed, some big buyers are starting to re-engage the market. Unfortunately, as the tax-credit exchange program gathers steam, many developers are finding that the biggest impediment to breaking ground is finding the debt.
The price of forward commitments from Fannie Mae and Freddie Mac has become prohibitively costly for many—pricing today is at more than 8.5 percent. And many banks are charging spreads of as much as 500 basis points for construction loans, while taking a much harder look at a borrower’s net worth.
“Right now, it’s much more difficult for me to find a run-of-the-mill construction lender than it is to find an equity investor, which is insane,” says Jim Sari, CEO of Winston-Salem, N.C.-based affordable housing developer The Landmark Group. “It’s the debt guys that are messing the system up now.”
Sari is working on several deals that already have equity investors lined up, as well as permanent takeouts either through a local bank, Fannie Mae, Freddie Mac, or the Federal Housing Administration. But the high price of construction loans, coupled with increased liquidity requirements, has made that execution the hardest nut to crack.
“The liquidity requirements from construction lenders have quadrupled or even gone up by 10 times,” Sari says. “They almost want a construction loan to be cash-collateralized now.”
The good news is that some of the country’s largest tax-credit buyers are re-engaging the market, including PNC, Citibank, and Bank of America. And with a huge volume of previously allocated credits being swapped through the tax-credit exchange program, there are fewer credits on the market. Banks, after all, still have Community Reinvestment Act (CRA) needs. But many banks are providing construction loans only for those developments in which they are an equity investor.
“It’s still a challenge to find a construction lender. Banks are still doing it in their backyards where they need CRA, but only the most well-known developers are able to find advantageous financing,” says Phil Melton, senior vice president at Charlotte, N.C.-based Grandbridge Real Estate Capital. “The FHA is still, in most cases, the optimum way of going about getting a construction loan.”
Construction capital remains one of the crown jewels of the FHA. All-in rates on the Sec. 221(d)(4) program were around 6 percent or less in mid-January. The low rates reflect the robust investor interest in Ginnie Mae securities. It’s an incredible turnaround from just a year ago, when all-in rates were more than 7.5 percent and lenders were holding commitments for 60 days looking for investors and trying to lock a rate.
Last year, the FHA made its (d)(4) construction/permanent loan program easier to use for tax-credit developers. In the past, 100 percent of a project’s equity had to be deposited in cash before the closing of the construction loan, which alienated tax credit deals. Now, only 20 percent is required.
Still, for all its work in courting tax-credit developers, the rule changes have taken awhile to be clarified and the pace of that business has been slow. In a meeting with the Mortgage Bankers Association last fall, HUD executive Carol Galante pointed out that the FHA had only insured about 10 percent of new tax-credit business, which she called “embarrassingly low.”
It’s a strange dynamic gripping the lending industry right now. For the last two years, the lack of tax credit investors was the biggest reason that new deals couldn’t get off the ground. And now “you can bring an equity guy to the dance, but the construction lender, even if you have a clear takeout, is still freaked out,” Sari says.