Affordable housing developers and investors were finding a much more calm low-income housing tax credit (LIHTC) market in July than they were a year ago, with expectation that prices and yields would remain steady at least in the short-term.

The price per dollar of tax credit averaged about 94 cents in the second quarter compared to 97 cents at the end of last year, according to leading national syndicators surveyed in July.

As a result, yields to investors inched up to average about 5.2 percent in recent months after having been in the mid-4 percent range a year earlier.

Under the federal LIHTC program, state agencies award credits to housing developers, who can then sell the tax credits to investors to raise equity for their affordable housing projects.

While the market was settling down, another issue was emerging. The Department of Housing and Urban Development has changed the way it calculates area median income (AMI). The move has industry participants concerned because it meant that AMI estimates dropped in many communities.

For developers, investors, and syndicators, this means that deals will be tougher to underwrite.

“This has become a significant issue for many projects, particularly in those markets—like in the West— where rents tend to be underwritten to the tax credit maximum to make the deals work,” said Joe Hagan, president and CEO of the National Equity Fund, Inc. (NEF). “Most NEF projects have rents at least 5 percent below maximum, so they have not been tremendously impacted by stagnating AMIs. However, we also have development partners that are finding they have to feed their deals after a few years because of an inability to raise rents based on AMI calculations. This is happening in what would otherwise be considered growing economies.”

Hagan said that with utility costs rising, some deals are forced to lower rents to stay within LIHTC limits. “How do you do that if you have debt to service, not to mention other rising operating costs?” he said. “It’s a real problem.”

Others agree. “It is a big issue from both an underwriting perspective and an existing property point of view,” said David Robbins, senior vice president at MMA Financial. “It will likely have an impact on operations but not necessarily investment performance.”

Todd Crow, director of institutional sales and portfolio management at PNC MultiFamily Capital, added that the changes have meant having to look more closely at rent growth assumptions.

Prices, yields stabilize

“For the moment, prices have stabilized,” said NEF’s Hagan in July. “We expect to see a further decline in the last quarter of the year, probably an additional drop of one to two cents on average.”

NEF reported raising $51 million in LIHTC capital and acquiring 37 projects in the first half of the year.

“It’s a bit surprising that pricing in California has not taken the hit that it has in other parts of the country,” Hagan said. “In virtually every other market, we have seen slippage on pricing since the end of last year. In general, we are seeing investors take a more targeted approach to deals. They have also become much more attuned to conservative underwriting than they have been in recent years.”

In July, NEF reported making its single largest investment in an affordable housing development, closing on a $46 million commitment to support EAH, Inc.’s rehabilitation of Crescent Park Apartments, a 378-unit project in Richmond, Calif.

Even with prices stable, an increase in interest rates seemed to be driving investor yields higher, Crow said in mid-July. He also expects to see modest price reductions and “somewhat higher” internal rates of return for the balance of the year. PNC raised nearly $212 million in LIHTC capital and acquired 22 projects in the first half of the year.

“The remaining 2007 deals have already determined their equity partners and so pricing has been set,” said Paul Cummings, senior vice president of syndication at Enterprise Community Investment, Inc. “I would expect that the remaining 9 percent and 4 percent deals that will close this year will achieve pricing that is in line with the previously secured pipeline.”

Enterprise reported raising more than $198 million and acquiring 50 projects in the first six months of the year.

Apollo Equity Partners, a unit of RBC Capital Markets, raised nearly $125 million and acquired 38 projects in the first half.

Boston Capital raised $193 million and acquired 60 projects. The firm recently partnered with The NRP Group on Ephesus Homes, a 45-unit single-family development in Detroit. The deal is Boston Capital’s 30th investment in Michigan in the last five years.

MMA Financial raised nearly $318 million and acquired 44 properties in the first half.

Raymond James Tax Credit Funds, Inc., raised about $250 million and acquired 36 projects. The firm recently supplied more than $5 million in LIHTC equity for the development of Pineview Apartments of Herrin in Herrin, Ill. Developed in partnership with Herrin Affordable Housing, Inc., the project will have 50 duplex units.

The Richman Group Affordable Housing Corp. raised $563 million and acquired 44 properties in the first half of the year. “Assuming the yield on the 10-year Treasury does not change, I think prices will remain relatively steady,” said Stephen B. Smith, executive vice president at The Richman Group. “However, if the yield on the 10-year Treasury increases substantially, you can expect to see prices decline. In general, the equity market appears to be becoming more sensitive to the general level of interest rates in the economy.”