For many in the affordable housing industry, 2009 was the worst year they had ever seen. The low-income housing tax credit (LIHTC) market’s continued decline, higher prices on debt financing, and the disappearance of many gap financing sources meant that very few new deals penciled out. And all indications are that 2010 will bring more of the same.
Interest rates are expected to rise, construction financing will prove elusive, and nobody is predicting a swift rebound in tax credit equity prices next year. What’s more, many subsidies, such as state housing trust funds and the Federal Home Loan Bank’s Affordable Housing Program, will likely continue to dwindle.
“It’s a new paradigm in terms of how you put your affordable housing deal together,” says Phil Melton, a senior vice president who leads the affordable housing debt shop at Charlotte, N.C.-based Grandbridge Real Estate Capital.
But as the economy continues to struggle out of recession, there are also reasons for hope. The higher yields on LIHTCs may lure some nontraditional or dormant investors back into the market. Additionally, the Tax Credit Assistance Program (TCAP) and Tax Credit Exchange Program (TCEP) introduced through the American Recovery and Reinvestment Act may help to jumpstart the dormant pipeline of tax-credit development.
“2010 will still be an extremely challenging environment,” says C. Lamar Seats, a senior vice president who leads the debt platform at Columbia, Md.-based Enterprise Community Investment. “But with the TCAP and exchange programs, and alternate investors coming back to the equity market, it should be a better year.”
Many industry players are pinning their hopes on TCAP and TCEP as a short-term path out of the current malaise. TCAP provides much-needed gap financing for tax-credit developments allocated from 2007 to 2009, and TCEP allows developers to exchange their unsold credits for 85 cents per tax-credit dollar.
While TCAP and TCEP are long on promise, they have been short on efficiency. The programs have a limited life, expiring by the end of 2009 and requiring developers to complete their projects by the end of 2010. At the same time, state Housing Finance Agencies and the Treasury Department have been slow to issue guidance and plans on how to disperse the funds, producing a “hurry up and wait” dynamic.
“The TCAP and exchange funds aren’t going to jumpstart anything, they’re woefully bureaucratic,” says Steven Fayne, a managing director at Citi Community Capital, the community development arm of the New York-based bank. “There’s a lot of uncertainty on some of the rules administered by the federal government and the states, and that hasn’t gotten resolved.”
Many in the industry believe that the volume of deals saved through the programs are just a drop in the bucket and that an extension of the programs is desperately needed. And ironically, in some cases, the programs have had a converse affect: Instead of trying to make deals work at 70 cents per tax-credit dollar, developers are further stalling projects, holding out to see what they can get from TCAP and TCEP.
“The legislation has delayed production of new affordable developments, or has put a lot of things on hold,” says Tim Leonhard, who heads up the affordable housing debt platform for St. Paul, Minn.-based Oak Grove Capital. “Why would a developer sign up a deal with a syndicator at 70 cents when he has the ability to potentially go back to the state and get 85?”
Some long-stalled projects, bolstered by TCAP and TCEP funds, did begin to break ground in the third and fourth quarters. But it’s a modest pace of activity. Many in the industry feel that the only way for the programs to have a meaningful or comprehensive affect is by getting the government to extend the programs for another year.
“It’s a good, short-term stopgap,” Melton says. “If we can get them extended beyond 2010, that opens up some real doors. They have the opportunity to help fill some gaps and provide some volume to get deals done next year.”