There were a lot of tax credit syndication deals that Todd Crow, senior vice president at PNC Multifamily Capital, simply had to walk away from in 2005. With tax credit pricing eclipsing the watershed mark of a dollar per credit for the first time last year, and yields slipping down into the 5 percent range, some deals that the firm otherwise would have pursued had to be let go because returns simply weren't good enough.
"While we hated to lose the business, we just didn't think those deals were good for our investors," says Crow. "I wish I could say that I've seen some pushback in pricing, but I really haven't. We're still losing deals at very high [tax] credit prices."
The country's largest tax credit syndicators and investors saw that high-price, low-return story play itself out time and again in 2005 as a flood of equity chased a finite number of affordable housing tax credits. But business was still good: PNC Multifamily, for one, raised a record $500 million in 2005. Yet key players in the tax credit field are betting the trend can't go on forever.
"We are dangerously close to that point where tax credits seem to make less and less economic sense," says Jeff Goldstein, director of real estate at Boston Capital Corp., which syndicated $600 million worth of tax credits in 2005. "There are some very safe investments out there, at rates that are not significantly different than tax credit rates. I think that really illustrates the big challenge for 2006, which is whether there will be an adjustment or a correction in this marketplace."
While credits are awarded to developers who build affordable housing, they can be sold to raise capital from investors or syndicators, who can then use them for their own tax relief. Those credits only represent dollar-for-dollar forgiveness in tax liability, but investors can still squeeze out a positive return at prices that are more than a dollar if they roll them into passive losses or other deductions going forward. Yet as rates on other investments such as energy credits and Treasury bonds have improved, 2006 could offer a different story for tax credit deals.
"I think more and more investors are waking up to the fact that unless their rate of return is guaranteed, things are going to be dicey for anybody who thinks they can do more than a dollar per credit," says David Kunhardt, senior vice president at Aegon USA Realty Advisors, a direct investor that did $206 million in tax credit business in 2005. "It's going to be very touch and go."
Good news for the tax credit industry came in December, when President Bush signed a relief package for the Gulf Opportunity Zone, increasing allocated credits threefold in areas affected by Hurricane Katrina. Last summer's devastation also underlined the importance of the program in lawmakers' eyes. "The low-income tax credit was part of the solution," Crow says. "I think we're in as good a shape legislatively as we've been in some time."
The increase should lead to more deals being done along the Gulf Coast in 2006. "We haven't seen those deals get allocated yet, but there's certainly an expectation they will," says Michael Lavine, managing director of the tax credit investing group at Wachovia Securities, which generated $468 million in tax credit investing and syndication.
–Joe Bousquin is a freelance writer in Newcastle, Calif.