That was the consensus at a session of the National Housing & Rehabilitation Association recent summer institute in Edgartown, Mass.
The LIHTC is a somewhat complicated vehicle that trades equity positions in affordable housing projects for a credit against the investor’s income tax.
It involves developers, who can be nonprofit or for-profit (NH&RA members are for-profit developers), state housing finance agencies, which administer the program, syndicators who package the deals, and investors who buy the credits. (Probably should add in the Internal Revenue Service as well.)
Investors get a double benefit. Not only do they get the tax writeoff, but usually they can buy the tax credits at below par, as prices and yields fluctuate with market conditions.
The mortgage crisis caused a big disruption in the market, driving away big investors like Fannie Mae. Also, revenue and earnings dropoffs at investors meant they had less need of tax credits.
In the last couple of years, though, the market has rebounded nicely, probably due to strong pricing that attracted as many as 22 insurance company investors, according to Tom Capp, chief operating officer, Gorman & Co., Oregon, Wis. But now, as yields have dropped from 10% to 6%, just five or six of those remain.
“I don’t think this is a deep market,” said Brenda Champy of Boston Capital Corp. She pointed out that if tax rates are reduced in the coming debate over tax reform, that will reduce demand and could cause yields to drop 100 basis points. She also said 12 investors currently make up 50% of the market for tax credits.
Victor Sostar, senior vice president at First Sterling Financial Inc., Manhasset N.Y., said that regional banks are becoming better prospects for tax credits since their cost of funds is lower than insurance companies, meaning they can live with somewhat lower yields.
The NH&RA meeting also heard details of a Federal Housing Association pilot plan for the LIHTC, mandated by the HERA Act of 2008 to increase FHA’s affordable housing production. However, it has taken until now for the pilot to even begin to roll out.
The pilot has four FHA hub offices (Boston, Detroit, Chicago and Los Angeles). Maximum loan size is $25 million.