Well, here we are. The federal stimulus package has finally been signed into law. The applications for OHFA’s 2009 LIHTC competitive round have been submitted, as 2008 and even some 2007 projects continue to languish due to lack of investor capital. And the economy continues to worsen spurring a significant increase in demand for affordable rental housing.

The Stimulus Package

By now you have probably seen a number of summaries on the contents of the American Recovery and Reinvestment Act. Without going into details, the advocates for the LIHTC program, including OCCH, wanted two things from the stimulus package: short term gap financing to allow stalled deals to get done, and some tax code changes that would help bring needed equity capital into the market. Bottom line is we got half a loaf. But as the saying goes, “half a loaf is better than none.”

So the good news is that we received significant amounts of gap financing both in the form of HOME dollars and in the option for states to “exchange” a portion of their 2009 LIHTC authority into cash. The $2.25 billion in HOME funds should net Ohio more than $75 million in capital and the exchange would allow OHFA to convert up to 40% of their approximate $26 million annual LIHTC authority into over $85 million in cash, if OHFA chooses to exercise that option. I’d say that’s a lot of money!

The bad news is that the stimulus package did absolutely nothing to help bring new corporate investors into the LIHTC market. Just two years ago, there was an estimated $9 billion in private capital funding affordable housing developments around the country. With the withdrawal of Fannie Mae and Freddie Mac from LIHTC investments, along with the reductions by some CRA-motivated banks due to the crisis in the financial sector, only an estimated $5 billion in new capital was entering the market causing prices to developers to dramatically decline, and certainly not enough to fund all deals with an allocation of credits.

So what does it mean for developers in Ohio? Here are a few thoughts:

Deals will get done but with a greater amount of gap financing and a smaller amount of tax credit equity.

Don’t focus on cents on the dollar paid by the investor, but on balancing sources and uses with the HOME or exchange funds. There will be a wider range of prices paid for credits. The limited number of “direct investors” may pay higher amounts for a few selected deals but the bulk of the transactions will be getting pricing in the high 60- low 70- cent range. This is the range needed to deliver a return that will begin to entice nonfinancial corporations to invest. Fortunately there is ample gap financing, though those dollars come with their own set of strings: Davis-Bacon wage rates, deeper targeting, etc.

Most deals will not begin to move until well into the third quarter.

This is a result of two factors. First, OHFA will come up with a plan on how best to implement the provisions of the stimulus bill, go through a public comment period to receive input and final approval. This takes time, though I am sure OHFA will be doing so much faster than other states. I will not speculate what OHFA will do at this point. Second, the equity markets are still frozen. Only now are some of the usual CRA-motivated bank investors setting their goals for the coming year and proceeding with underwriting new investments. And there has been no penetration yet of the non-financial institution corporate investor market, though rising yields will hopefully attract them later in the year.

For our part at OCCH, we plan to have an initial closing on our 2009 fund by the end of the second quarter and admit new investors throughout the year. We have received several verbal commitments and are working with our investors as they move through their own formal approval process.

And while the previous two comments are fairly optimistic for deals in the pipeline, here is a final thought.

The long term future of the LIHTC program is tied to the leverage of private capital and reliance on private sector oversight and discipline.

The influx of public sector gap dollars is certainly welcome and needed at this point in time, but the program will not survive if we depend on such huge subsidies on an ongoing basis. The bi-partisan support for the program will evaporate and the LIHTC program will fade into history as one more federal housing program that served its purpose but became just too expensive.