Tax Credit Equity Market Update

I think we can all agree that 2009 was a very tough year for both the country as a whole and the affordable housing industry in particular.
In early 2009 the LIHTC equity market was in free fall as the previous withdrawal of Fannie Mae and Freddie Mac, historically the two largest buyers of tax credit was followed by the meltdown in the financial
markets and the reduction in investment levels by the other large
group on investors: Community Reinvestment Act (CRA) motivated financial institutions.

The market stabilized as the year progressed as banks began to invest, albeit at higher yields and lower pricing to developers, and the resources from the federal American Recovery and Reinvestment Act or ARRA were allocated to fill funding gaps, or to fund projects without an investor through the Tax Credit Exchange Program (TCE). The result was a crazy year end as stalled 2007 and 2008 projects closed and (weather permitting) started construction. The ARRA allocation process, along with the lengthy federal environmental review process, resulted in delays: by December 31st, on a national basis, less than 5% of the funds authorized by the ARRA Tax Credit Assistance Program (TCAP) had actually been disbursed.

In Ohio, the Ohio Housing Finance Agency moved very quickly to implement ARRA programs and was among the first to access TCAP and TCE resources. By moving quickly and in a flexible manner, all but a few of the stalled projects have closed or are moving toward closing in the near future. By structuring a portion of the TCAP funds as bridge financing for investor equity payments to projects, significantly greater private capital flowed into Ohio projects, especially into rural areas that are less attractive to the CRA-motivated investors. OCCH, for example, worked with Nationwide Insurance on a $75 million investment using the TCAP bridge product. And 100% of the bridge loans will be repaid and recycled by OHFA into future affordable housing projects.

In 2010, there is cause for cautious optimism. Many bank investors are already aware of the amount they have to invest for the year and ARRA resources remain for the 2009 projects now seeking investors but with funding gaps. Prices paid by investors will nudge up a bit. While markets are heating up for projects on the coasts, appetite for projects in so-called “fly-over states” like Ohio, and particularly in rural markets, will lag.

At OCCH, we are very optimistic about our equity raise in 2010 for 2009 projects and look forward to another successful year.

The real concern, for Ohio and nationally, is what happens with projects with 2010 and 2011 awards. Without an increase in pricing and the ARRA resources gone, many projects will simply not be feasible. What is needed is legislative action to stimulate the tax credit investor market. The tax credit industry has rallied around three proposals critical to the future of the LIHTC program. These include: an extension of the exchange program into 2010, adjustments to the tax code related to extending the carryback of tax credits from the current two years to five years, and opening up opportunities for certain entities currently organized as Subchapter S corporations to become LIHTC investors.

For more information and recommendations for action around these issues, please go www.rentalhousingaction.org to find out and become involved in the efforts to advance these critical proposals.

Hal Keller