The difficult year 2020 has been a year of affirmation and progress for the affordable housing sector. Despite massive job losses across the country, stable occupancy rates and rents at properties funded by the federal low-rental housing tax credit program have exemplified resilience.
Equally promising, as part of the $ 1.4 trillion omnibus bill passed at the end of 2020, Congress reset the LIHTC rate to a fixed rate of 4%, allowing developers to raise more than equity and reduce the debt and financing gap needed for projects. Prior to this stage, the rate was fluctuating and had fallen to an all-time low of 3.07% in 2020, according to law firm Pillsbury Winthrop Shaw Pittman.
Given these highlights, affordable housing is attracting attention, said Dudley Benoit, executive vice president of Alliant Capital, a LIHTC syndicator based in Woodland Hills, California. unsubsidized units.
“Now that we are near the end of the pandemic, people are looking at their measurements and analyzes and can see that, even during the pandemic, affordable housing assets have performed well,” said Benoit. “So investors are saying, ‘Let’s get as much as possible.'”
Indeed, the National Equity Fund (NEF), a Chicago-based affordable housing tax credit syndicator and lender, invested $ 1.5 billion in mostly new development and preservation projects in 2020, the largest total in 33 years of company history.
“We are seeing a lot of opportunity from potential developers and interest from investors coming into the market,” said Matt Reilein, President and CEO of NEF. “I think the focus is on the social need for affordable housing, but investors also see it as a solid investment beyond positive social outcomes.”
Feel the pressure
Despite the steady performance and supportive action on the 4 percent tax credit – one that affordable housing advocates have spent years lobbying for – these favorable trends have not entirely removed funding pressures. affordable development. A chronic housing shortage continues at a time of rising construction prices. Even before COVID-19, 30% of US households spent more than 30% of their income on housing, according to the latest report from the Harvard Joint Center for Housing Studies. Of these cost-burdened households, about half spent more than 50% of their income on shelter.
Meanwhile, very low-income renters – those earning 30 percent or less of the region’s median income – face a shortage of 6.8 million affordable units, according to the National Low’s annual survey. Income Housing Coalition.
Melissa Marcolini-Quinn, senior vice president and general manager of NorthMarq in Orlando, Florida, has witnessed how the imbalance plays out. Marcolini-Quinn has secured a $ 4.25 million term commitment from Freddie Mac for a permanent loan on Brownsville Manor, a new 88-unit LIHTC development at 9% in Pensacola reserved for tenants 55 and over. The community opened in November 2020 and was fully let a month later, she said.
“It’s impressive that it’s hired so quickly,” she said. “But at the same time, it’s sad and it speaks to the need for affordable housing there.”
In addition, developers have yet to see the full benefit of LIHTC at 4%. For a $ 10 million transaction, the adjustment would ideally yield about $ 1 million more in equity than when the rate was around 3%, Marcolini-Quinn said.
But investors have lowered the prices they are willing to pay down to 5 cents, to about 88 cents per loan, observers say. While the fixed rate can provide investors looking to reduce their tax liability with more credit, the extra dollars they pay don’t provide the same return as before. The reason: Depreciation and other items that were also used to offset income remain unchanged, noted Mansur Abdul-Malik, vice president of development at the NHP Foundation, a New York-based affordable housing developer who owns properties in 15 states and Washington, DC.
“In order to maintain the balance between tax credits and fixed losses, investors need to reduce the amount of money they pay in tax credits,” he said. “This is a phenomenon developers are still embarrassed about when they see stock prices falling.”
Still, the fixed rate offers the potential to raise more equity overall. Among other benefits, developers can more easily rework agreements that were not eligible for the 9% LIHTC, Abdul-Malik added. While 9% of tax credit projects typically target tenants in very low income brackets, he said, the 4% tax credits allow for a broader mix of income, which can provide more income to support the project.
NHP recently experienced this situation in Baltimore, where it is overseeing the redevelopment of 17 vacant acres in the Park Heights neighborhood. The $ 100 million project will see new apartments, senior housing and single-family homes in two phases. After NHP failed to win 9% of LIHTC to help fund the first phase, it was able to secure 4% tax credit funding.
“We came back and sharpened our pencils, and boom – it works like a 4% deal,” Abdul-Malik said. “But it wouldn’t have worked if the 4% rate hadn’t been set.”
Affordable housing watchers are optimistic that prices will improve as the market adjusts to the new rate, which has effectively increased the supply of tax credits in the market. Additionally, in addition to setting the rate at 4%, the year-end omnibus bill authorized $ 1.2 billion in LIHTC disaster relief for 11 states and Puerto Rico. Together, these two steps likely added some $ 3.5 billion in tax credits to the market, Reilein noted.
“We don’t believe the easing of prices is due to an underlying perception of risk in the market,” Reilein said. “We think it’s related to this little disruption due to the 4% credit patch and the extra layer of disaster credits. It is an important movement of the offer. “
A catalyst for reversing the decline in prices could come from a tax increase sought by the Biden administration. The average price of LIHTC fell from around $ 1.05 per loan in 2016 to less than 95 cents in 2017 and has largely remained there, according to Novogradac, a diversified advisory and consultancy firm. This decrease stems from the 2017 tax cuts, which reduced the corporate rate from 35% to 21%, reducing the need to offset income with losses.
“It was a dramatic drop in the corporate tax rate,” said Dirk Wallace, partner in the company’s Dover, Ohio office. “We expect that an increase in the rate will fuel greater demand for credit and that prices are expected to rise.”