Market observers thought tax reform would disrupt the market for LIHTCs. The disruption never happened.
In 2018, prices seemed poised to drop for federal low-income housing tax credits (LIHTCs)—the most important federal program that helps pay for the cost of building new affordable housing units.
It didn’t happen, and LIHTC prices are also unlikely to fall in 2019.
“The price has stayed pretty steady over the last year,” says Jennifer Schwartz, director of tax and housing advocacy at the National Council of State Housing Agencies (NCSHA), based in Washington, D.C.
Tax credit prices had already dropped in 2017, as the corporations that buy LIHTCs bet lower corporate taxes would cut into their need for tax benefits. Then Congress passed a reform of the federal tax code that cut corporate taxes more than anyone anticipated. Experts thought LIHTCs prices would drop again, but they stayed relatively stayed relatively stable in 2018.
In 2019, “the market is going to be very strong,” says Cindy Feng, a Boston-based partner and leader of tax credit investment services with accounting firm CohnReznick.
Developers resist lower prices
The federal LIHTC program provides developers that aim to build or rehabilitate affordable housing with a tax credit that they can sell to investors to help pay for the cost of the development. The more investors are willing to pay, the more money developers have for construction.
LIHTC prices dropped sharply after the Presidential election of 2016 because Republicans who then controlled the White House and Congress promised to reform the federal tax code and cut the overall corporate tax rate. Investors guessed the top tax rate would fall from 35 percent to 25 percent. The prices they paid for LIHTCs dropped accordingly—from an average of over a dollar for a dollar of LIHTCs plus related tax benefits, all the way down to an average of 92 cents at the end of 2017, according to CohnReznick.
“They started pricing that in before tax reform passed,” says Schwartz.
Affordable housing developers scrambled to fill gaping holes in their budgets. A project that cost $10 million to develop could easily end up short $1 million. Many deferred development fees—if they hadn’t already planned to do so—and tapped all available sources of secondary financing.
Affordable housing projects financed with tax-exempt bond loans and LIHTCs often took on hard debt equal to 60 percent or even 70 percent of the cost of the project.
When tax reform cut the corporate tax rate to 21 percent, experts thought LIHTCs prices would drop again in response, probably by another four cents to about 88 cents for a dollar of LIHTCs. Instead, pricing for LIHTCs has stayed relatively stable. Investors paid an average of 91 cents for a dollar of LIHTCs in December 2018, according to CohnReznick, only a penny less than the year before on average.
In many cases the yields that investors are willing to accept on their LIHTCs investments have fallen, averaging 4.75 percent at the end of 2018, according to CohnReznick. However, in multi-investor funds, different investors receive different yields. Some investors, like large banks motivated by the requirements of the federal Community Reinvestment Act (CRA), can accept yields as low as 3.75 percent. Economic investors that are more focused on yield are able to demand yields from 5.5 percent to 6.0 percent in the upper tiers, and they are unlikely to accept less.
Many firms that syndicate LIHTCs to investors have also reduced the amount of money they take from transactions or their “loads.” “Syndicators are getting squeezed as far as their loads,” says Feng. Investors are also structuring tax credit deals to provide more losses in the first year for additional tax benefits.
Strong demand for LIHTCs in 2019
The expectation is that LIHTC prices will remain stable in 2019.
“I doubt that the price would drop further this year,” says Feng. “There is a very active, busy market for the first quarter of this year… The investor demand is still very strong.”
Cohn Reznick counts $1.8 billion in multi-investors funds scheduled to close in the first quarter, which is a strong number, according to Feng.
The banks that buy LIHTCs to satisfy the requirements of CRA also continue to invest, unphased by the potential reform of the CRA by federal regulators. The demand for LIHTCs has also been supported by the return of Fannie Mae and Freddie Mac to the market, which began to buy LIHTCs in 2018 for the first time since the Great Recession.
“Fannie Mae and Freddie Mac were able to put more equity into LIHTCs in 2018 than many expected,” Feng notes.
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