Download The State of the Low Income Housing Tax Credit Market – National

The State of the Low Income
Housing Tax Credit Market –
National and Local Perspectives
An Arizona Housing Alliance Training Session
May 26, 2010
Wayne H. Hykan, [email protected]
Ellen O’Brien Kauffmann, [email protected]
Mark J. Maichel, [email protected]
How the Credit Crisis Even Clobbered Affordable Rental
Housing
•
A loss of tax capacity by investors in the market – especially Fannie
Mae and Freddie Mac
•
Investors prefer shorter holding periods that are provided by LIHTC
investments – LIHTC investors generally face risk for 15-year
compliance period
•
Increased risk aversion, especially real estate risk
•
Useful sources on the state of the affordable housing industry
-
The Disruption of the Low-Income Housing Tax Credit Program:
Causes, Consequences, Responses, and Proposed Correctives, Harvard
Joint Center for Housing Studies, December 2009
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Low-Income Housing Tax Credit Investment Survey, Ernst & Young,
October 2009
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American Recovery and Reinvestment Act of 2009
Provides Some Assistance
•
Tax Credit Assistance Program
-
•
$2.25 billion of subsidy to fill funding gaps
Arizona has committed approximately $27 million
Program is only available for projects awarded tax credits during 2007
through 2009
This was a stopgap program only
1602 or Tax Credit Exchange Program
-
Program does not involve large tax expenditure to Treasury
Only applies to 2009 unless extended
Shrinks the total amount of tax credits to be sold in 2009
Any grant funds must be used to make subawards by January 1, 2011
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10 Year Treas Rate
Section 42(b) Tax Credit Applicable Percentages and
Interest Rates
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
30% PV Applicable Percentage
US Treasury Securities 10 Year CM
70% PV Applicable Percentage
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The Banks as Leading Buyers of Tax Credits
•
Community Investment Act requirements
•
Disruption of markets allows much higher yields than
before the credit crisis
•
Complementary products (e.g. construction loans)
•
Big banks already have the expertise in underwriting real
estate in general, and tax credits in particular
•
Low interest rate environment provides predictable profits
– tax capacity
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Deals That Are Getting Done
•
9% deals vs. 4% deals
•
100% low income vs. mixed use
•
Real estate markets
•
Well-capitalized developers/strong track record
•
Underwriting standards – conservative
•
Certain acquisition/rehab – (e.g. - §8 property)
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Tax Credit Financing of Public Housing
•
Increased volume cap makes facilitates acquisition and renovation of
public housing by public-private partnerships
•
Tax credit structure allows leveraging of governmental resources
(e.g. capital fund financing program money)
•
HUD support for mixed finance transactions
•
Deals often structured with little or no “must pay” debt
•
Example – in March 2010, New York City Housing Agency finances
the modernization of over 14,000 units using tax credits
•
HUD Transforming Rental Assistance initiative
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Deals That Are Getting Done
LIHTC and Energy Credit Projects
•
Energy credits are investment tax credits like historic tax credits
(HTCs) with many similar rules. Investors have routinely worked on
projects that combine HTCs and LIHTCs, and are comfortable with
transactions that combine energy credits and LIHTCs.
•
Higher IRRs to investors because energy credits are claimed
immediately in the year the property is placed in service.
•
Credit pricing has been slightly higher in such projects
•
If ARRA Section 1603 grants in lieu of energy credits are utilized,
the energy property must be placed in service in 2010 or construction
of the property must commence in 2010 and must be completed by
the tax credit expiration date of the particular energy property.
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Pricing
•
Yields – 11-11.5%
•
Geography
•
E and Y report – participating syndicators reported prices
from 58¢ - 82¢
•
Areas showing increased interest and pricing include
Minnesota, Virginia, Maryland and Arizona.
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Passed and Pending Legislation
•
Extension of Exchange Funds
•
Codification of Economic Substance
•
Extending carryback for 5 years
-
Bingaman bill
-
Pascrell bill
•
Modification of Passive Loss Rules for certain taxpayers
•
Accelerated Credit Delivery
•
Making the LIHTC a refundable credit
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Passed and Pending Legislation/IRS Guidance
IRS Notice 2010-18, 2010-14 I.R.B. 525, issued on March
17, 2010, clarified:
(1) ARRA Section 1602 tax credit exchange sub-awards are exempt
from federal income taxation and, therefore, are excluded from the
gross income of sub-award recipients, and
(2) The sub-awards do not reduce either the eligible basis of a
building for purposes of IRC Section 42(d)(5)(A) or the depreciable
basis of the building.
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Passed and Pending Legislation
Codification of Economic Substance Doctrine:
•
The judicial doctrine of economic substance was codified at IRC
Section 7701(o) in the Health Care and Education Reconciliation Act
of 2010. Economic substance codification is designed to clarify the
doctrine by providing courts with a uniform definition of economic
substance, but not alter the flexibility of courts in other respects.
•
When the economic substance doctrine applies to a transaction, the
transaction will have economic substance only if the taxpayer
establishes (i) the transaction changes in a meaningful way, apart
from federal income tax consequences, the taxpayer’s economic
position, and (ii) the taxpayer has a substantial non-tax purpose for
entering into the transaction (a conjunctive analysis).
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Passed and Pending Legislation
•
With respect to the first prong (change in economic position), a taxpayer
can rely on factors other than profit potential to demonstrate that the
transaction results in a meaningful change to the taxpayer’s economic
position. However, where a taxpayer relies on profit potential, the
present value of the reasonably expected pre-tax profit has to be
substantial in relation to the present value of the expected net tax
benefits to be received by the taxpayer. The statute does not require or
establish a minimum return that will satisfy the profit potential test.
•
In evaluating the taxpayer’s non-federal income tax purpose for entering
into the transaction, any state or local income tax effect which is related
to the federal income tax effect is disregarded. In addition, the
achieving of a financial accounting benefit is also not taken into account
if the origin of the accounting benefit is a reduction in federal income
tax.
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Passed and Pending Legislation
•
The legislative history of the codification of the economic substance
doctrine provides that if the realization of the tax benefits of a
transaction is consistent with the Congressional purpose or plan that
the tax benefits were designed by Congress to effectuate, it is not
intended that such benefits be disallowed. In this regard, the
legislative history states:
“Thus, for example, it is not intended that a tax credit (e.g., section
42 (low-income housing credit), section 45 (production tax credit),
section 45D (new markets tax credit), section 47 (rehabilitation
credit), section 48 (energy credit), etc.) be disallowed in a transaction
pursuant to which, in form and substance, a taxpayer makes the type
of investment or undertakes the type of activity that the credit was
intended to encourage.”
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Preservation
•
Current portfolio of multi-family projects
-
•
•
Public policy for acquisition/rehab deals
Key priority for state agencies is the acquisition/rehab of existing
properties using tax credits
-
•
1.6 million
Federally assisted or insured by HUD (e.g. - §8, §236)
2.1 million LIHTC units since 1987
40 state housing agencies have a priority or set aside for preservation
projects
Preservation Strategies
-
Tax exempt financing and 4% credits
Recycling credits
Year 15 exit strategies
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Preservation
• Affordable Housing Preservation Bill
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APRIL 2010
ARIZONA HOUSING ALIANCE & BALLARD SPAHR WEBINAR
ARIZONA LIHTC OUTLOOK
1.Community Reinvestment Act Initiative
2.Who’s in the market and what’s the appetite
3.Pricing
4.What kind of projects are getting done
Community Reinvestment Act| CRA
SUMMARY-CRA Investor
SUMMARY-CRA Investor
CRA is a United States federal law designed to encourage commercial banks and savings
associations to meet the needs of borrowers in all segments of their communities, including
low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce
discriminatory credit practices against low-income neighborhoods, a practice known as
redlining. The Act requires the appropriate federal financial supervisory agencies to encourage
regulated financial institutions to meet the credit needs of the local communities in which they
are chartered, consistent with safe and sound operation. To enforce the statute, federal
regulatory agencies examine banking institutions for CRA compliance, and take this information
into consideration when approving applications for new bank branches or for mergers or
acquisitions.
„ The law, emphasizes that an institution's CRA activities should be undertaken in a safe and
sound manner, and does not require institutions to make high-risk loans that may bring losses
to the institution.
Lending TEST Matrix
Lending activity
Assessment area concentration
Geographic distribution of loans
Borrowers Profile
Responsiveness to credit needs of
economically disadvantaged, small business
& low income
Community development lending
Product innovation
Investment TEST Matrix
Investment & Grant Activities
Responsiveness to credit & community
development needs
Community development initiatives
Service TEST Matrix
Lending Activity
Accessibility to delivery systems
Changes in branch location
Reasonableness of business hours
Community development services
„ Ratings: Outstanding, High Satisfactory, Satisfactory, Needs to Improve & Substantial Non-
Compliance.
Who’s in the Market & what’s the appetite
CRA DRIVEN
CRA DRIVEN
„ Arizona was obviously one of the worst hit states in the economic downturn. With lots of
available land and plenty of new demand resulting from population growth, housing
development hit all time record highs. This was a major backbone to the economic
development of the state. Many of the large banks and smaller community banks provided
credit products that facilitated this growth. As the markets started to fail the liquidity of those
banks fell into risk and in many cases resulted in non-performance and then followed into
foreclosure.
„ Today many of the large banks like US Bank, JPMorgan Chase, Wells Fargo are active in the
state; but are very sensitive to new lending and investment opportunities.
„ Some community banks like Johnson Bank, Alliance Bank/Bank of Nevada & National Bank of
Arizona are starting to emerge with some gathering interest into the affordable housing lending
and investment space.
ECONOMIC DRIVEN
ECONOMIC DRIVEN
„ A positive aspect to the erosion in LIHTC credit price has been the fundamental increase in
yield which has caused more interest in the credit as the markets continue to change.
**Regardless of the type of lender or investor there is still a very large emphasis placed on
the sponsor, the development team, deal location and proposed target populations.
Price
LIHTC Price
LIHTC Price
„ In Arizona the LIHTC price growth was pretty closely tied to the demand and CRA activities
taken place in many of the Arizona markets. Prior to the current economic conditions pricing
reached $.95 cents or higher.
„ Today, we are seeing more risk based pricing tied to the sponsor, the location and the
populations served. Where the average price may be .67 cents in a large MSA you could see
that reduced to .63 or lower depending on the rural location or on the complexity of the
structure and intended populations.
„ The syndication firms placing the credits are further challenged by a more strategic
management of their lines of credit and the timing of the actual upper-tier pay in schedule.
Some upper-tier investors have also placed “caps” on what can be paid at the lower-tier and
even have required the use of particular material suppliers at the transaction level.
DEBT
DEBT
„ Construction debt remains a challenge as similar sensitivity to the sponsor, location and project
characteristics are tightly reviewed. Some concerns are starting to grow as most of the
construction debt is floating LIBOR based pricing. LIBOR is currently low, but for how long?
Additionally, construction debt can be tied to LIHTC investment.
„ Permanent debt remains the most challenging in Arizona. Rates can range from 6.75% to 9.75%
and higher. The higher rate has placed a large amount of pressure on larger gap investment
from softer sources of funds.
What type of projects are getting done
9% DEALS
9% DEALS
„ Arizona’s competitive round has been a system devised of set-asides and scoring. Specific
populations or project types have been targeted such as; Historic, Acquisition/Rehab, Special
Needs, Rural location and the federally mandated Non-Profit set-aside. Projects that do not fall
into these categories land in a “general pool” and all categories are scored and ranked.
„ Arizona has a focus to get LIHTC distributed into the Rural communities. It has become
extremely challenging to do so as investors are focused on CRA and locations with the highest
demand.
„ Limited soft sources of funds has increased the difficulty of filling the gap from the loss of
permanent debt sizing and reduced credit price.
CURRENT 2010 ROUND INITIAL SUMMARY
CURRENT 2010 ROUND INITIAL SUMMARY
„ This year there were 31 applications submitted. (1) Set-Asides = 2 Veteran, 6 Rural, 3 Tribal, 8
Non-Profit; (2) 12 projects are not in a Set-Aside; (3) 10 in total are located in Rural areas; (4) 9
appear to have a “rehabilitation” activity; (5) Average units per project 78; (6) Average project
cost/unit $166,805; (7) Average annual credit request $1,163,473; (8) Average gap financing
request is $1,600,000; (9) Estimated average developer fee $1,400,000; and (10) 17 Senior tenant
and 14 Family tenant projects.
What type of projects are getting done
4% DEALS
4% DEALS
„ Not many TEB deals have been executed in the last few years due to various local and national
market conditions.
„ The TEB system in Arizona allocated through a lottery system. A proposed project seeks approval
from an issuer. Once approved the proposed project enters the lottery on either January 1 or
July 1. If Volume Cap is available or becomes available after those dates, then its an “over the
counter” submission.
„ There are hard allocation fees that must be paid upon a reservation of TEBs and the project must
close within a required period of time.
„ The lottery and closing requirements coupled with the “at risk” capital make it considerably
difficult to get all the moving parts to come together. An experienced underwriter, feasibility
and legal team should be assembled before beginning this process.
Q&A
Please submit your questions now.
Or, contact our presenters:
Wayne H. Hykan, [email protected]
Ellen O’Brien Kauffmann, [email protected]
Mark J. Maichel, [email protected]
Quinn Gormley, [email protected]
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