Fall 2008 issue of Horizons

INDUSTRY ◆

REAL ESTATE

For example, a project that was originally underwritten in the low 90 cent (per dollar of tax credit) range may now be looking at pricing in the low 80 cent range. The result is that many of these deals now have significant budget shortfalls and may not be completed. Beyond the challenge of low prices, many developers are having a difficult time finding investors for their projects. The shortage in equity has left both developers and state agencies scrambling to find creative ways to fund gaps in development sources. Those investors that are still in the market are being flooded with proposals from desperate developers. Basically, there are too many deals chasing the small number of investors that are still in the market. For the first time in a long time, the demand and supply for tax credit equity is out of balance and, as of press time, it is still uncertain when the market will stabilize. LIHTC syndicators are searching for the point at which prices to developers allow projects to be completed and yields to investors are high enough to attract tax credit buyers. In 2007, the yields to investors dipped to historic low rates of 4.5 percent to 4.75 percent, as many developments were being priced higher. Today, many syndicators believe that yields to investors will need to be in the 6.5 to 7 percent or higher range to attract investors back to the market. Developers and state housing agencies are looking for creative ways to fill the financing void. As an encouraging example of how state agencies are attempting to alleviate the problem, the Missouri Housing Development Commission has requested that all 2008 applicants resubmit their development source and use schedules according to terms more reasonably achievable with today’s marketplace. MHDC is preparing for the recapture of reserved tax credits, and it hopes to determine which projects initially denied credits could potentially move forward with construction using this reserve. Another recommendation made by the staff at MHDC is to provide additional HOME funds in order to fill the financing gaps. MHDC commissioners, however, have been hesitant to back this recommendation prior to knowing to what extent, if any, the fallout of awarded So what does all this mean?

Housing Tax Credit Industry Continues to Struggle The low-income housing tax credit (LIHTC) program has been on its heels for much of 2008 and continues to face several challenges. The problem is so great that many industry experts predict that a number of new projects with 2007 and 2008 tax credit reservations will not get their equity this year since the project may no longer be feasible. The situation was led by the withdrawal of several major investors, including Fannie Mae and Freddie Mac. Several of these investors have pulled completely out of the market or, at best, have significantly reduced their investments in LIHTC projects for 2008. It is estimated that approximately 40 percent of the market is missing in action. In turn, this situation has continued to put downward pressure on the price for LIHTCs. By Bryan Keller, CPA, and David Herdlick, CPA

47 ◆ fall 2008 issue