Expectations are mixed when it comes to 4% low-income housing tax credit (LIHTC) and private-activity bond deals this year.
Projects are being challenged by rising interest rates, some states reaching their bond caps, and the need for soft debt.
At the same time, 4% credits and bonds remain critical tools to finance large affordable housing developments, and the recent establishment of a minimum 4% LIHTC floor is a boost to deals. Affordable housing advocates also continue to push for lowering the 50% bond financing threshold test, a move that would help finance more deals and create more housing.
LIHTC syndicators shared their expectations about the bond market in a recent Affordable Housing Finance survey:
· “Absent the availability of additional soft funding, we expect fewer 4% transactions given rising interest rates and increased construction costs. Accordingly, bond cap should be more available, a welcome sign given the imbalance (greater demand than supply) in recent years throughout our geography. This could also be a positive sign for metro communities that can sustain stronger rents to support higher leveraged transactions.”— Dana Boole, president and CEO, CAHEC
· “In the current environment, getting a 4% deal done requires a lot of soft debt. The system has ARPA [American Rescue Plan Act] dollars now, but as those funds get allocated, the industry is going to need to find new money. Without soft dollar resources, it is going to be difficult to make 4% deals to work.”—Josh Ghena, senior vice president, equity business funding, Cinnaire
· “More states are reporting oversubscription of private-activity bonds. This has resulted in many housing projects in bond volume-constrained states like California, Texas, Tennessee, Utah, and Indiana sidelined or pivoted to market rate in the absence of 4% tax credits, further exacerbating the affordable housing crisis in the United States. The industry continues to advocate for a reduction in the 50% test that would allow more projects to qualify for 4% housing credits with lesser allocations of private-activity bond volume.”—Julie Sharp, executive vice president, Merchants Capital
· “We are cautiously optimistic and bullish on the 4% credit and bond market this year, both with respect to R4’s LIHTC equity volume and R4 Capital Funding’s tax-exempt lending business. Over the past 30 to 60 days, we have started to see improving conditions with less severe volatility. Our developer clients have adjusted to the higher rate environment, and our pipeline of 4% transactions (both equity and debt) is robust with opportunities in strong markets throughout the country.”—Jason Gershwin, managing director, R4 Capital
· “We expect to continue to see and pursue more 4% transactions in 2023. The fixed 4% rate allows many deals that previously did not pencil without additional sources to now pencil (or better pencil). In addition, many 4% transactions also fared better in 2021 and 2022 when facing rising construction cost pressures because of the incremental benefit of additional equity proceeds associated with cost increases, as compared to 9% transactions with a fixed reservation amount. On the flip side, we are finding that some 4% transactions in high-cost areas are becoming exceedingly large and complex, thereby reducing the number of available equity distribution options. Additionally, more highly leveraged 4% deals are more susceptible to deal feasibility issues in a rising interest rate environment, so we are encouraging our developer partners to be conservative with underwritten interest rates and corresponding debt levels to avoid surprises at the closing table.—Stephanie Kinsman, managing director, investor relations, Red Stone Equity Partners
· “The majority of investments will continue to involve tax-exempt bonds and the 4% tax credit. We expect to continue to see larger 4% bond deals making up a significant portion of the market this year. Depending on geography, pricing remains at levels from 2022 and are expected to remain at that level.”—Todd Crow, executive vice president and manager of tax credit solutions, PNC Real Estate