Whither LIHTC

Although the articles don’t leap out at you, Affordable Housing Finance is providing some nice summaries of this week’s action at AHF Live in Chicago.

One industry roundtable, Where Does the LIHTC Industry Go? identified some significant challenges to the LIHTC program and the business models of affordable developers, syndicators, and financiers. The hard truth was highlighted by Kansas City’s Lee Harris of Cohen-Esry, “We’ve got equity for many developments that is simply not available. Where equity is available, pricing is down 20 cents or more.”

So how did we get here? The shortest answer is that for the past several years, the early LIHTC (Low Income Housing Tax Credit) non-financial investors disappeared and the GSEs and financial firms came to dominate the $10b market. In addition to the monetary benefits of the tax credits, the commercial banks could meet CRA (Community Reinvestment Act) needs and ‘green’ their portfolios by throwing a few ducats at Enterprise’s Green Community Programs (a laudable goal) and at those developers who anticipated the direction of the larger market. So long as the Fed enforced CRA and profits required tax credits, the industry hummed.

Some of you may have read recently that’s no longer the case.

Losses on other operations will be carried forward to offset profits (if any) over the next two years. With the early Fall panic in the banking industry, the Fed basically waived CRA requirements for urgent acquisitions. That may be temporary, but the carry-forward losses for 2007-09 will keep the commercial banks out of the market until 2010-11 at the earliest.

My firm essentially stepped away from the syndication business back in 1Q 2008. We had been one of the largest syndicators and debt originators of affordable housing in the country, but between stress placed on warehouse lines (where we stuck projects before selling them to the fund investors), wildly changing construction costs, and the inability to finance marginal deals with tighter credit standards, we are done for a while. I think we’ll limp through 2009 doing agency debt deals, but the equity side is not very busy right now. I don’t think they’ll ramp up again until 2010-11 at the earliest.

So the lack of demand for our product (tax credits) means that there is no supply for developers. Builder magazine highlighted the pain in the SFH market, but I promise it extends to multi-family developers as well. Unfortunately, since LIHTC funds an outsize portion of the affordable housing in the US, this means that there will be very, very few deals completed over the next several years. The shadow market of failed condo projects, REO homes, and aging market rate properties may take up some of the slack, but we are facing several years when no new affordable product is created or rehabilitated.

Which gets us back to the initial question: Whither LIHTC?

I don’t know yet. We are facing several bad years and the collapse of stalwart investors means that the entire program may need to be rethought. I’ll leave that for another post.

For those interested in the history of LIHTC or the Green Community Program, Enterprise provides an excellent summary. The NYT also has a nice summary of the challenges faced by Jonathan Rose even in the oddball NYC market.