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The special Best of Mesa 2017 issue will publish March 26.
Good luck to all the best businesses in Mesa. – Contact Ralph Zubiate at 480-898-6825 or rzubiate@timespublications.com.
The specter of tax reform hangs over the low-income housing tax credit (LIHTC) market, threatening a slowdown in affordable housing production this year.
Even though tax reform may be a year or more away, it’s already triggered major shifts in the industry as LIHTC investors have pulled back since the November election, caused housing credit pricing to fall...
“Within a two-week period (after the election), the LIHTC market experienced the most dramatic change this industry has ever seen,” says Mark McDaniel, president and CEO of Cinnaire. “Investors reacted immediately to the possibility of tax reform that would result in significantly lower corporate tax rates.”
Some investors pulled out of funds they had verbally committed, others stayed in but indicated that it would be their last investment assuming a 35% tax rate, and others modified their investment parameters, according to McDaniel, a veteran housing credit syndicator.
“The uncertainty as to what the tax plan will look like is the biggest driver of any hesitancy in the LIHTC market right now,” says Stacie Nekus, senior vice president, investor relations, at Alliant Capital. “Five points of corporate tax rate change translates to approximately 100 basis points of change in internal rate of return (IRR) (on average) which translates anywhere from 5 to 10 cents per credit, depending on the transaction and if it’s a 4% or 9% credit. Those are large fluctuations that make it difficult to adapt.”
Syndicators overwhelming expect pricing to developers to decrease in the first half of 2017, according to an Affordable Housing Finance magazine survey in January.
Several market veterans estimate prices will be 10 to 15 cents less per dollar of credit compared with a year ago.
This could mean some deals will no longer pencil out and will need to find additional soft funds or be value engineered. It may be especially difficult for tax-exempt bond deals with 4% LIHTCs, which are more highly leveraged. The LIHTC is the nation’s primary tool for creating affordable housing, and any drop in the production of housing credit developments is alarming.
“The need for affordable housing is at an all-time high, and the production of units will not come near to meeting demand,” says Tammy Thiessen, director of equity sales, at RBC Capital Markets. “The current market disruption only exacerbates this problem.”
The more than 20 syndicators surveyed by AHF paid an average of $1.02 per dollar of credit in the fourth quarter of 2016 compared with 99 cents a year earlier. Yields to investors averaged 4.47% in the fourth quarter, a drop from the 5.3% average at the end of 2015, according to the survey.
The recent fourth-quarter prices aren’t expected to last and have been coming down.
“Pricing for deals in 2017 will be much lower than deals in 2016,” says Jeff Weiss, president of Alden Capital Partners. “However, these deals will have adjusters to take into account differences in assumptions made at closing and actual tax reform legislation. LIHTC deals will also be envisioned with lesser amenities or the deletion of costs in excess of the amount necessary to support the allocation of credits.
Others agree that the developments themselves may begin to look different.
"Going forward, LIHTC projects will likely be scaled back with ‘no frills’ design elements and will include more cost-saving measures,” McDaniel says, adding that mixed-income projects in strong communities may become more popular because they can support more debt and are a little less dependent on LIHTC equity.
John Wiechmann, president and CEO of Midwest Housing Equity Group, also expects “a return to plain-vanilla transactions.”
What developers can do
While some syndicators expect investor apprehension to remain as long as tax reform remains unsettled, a few are optimistic that many of the concerns will begin to lift in the coming months for several reasons, including the strong bipartisan support that the program has built in Congress, Community Reinvestment Act investors’ continuation to invest in housing credits, and the creativity of the LIHTC industry.
In mid-January, housing finance agencies in Colorado, Illinois, North Carolina, Ohio, and other states were pursuing ways to assist struggling 2016 deals. The ideas include helping fill funding gaps with 2017 tax credits and rescheduling allocation rounds and extending deadlines.
Syndicators also recommend other steps to get through this turbulent time.
“Developers need to be cautious about acquisition prices of properties intended for LIHTC development,” says Todd Crow, executive vice president at PNC Real Estate. “With LIHTC prices decreasing, larger gaps in financing will be created and therefore some developments will have gaps too big to fill. Lowering acquisition prices of land and or existing properties will help to fill some of the gap.
The next six months will be “choppy,” says Christine Cormier, senior vice president at WNC.“To the extent deals are in the closing process, there is a high likelihood that they are being repriced based a tax rate of between 20% and 25%,” she says. “Adjusters are being agreed to that would adjust equity up or down based on where we finally land from a corporate tax rate perspective. The key for a developer that is looking to move forward will be to get a good understanding of the ultimate home for the deal and ensuring that there is committed equity to the deal from an end investor at a price point that works for the deal.”
Other syndicators also stress the importance of closing deals quickly, especially remaining 2016 transactions.
“Developers should focus on getting committed deals closed as soon as possible as investors appear to be honoring short-term commitments,” says Tony Bertoldi, executive vice president at CREA. “The outlook beyond the next couple of months and into the second quarter is less clear. Developers should remain in close contact with their syndicator partners and state allocating agencies over the next several months and obtain timing extensions, if possible, or seek additional soft dollars or additional credit awards on deals that have an immediate requirement to close.”
While investors may remain on the sidelines, clear guidance from the administration may result in an avalanche of demand for new deals, so the market could move very quickly. The economy appears to be very healthy, and once the dust settles, investors should continue to have a strong demand for credits, Bertoldi says.
“Do not delay in closing transactions to the extent a viable investor commitment is in hand,” says Stephen Daley, executive vice president at The Richman Group Affordable Housing Corp.
If you need to close soon, push hard to do so, adds Hal Keller, president of Ohio Capital Corporation for Housing. “If you can, wait until things calm down,” he says.
In addition, developers should be conservative when estimating LIHTC pricing. “Expect lower prices regardless of tax reform clarity due to higher interest rates and looming threat of tax reform,” says Steve Kropf, president and CEO of Raymond James Tax Credit Funds.
Being cautious on pricing expectations in the 2017 allocation rounds, agrees Mark Gipner, manager, fund development, at Community Affordable Housing Equity Corp., often known as CAHEC. “The magnitude of the pricing reduction is unknown at this point,” he says.
Staying in touch with your financial partners will also be critical in the coming months.
“It’s going to be an uncomfortable adjustment period to adapt to this new pricing environment, especially given the unprecedented speed at which it has occurred,” says Ryan Sfreddo, managing director at Red Stone Equity Partners. “Now, more than ever, is the time to be communicating early and often with your financial partners and other project stakeholders.”
2016 Tax Credit Activity
Company
Capital Closed (in $ millions)
LIHTC Projects Acquired
Alden Capital Partners
280
24
Alliant Capital
416
42
Boston Capital
655
76
Boston Financial Investment Management
589.5
51
Cinnaire
214.2
35
Community Affordable Housing Equity Corp.
178
33
CREA
547
70
Enterprise Community Investment
811
70
Housing Vermont
17
4
Hudson Housing Capital
367
30
Massachusetts Housing Investment Corp.
47.9
8
Midwest Housing Equity Group
190
42
National Equity Fund
947.6
88
Ohio Capital Corporation for Housing
376
45
PNC Real Estate
608.4
50
R4 Capital
389.5
49
RBC Capital Markets—Tax Credit Equity Group
897
72
Raymond James Tax Credit Funds
1,007
104
Red Stone Equity Partners
556
46
The Richman Group Affordable Housing Corp.
810
59
Stratford Capital Group
286
31
WNC
413
33
Source: Affordable Housing Finance survey, January 2017
Donna Kimura is deputy editor of Affordable Housing Finance. She has covered the industry for more than a decade. Before that, she worked at an Internet company and several daily newspapers. Connect with Donna at dkimura@hanleywood.com or follow her @DKimura_AHF.
Roberts: A $225 million subsidy for Coyotes? Really?
by John Washington on February 15, 2017
Take away the rainbows and roses and you are left with a project that commits $170 million in future state funds and $55 million in city funds to another hockey arena. This, in a state that can’t adequately fund its schools. “Fundamentally, what you are doing is you are going into the state general fund and you are appropriating dollars to a private concern,” said Sean McCarthy of the Arizona Tax Research Association. He’s right, of course, but in the end it didn’t matter. The bill sailed through the committee, 6-1. Cue Sen. Bob Worsley, R-Mesa, who is running the bill: “I feel for this organization, that they have the right to vote with their feet and do what they think is right for them and their fans.” Big crocodile tears from Worsley for millionaire owner of the Coyotes, Anthony LeBlanc, whose courtship of ASU’s Michael Crow was rejected when Crow found out that LeBlanc was expecting to RECEIVE a big dowry instead of offering one. So Worsley sent LeBlanc a Valentine’s Day gift to cheer him up. And BTW, this is the same Bob Worsley who was anti-gay before he saw the light (or the dollar signs) and became anti-anti-gay. I should also point out that Worsley’s co-sponsor/co-conspirator/vice-chair is Karen Fann, R, Prescott; and their fellow minion morons on Worsley’s AZ Senate Transportation and Technology Committee include Kate Brophy McGee, R, Phoenix; Juan Mendez, D, Tempe; Lisa Otondo, D, Yuma; Jamescita Peshlakai, D, Tuba City; and Frank Pratt, R, Casa Grande. [I have to apologize in advance to one of the aforementioned senators, because the vote was 6-1…so one of them voted against it, but I can’t tell which from looking at the sucky AZ legislature website.] Arizona Rep Anthony Kern (quoted in the Arizona Daily Independent) is rightfully calling the routing of the bill through the Senate Transportation Committee an act of legislative trickery:
“Procedural tricks in the Senate are now being used to circumvent the legislative process and hide the grim reality from the taxpayers directly affected by these bills,” said Representative Kern. “The original bill, SB 1474, could not stand on its own merit and didn’t have the correct number of votes necessary to advance the Senate Commerce & Public Safety Committee it was originally assigned to. This disservice to the citizens of the state who should not be responsible for funding yet another sports arena.”
…virtually all of a [tax incentive financing arrangement] would be cannibalized from sales and hotel tax receipts elsewhere in the state, but a slice of a sales tax surcharge could come out of a team owner’s pockets, depending on how big the surcharge area is — but the vast majority of it would be a straight-up gift to team owners, all to allow cities in one part of Arizona to steal teams from cities in another.
I note with no irony whatsoever that Neil and I independently applied the label of “morons” to the AZ legislators who are promoting these really, really bad deals. Source: Roberts: A $225 million subsidy for Coyotes? Really?
Update, 5:15 pm: Scott O’Connor adds: “This arrangement would also work for the arts and music theater Worsley and his wife are proposing in Mesa. No conflict of interest in this, is there?”
Happened to enjoy a conversation over breakfast last week with an un-named colleague last week who brought up the subject in this post headline. Like some unanticipated remarks that oftentimes liven-up face-to-face communications, this impromptu comment stimulated a follow-up response: Oh yeah, why? We'll leave it to readers' imagination, but perhaps it's got something to do with the changing face of politics and leadership here in the New Urban Downtown Mesa.
Scott Smith popped-up on your MesaZona blogger's radar screen back in December 2014 two weeks after my arrival here right in front of the entryway at Encore On First, the first new apartment complex downtown in 30 years that received the Real Estate Design Award 2014 for outstanding residential development that is affordable and attainable gaining praise in the real estate market driven by form-based zoning and transit-oriented development clustered around the expansion and extension of Valley Metro Light Rail service to the Central Mesa Business District - one of the outstanding achievements for Scott Smith during his political career and time in-office here
Appearing at the same grand opening was developer Charles Huellmantel, seen in the image to the left, who took an investment risk aligning with a coalition of public-private partnerships for financing a $30M project to realize a new vision for downtown as a great place to live in a burgeoning Arts-and-Entertainment district located along the line of public transit. Encore On First West opened adjacent to this 5-story building last year, both serving as a catalyst for further vertical housing options development south of Main Street. While Encore On First did give rise for new housing options, Scott Smith also had other high ambitions for his time in-office. Some of those are highlighted in an article from November2013 written by Jon Talton, who publishes on RogueColumnist.com More than a few of his remarks, excerpted below, tell more about Scott Smith Mesa rising Mesa has landed an Apple factory and 2,000 jobs (provided the Gilbert school board goes along with the tax incentives), the latest in a series of triumphs as Phoenix falls into eclipse and the big issues are "pension spiking" and the "food tax." Is "the city of wide streets and narrow minds" finally starting to punch at its weight? Unlike most of the "boombergs" that have encircled Phoenix despite the aggressive annexation intended to prevent just that, Mesa always had a special identity. Settled by Mormons, Mesa had a distinctive set of small-businesses and agriculture-based industries and was surrounded by miles of citrus groves. This began to change in the 1970s when the Superstition Freeway, as it built east, killed Main Street shops. Worse, the city inflicted a series of wounds on itself even as it notched huge population growth. . . Instead of balancing industrial land use with residential, Mesa plowed under the groves for subdivisions. By the 2000s, most Mesans had to commute outside the city limits for work. Mesa very nearly was left out of the starter line of light rail (WBIYB), but then-Mayor Keno Hawker persuaded a reluctant City Council to help fund one mile from Tempe into Mesa. The Mesa Arts Center was completed in 2005 in an effort to undo some of the damage to downtown, but it struggled. By 2010, Mesa's population was more than 439,000. It was more populous than Cleveland, Cincinnati, St. Louis and Minneapolis but had none of those cities corporate or cultural assets — or great bones. The municipal building, an ugly office on Main, seemed to exemplify its lack of ambition. That has changed under Mayor Scott Smith, the most effective and interesting public official in Arizona today.
Scott Smith with plans for Sloan Park
Or maybe it's a lesson-learned when a public figure gets elected to a local office with higher political ambitions to head up Arizona state government, endorsed by certain powers-that-be in his political base, yet gets defeated in the gamble to become governor. The fact that Scott Smith is 'missed' here in Mesa might speak oodles about his initiatives to move Mesa forward as a motivated outsider who never served on the Mesa City Council. Scott Smith is a Game-Changer [now CEO of Valley Metro] but somehow the game here in Mesa just is not so dynamic with his second-string successor
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