THE LOW-INCOME TAX CREDIT MARKETPLACE: 2012 OUTLOOK
By Christiana Foglio, Founder and Chief Executive Officer Community Investment Strategies, Inc.
January 16, 2012 – It appears, from all economic indicators and the velocity of multi-family trades in the past 12 months, that investors will continue their love affair with the apartment-rental sector throughout 2012 and beyond. Not only is this good news for market-rate properties, it is welcome news for those focused on the low-income tax credit (LITC) market segment, which accounts for approximately 90 percent of all affordable housing development in the U.S. today.
Investors are expected to aggressively compete for and pay inflated prices for large market-rate multi-family properties, resulting in rent increases to justify low cap rates. Overall occupancies will remain strong, based on the current rates, and even stabilize at properties lacking a rental subsidy, such as Section 8 assistance. In many markets, however, traditional low- and moderate-income renters will be “priced out” of market-rate buildings and complexes, forcing them to seek alternative living options that will add to existing demand for affordable housing.
According to the U.S. Department of Housing and Urban Development (HUD), an estimated 12 million renter and homeowner households now pay more than 50 percent of their annual incomes for housing. In an era where affordably is defined as paying no more than 30 percent of household income on housing, this number demonstrates a significant shortfall that spans virtually every urban and suburban market nationwide.
One area of principal concern is the affordable senior market, where many older adults are selling their homes to downsize to a more economical, worry-free living option. As single-family home sales continue to lag, the number of seniors ready and able to move into new affordable housing has been dramatically impacted. Concessions and lengthier lease-up periods have become the norm, particularly in suburban locales. And in many cases, today’s independent seniors – who are well educated and savvy – are seeking rental subsidies that extend beyond a tax-credit rate to make the move from homeownership to rental living.
At Heritage Village at Seabreeze, a new 55+ affordable living community in the heart of New Jersey’s Ocean County, an array of incentives, along with the community’s strategic location and amenity-filled lifestyle, have been attracting significant interest. New move-ins have been taking advantage of multi-month free rent/free utilities offers while residents have been recruiting new neighbors thanks to a Referral Incentive Program. The result: a steady flow of income-eligible candidates.
The Art of LITC Financing
In 2012, $7 billion in new LITC are expected to flow into the nation’s investor market. Tax reform and banking regulations, including changes in the Community Reinvestment Act (CRA) requirements, are expected to enhance equity pricing. As banks continue to dominate the marketplace, amendments to the CRA regulations will allow banks to invest in larger geographic areas, resulting in a narrowing of the credit pricing gap in historically low-priced non-CRE areas. It is not unusual to see a 10 cent-per-credit differential between a high-priced CRA area and a non-CRA qualified area.
Although the tax-credit market has not been attracting new investors at the same pace as the market-rate sector, current and past players are expected to continue their level of buying activity. However, industry experts are keeping a watchful eye on insurance companies and non-CRA obligated entities. In a sector with yields on investment at or below 6 percent, these investors may decide to withdraw from the LITC market, prompting additional downward pressure on pricing in 2012. If this scenario plays out, the LITC sector may stall once again, just as it did in 2008 and 2009 before the Federal Stimulus package aborted a virtual industry collapse. Based on the current tenor in Washington, a second stimulus is highly unlikely. Therefore, states lacking supplemental grant money to add to LITC proceeds will basically only see acquisition and rehabilitation of existing housing stock, at best.
For the development community, all eyes are on Washington and pending legislation, including S.1989 to amend the IRS Code of 1986 and extend the fixed value for the 9 percent tax credit. Without the fixed value, properties under development will need to scramble to be placed in service before December, 2013. Projects that miss this deadline could experience significant shortfalls in their development sources to complete construction. The extension of the fixed 9 percent value will ensure the financial viability of these projects, many of which are slated to begin construction this spring.
There is no doubt that 2012 presents its own unique set of obstacles – and guessing game – for low-income renters as well as developers. Although demand continues to be strong for affordable-rental units, supply may be considerably affected by tax policy and regulatory reforms. In this market segment, the law of supply and demand cannot function without considerable government manipulation and private sector profits.