Respond to Equity Market Disruption

Published by Mark Shelburne on Monday, January 23, 2017 

Last fall’s election outcome greatly increased the likelihood of changes in the Internal Revenue Code, including a reduction in corporate tax rates. Because of this possibility, corporations are analyzing potential consequences for their investments in low-income housing tax credit (LIHTC) properties. As a result the LIHTC equity market is experiencing significant disruption. However, it’s important to note there is no shortage of demand for LIHTCs. Rather, the current questions involve pricing, with many closings delayed, and those deals that are going forward being closed with notably less equity.

Allocators’ Role
Normally LIHTC allocating agencies’ involvement in the developer-investor relationship is limited. However, when challenges arise agencies can play a crucial part. Novogradac & Company is surveying allocators about how they are addressing the disruption; the initial responses are below. Although some may have not yet decided on a course of action, all are aware of the issues and evaluating their options.

The responses fall into several categories:

  • gathering feedback from program participants;
  • monitoring past awards’ progress towards closing;
  • providing LIHTCs and appropriated sources to fill gaps;
  • lowering equity price assumptions for 2017 applications; and
  • making other changes in the award cycle, including delayed deadlines.

In a few cases the resulting policies involve amending qualified allocation plans (QAPs).

There is extensive variation between states, which makes sense. Agencies take different approaches to many, if not most, aspects of administering LIHTCs. While sometimes a source of frustration for those who work across the country, the ability to respond in ways specifically tailored to local circumstances has been and will be a continuing source of strength for the LIHTC.

State Responses
These summary descriptions are not necessarily complete, and may leave out state-specific nuances. For the sake of simplicity each LIHTC allocator is referred to as the agency, even though some have different names (e.g., authority). The descriptions only cover the 9 percent LIHTC, not tax-exempt bonds.

The agency has asked 2016 award recipients for all of their investors’ underwriting parameters, including the assumed tax rate, resulting pricing, and any adjusters. Developers need to update letters of interest for the carryover allocation. The agency decided to not extend its March 1 application deadline after talking to stakeholders.

The state’s rules contain penalties when past years’ awards do not meet certain benchmarks relating to closing equity. Because of the unpredictable nature of recent delays, the agency is “extending the readiness deadlines for first and second round projects by three and two months, respectively.” Not meeting these extended deadlines will result in losing an allocation, but not being penalized with negative points on future applications.

The agency is analyzing the 2016 awards to see what it can do about gaps caused by lower pricing (there is a possibility of using state tax credit for bond deals). The next 9 percent application deadline is June 1.

Earlier this month developers with a 2016 award had to submit an updated firm equity commitment letter with pricing valid through June 30, 2017. Failure to do so “may negatively impact a project’s ability to obtain subordinate financing resources.” The agency anticipates approving additional funding in February. Previously the agency has held two application rounds in a calendar year, but for 2017 cancelled the first. The remaining application opportunity is in June.

Applications for 2017 LIHTCs in were due in November, with awards planned for February. In December the agency held a call with the state developer group to discuss how to proceed. The development community did not want to resubmit their applications with lower pricing or postpone reservations. The agency’s focus will be utilizing the state housing trust fund to fill gaps on deals that haven’t closed and holding back LIHTCs for 2017 awards. The reservations will allow the 120 percent boost to equal the 130 percent amount.

Staff is considering LIHTCs and the National Housing Trust Fund as possible gap fillers. The application cycle will move forward as normal.

The agency continues to monitor projects in its pipeline and has taken action, including addressing declines in pricing and helping avoid such declines by working to meet stepped-up closing deadlines. Developers submitted 2017 applications on January 13. Staff has discussed the market uncertainty with several investors/syndicators. The requirements for equity commitment letters allow downward adjuster language.

The agency is engaged in discussions with its partners (developers, lenders, equity investors, etc.) and is monitoring the situation. At this point it has made no policy changes or determinations.

The agency is carefully monitoring LIHTC developments with prior awards that now are in the closing process; several developers have experienced pricing issues. At this point the agency is not planning to set-aside LIHTCs to resolve shortfalls, but rather will work through the developments as investments reach a critical point. Appropriated sources, increased deferred fee and local funds may be part of the solution. In advance of the preliminary application the agency reached out to many members of the development community about a possible delay and decided to maintain the current schedule.

The application deadline has been postponed from January to the end of February.

The application review process was underway when the market changed. The agency re-underwrote using $0.85 pricing, which created feasibility challenges. The awards made January 23 will have a “Pricing Adjustment” contingent award of up to 10 percent of the LIHTCs and depend on new underwriting and supporting documentation.

North Carolina
The agency has proposed a QAP amendment that, if approved, would make the following changes:

  • Owners may return their 2016 allocation for more 2017 LIHTCs.
  • Reconsideration will not take into account increased uses.
  • Allocations above the 2016 amount will count towards the developer’s 2017 award limit.
  • The deferred developer fee must remain and be a minimum of 25 percent.
  • Requests submitted “without a firm equity commitment will assume an equity price of $0.90.”
  • The maximum additional allocation will be $100,000 in annual LIHTCs.

The agency has proposed extensive amendments to its QAP. If approved:

  • The agency award additional 2017 credits to projects that received awards in 2016;
    • approximately 17 percent of the state ceiling will be available,
    • the estimated amounts will be between $400,000 and $1 million.
  • Developers “may not increase the project costs, reduce deferred developer fees, make design or services changes, or alter the income targeting ratio.”
  • There is a minimum deferred fee percentage which is correlated to the amount of increased LIHTCs.
  • “Owners must negotiate an agreement with the equity provider to return a portion of the additional” LIHTC or repay an agency loan if investor returns exceed initial projections.
  • The agency will list applications that would have received an award if not for this change; these proposals “may receive a competitive advantage in the 2018 QAP.”

In December the agency announced LIHTC developments that have not closed on all funding sources by January 31, 2017, must submit:

  • fully executed equity letter of intent (dated after July 14, 2016)
  • all executed financing commitment letters
  • updated budget (including sources and uses)
  • proposed timeline to achieve a construction closing, and
  • documentation that demonstrates the development is moving forward.

Not being able to demonstrate a viable financing plan may result in losing the allocation. In a memo to recipients of LIHTCs in 2016, the agency said, “Additionally, the Agency may not accept future applications from developers who are unable to move forward… and do not return the tax credits in a timely manner.”

South Dakota
The agency is not making any major changes at this time, but will be flexible as developments try and close between April and June.

The agency does not plan on modifying its basis boost policies to close funding gaps. There may be an effort to pursue additional state credits. The 2017 application and award schedule is moving forward as planned.

The agency proceeded with its scheduled January 18 application deadline and asked applicants to review and adjust assumptions to the current market conditions. Staff will work closely with each applicant and public funders to address gaps on a case by case basis.

The 9 percent application deadline was moved from February 3 to March 3; the expected LIHTC pricing range will be $0.88 to $0.94. A minimum of 85 percent of projected funding sources must be “committed” at the time of application. If the application’s uncommitted funding sources exceed 15 percent, the agency will increase the credit amount (as needed) to reduce uncommitted sources to 15 percent, which may result in a point reduction.

Conclusion and Next Steps
Just as all agencies are considering the best approach for their states, they also are interested in the status of both past awards and upcoming equity pricing. Please reach out to them with information as it develops. Doing so can only help your development/application and the LIHTC overall.

Contact Mark Shelburne with any comments or questions.