LIHTC Investors Hit Pause As Profits Become Unclear

Affordable housing owners were already having challenges on a number of fronts before COVID-19. Now, in the midst of the pandemic, some Low Income Housing Tax Credit investors are telling owners they are going to stop investing until there is more certainty in the market, according to Deirdre Robinson, partner at Sullivan & Worcester. If more investors go that route, this will have serious implications for projects going forward that do not yet have investors committed.

“If investors stop investing, deals will not get done, or they will get done at a much slower pace,” Robinson says. “We are already beginning to see that some investors are now choosing to delay their investments as they watch what happens with the stock market.”

Robinson continues, “the ‘wait and see’ that we are now seeing from some investors is less driven by the virus itself but rather by the uncertainty in the market and investors not knowing what their financial situation is going to be and what their profits will be this year and in the future since that is what really drives the investment. It is tax liability offset by the credits and so if the tax liability is not there, or it is there at a much lower amount than expected, then those investors don’t need as much of the credits.”

The lack of investing could also soften the market similar to the 2008-2009 recession where investors left the market for a time or were investing at a much lower level and this had a direct impact on pricing, Robinson adds.

Another impact of investors leaving the market is that deals that have already been awarded credits cannot get done in the time frame required by Section 42 and so it is possible that credits will have to be returned to the state.

“None of this is good during a time when there may be a greater demand for affordable housing,” explains Robinson.

One of the implications for projects that do not have investors committed is that it may become harder for developers who are looking for investors to find them. At the same time, investors may become more selective in their choice of projects if they have more limited funds to invest.

Developers looking for investors at this time may not only find a diminished pool but may also start to see changes in pricing.

Up until earlier this month, the low-income housing tax credit pricing was strong but if what happened in 2008-2009 is any indicator of what could happen now, then developers should not be surprised to see a reduction in pricing and if this happens, unless there is a similar reduction in construction expenses, then many of these deals will be “facing a shortfall in sources with no clarity right now on where those extra sources will come from because state and local municipality resources are going to potentially be pulled in many directions,” concludes Robinson.