Tax Credit Prices Continue to Drop
Since June 2008, tax credit prices nationwide have fallen almost 5 cents per 10-year tax credit dollar. As of Oct. 1, 2008, tax credit prices are in the range of 75 to 82 cents per dollar. This figure represents a steep decline in value from a year ago, when prices were in the range of 90 to 95 cents per dollar.
There are a number of reasons for the decrease in equity, including reduced demand by investors who are seeking higher yield investments, says affordable housing consultant A.J. Johnson, an expert in the low-income housing tax credit (LIHTC) program.
“Not only is investment demand lower than the current glut of housing projects seeking tax credit equity,” Johnson says, “but the pool of investors is smaller, too.”
The number of investors in tax credit projects is not limited to financial services companies that need credits to satisfy legal requirements imposed by the Community Reinvestment Act (CRA). But in geographic areas where there are no CRA demands, such as in rural areas and many parts of the Midwest, housing projects have had limited success in selling their tax credits.
“Even if a project had been given the green light a couple of years ago, it may no longer be financially viable, because the developer's financial forecast no longer holds true,” Johnson says. “Credit prices were much higher when the deal was being put together initially,” he adds.
Because of the availability of alternative investments, such as Historic Tax Credits and New Markets Tax Credits, banks and financial services and insurance companies are choosing them. These alternative programs often have less complex regulatory requirements and lower risk compared with the LIHTC program, Johnson says.
A.J. Johnson: A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; (757) 259-9920; firstname.lastname@example.org.