CHAPA Young Professionals Brown Bag Lunch Series

Transcription

1 CHAPA Young Professionals Brown Bag Lunch Series P owered by Tax Credit Investment Services An Introduction to the LIHTC Equity Market & Overview of Recent LIHTC Property Performance CohnReznick LLP

2 Who We Are CohnReznick LLP is a national accounting, tax, and advisory firm with one of the largest and most experienced tax credit practices in the country. Tax Credit Investment Services ( TCIS ) is a dedicated business unit within CohnReznick that provides strategic advisory and due diligence services to help clients make informed decisions on acquiring and managing tax-advantaged investments. Working with commercial real estate, compliance, and corporate tax personnel, TCIS provides advisory services related to equity market conditions, investment options, investment due diligence, regulatory requirements, and investment impacts to financial statements. Our core services include: Market education and industry research Tax credit and investment strategies Investment due diligence Portfolio reviews (tax benefit, investment performance, etc.) and benchmarking Organizational assessment System and process improvement 1

3 Tax Credit Investment Services The TCIS Team is comprised of a multi-disciplinary group of professionals including CPAs, attorneys, financial analysts and other professionals with real estate, banking and public sector experience, well-versed in all realms of the tax credit equity market. TCIS is well regarded in the industry for: Having authored over 600 investment due diligence reports for tax credit investors since the early 1990s; experience with multi-investor, proprietary and secondary market transactions; Having authored numerous affordable housing industry studies and spoken frequently at industry conferences and events; Being sought after by the bank regulators and GAO to provide industry data and insights; Publishing a bi-monthly monitor of the LIHTC equity market trends and pricing in the Tax Credit Advisor magazine; Having designed the industry s first and only third-party application to automate the financial reporting for tax credit investments. 2

4 Representative Publications 3

5 How the Program Works A Developer applies to state housing agency for LIHTC for their development Multiple applications are reviewed by the State Housing Agency in competition for each LIHTC allocation The State Housing Agency award credit allocations to Developers with the highest scoring projects according to the Qualified Allocation Plan Reduced debt burden allows for lower rents to low income tenants Investors provide equity, Developers can build with less debt and Syndicators receive fees for setting up the transaction, and ongoing asset management. Syndicators bid to acquire Developer s LIHTC projects developers weigh the price offered, speed of execution and existing syndicator relationships through the bidding process. Capital from Investors is also raised to finance the projects development 13

6 How the Program Works Once a developer receives an allocation of housing credits from the agency, he begins entertaining offers of interest from investors and syndicators. The term syndicator refers to a firm that raises capital from housing credit investors through investment partnerships that deploy the capital by making investments in multiple LIHTC projects. As an intermediary, the syndicator is compensated for raising the capital, making the property investments and asset managing the property investments for a fifteenyear holding period Roughly 75% of the annual LIHTC equity market is raised by syndication firms. Wells Fargo, Bank of America and US Bancorp are the largest direct investors investors that perform ongoing asset management of acquired assets without engaging a syndicator Equity Market for LIHTC Investments (in billions) $[VAL UE] $3.8 Syndicated $9.7 Direct 5

7 How do investors choose investment vehicles? Direct investment Investor owns a 99% LP interest in an operating partnership with the developer as GP and no third party intermediary. A few large investors have full time staff to underwrite & asset manage such investments. This option would be difficult to execute otherwise. Fund investment Investors acquire LP interests in an investment fund organized by a syndicator/fund GP. The syndicator finds and underwrites investments in a series of operating partnerships Multi-investor Funds typically 5-10 corporate LP s, investors can typically review about 70% of the fund s property investments before committing Single Investor (Proprietary) Funds same idea with an experienced investor keeping more control e.g. veto rights on property selection 10

8 Portfolio Composition Since % Gross Equity Percentage of Fund Type Since % 80% 70% 60% 50% 40% 30% 53.9% 56.2% 68.3% 78.7% 74.6% 85.8% 80.1% 82.4% 51.4% 51.6% 62.8% 59.6% 69.0% 69.8% 20% 30.3% 10% 0% Multi Investor Proprietary 7

9 Size of the Market: 2015 Syndicated vs. Direct Equity Volume (2015) Group 4 - six syndicators Group 3 - ten syndicators Six direct investors $2.3B $0.3B $3.8B $3.5B $3.9B Group 2 - seven syndicators Group 1 - five syndicators 8

10 The Role of a Syndicator To accommodate the demand for housing credits and to take advantage of economies of scale, a syndicator typically acquires equity interests in a number of property partnerships. A syndicator provides a limited amount of initial capital to the developer to secure the property investment, with the intention of syndicating the future stream of benefits generated by the properties to fund investors in exchange for their equity investment. The syndicator originates potential property investments, underwrites their risks and rewards, provides ongoing asset management of the property partnerships, and provides the investors with periodic investment updates, audited financial statements and income tax reporting information Syndicators are compensated for their services through a variety of fee payments ( the load ) which average 5-7% of gross equity, and receives reimbursement for some of their marketing and underwriting expenses 9

11 Syndicator Selection Criteria Investors choose syndication partners based on a number of factors including Prior portfolio performance Yield achievement relative to projected yield Timeliness of credit delivery Property occupancy, debt coverage ratio and per unit cash flow Incidence of portfolio foreclosure Ease of investor closing Experience of senior management Organizational operational stability Asset management sustainability Ability to secure investments in desired markets (for CRA or other reasons) 10

12 Investor Motivations Favorable riskadjusted return Corporate social responsibility / public relations Investor Motivations Positive consideration under the Community Reinvestment Act Cross-selling opportunities Tool to manage the company s effective tax rate 11

13 Growth & Composition of the Housing Tax Credit Program Years Market Size Investors Yields $1 Billion Individuals 20% $2 Billion Corporations 11% - 18% 2000 $4 Billion Corporations 10% $9 Billion Corporations 4.5% - 7% $5 Billion Bank Investors 8% - 10% 2010 $10 Billion Banks, insurance companies 10% - 12% $11 Billion Banks and other corps 6% - 8% $12-14 Billion Predominantly banks 4.5% - 7% The continued and increasing influence of commercial banks coupled with the increase in the price of housing credits has rebuilt the equity market for housing tax credit investments since

14 Community Reinvestment Act Enacted in 1977 to reverse redlining by banks 13

15 Community Reinvestment Act National banks are examined by the regulators on three year cycles for their compliance with these goals based on a lending test, investment test and service test Objectives are principally tied to low-moderate income areas where the banks take deposits called Assessment Areas In order to receive positive consideration under the investment test, potential projects must meet the definition of qualified community development investments. LIHTC projects automatically qualify. Housing credit investments are a perfect solution because their track record is outstanding and whether they are financed as direct or Fund investments, they can be matched precisely with areas that they need to supply debt or equity capital. 14

16 State of the Current Market Based on data collected by CohnReznick LLP from all active syndicators and six direct investors, it is estimated that investors collectively funneled at least $13.8 billion into the housing credit investment market in the last year, making 2015 a record volume year in the history of the housing credit program. The incidence of sub-5.00% investor yields on national funds has taken a strong hold since September 2015 as housing credit prices continue to remain above the $1.00 mark in many markets. Despite diminishing yields and soaring housing credit prices, investors, especially those incentivized by the Community Reinvestment Act, continued to demonstrate robust appetite for housing credit investments. Low risk asset class in mature market with participation by Fortune 500 companies Low regulatory risk Credit made permanent in 1993 Considered to be a public welfare investment; favorable regulatory treatment Consistent 10-year history of after-tax return in the 5.50%-7.50% range Low foreclosure and recapture risks 15

17 Historical Housing Credit Pricing and Yield 16

18 Housing Credit Yield vs. 10- Year Treasury 12.00% Housing Tax Credit Yield vs. 10-Year Treasury 10.00% 10.61% Gross Equity Price 8.00% 6.00% 4.78% 5.19% 6.82% 9.17% 6.82% 6.17% 7.23% 6.96% 5.88% 4.00% 2.00% 4.76% 4.66% 3.78% 3.36% 3.23% 2.99% 1.76% 1.92% 2.54% 2.10% 0.00% Year of Investment Average annual values (not monthly) Quarterly Effective IRR 10 Year Treasury Rate 17

19 Current Funds 18

20 Overview of Recent LIHTC Property Performance

21 Study Background The first study began in 2000 when 6,250 properties were surveyed. Over 21,000 properties surveyed in 2015; representing approximately 70% of actively managed LIHTC properties and 90% of those placed in service in the last five years Data contributed by 35 participants, including 32 syndicators and 3 direct investors Focused on the operating performance of nearly 16,000 stabilized properties 20

22 Key Performance Metrics Physical occupancy the number of occupied units divided by total number of revenue-producing units in a given property. Economic occupancy annual collected rent (net of vacancies, concessions and bad debt) divided by annual gross potential rent. Debt coverage ratio (DCR) net operating income (after required replacement reserve contribution) divided by mandatory debt service payments. Per unit cash flow the cash flow available after making mandatory debt service payments and required replacement reserve contributions, divided by the total number of units within the property. Incidence of underperformance properties operating with <90% physical occupancy, <1.00 DCR, or negative per unit cash flow. The incidence of project foreclosures. 21

23 Portfolio Performance - Occupancy Occupancy levels in LIHTC properties have been remarkably consistent from one year to the next; stayed at 96%+ and reached a historical high of 97.5% in The spread between physical and economic occupancy has decreased to just 90 basis points. 22

24 Portfolio Performance - Occupancy 99.0% Median Physical Occupancy - US vs. MA 98.5% 98.0% 98.1% 98.2% 98.4% 98.4% 97.5% 97.0% 96.7% 97.0% 96.5% 96.0% 96.2% 95.5% 95.0% Median US Physical Occupancy Median MA Physical Occupancy 23

25 Portfolio Performance DCR/Cash Flow Improved financial performance sustained DCR hovered between 1.13 and 1.15 for a significant portion of the last decade, before rising to 1.21 in marked the first year when none of the states operated below 1.00 DCR Strong financial performance was observed across every segment and nearly every participant s portfolio 24

26 Portfolio Performance - DCR Median DCR - US vs. MA Median US DCR Median MA DCR 25

27 Portfolio Underperformance Incidence of underperformance continues to decline 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Below 90% Physical Occupancy Below $0 Per Unit Cash Flow Below 1.00 Debt Coverage Ratio 26

28 Cumulative Foreclosure Rate Survey respondents reported that 133 properties were foreclosed since their inception, translating into a cumulative foreclosure rate of 0.66% as of % 0.60% 0.56% 0.66% 0.59% 0.50% 0.45% 0.53% 0.40% 0.38% 0.31% 0.30% 0.20% 0.11% 0.16% 0.18% 0.21% 0.21% 0.24% 0.10% 0.07% 0.09% 0.00% Foreclosure Rate by Equity Foreclosure Rate by Number of Properties 27

29 Annual LIHTC Foreclosure Rate vs. Conventional Multifamily 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% LIHTC Foreclosure Ratio FDIC Insured Multifamily Delinquency Ratio 28

30 Incidence of Foreclosure by Leverage Ratio %-15% 16%-30% 31%-45% 46%-60% 61%+ 29

31 Are LIHTC investments risk free? Housing credit projects are actually very fragile by design, primarily due to: Rent restrictions Section 42 mandates that state housing credit agencies allocate just enough credits to make the project feasible. So housing credit properties can get into trouble when: When rents can t be raised due to negative AMI growth When projects are over-leveraged When replacement reserves aren t funded and maintenance is deferred Operating expenses spike Additionally, housing tax credit properties must conform to statutory and compliance requirements. 30

32 Questions?

33 THANK YOU! Cindy Fang, Senior Manager Regan St. Pierre, Manager Matt Barcello, Manager Corinna Liu, Senior Associate