Availability of Tax Credit Equity Is One Challenge Facing Affordable Housing
- Oct 16, 2008
Daryl Carter (pictured) is the CEO of Avanath Capital Partners, a real estate investment firm focused on affordable housing, urban real estate investment, mortgage services and specialty finance. It was founded in November 2007. Prior to founding Avanath, Carter co-founded Capri Capital Limited Partnership, where he managed approximately $7.4 billion worth of assets, as well as participated in equity and mezzanine investments in multifamily and commercial real estate. Carter talks to MHN Online News Editor Anuradha Kher about the challenges of finding financing for affordable housing, LIBOR-based and Treasury-based rates, and how his company is dealing with the credit crunch.MHN: How is the Fed rate cut likely to affect multifamily financing rates?Carter: The Fed rate cut will likely improve the capital flows to the multifamily sector and eventually lower multifamily financing rates. MHN: What is happening to LIBOR-based and treasury-based rates?Carter: Hopefully, the Fed rate cut and the government investment in banks will lower the rates of LIBOR-based financing and treasury-based rates.MHN: What is the financing situation for affordable housing projects?Carter: There are three challenges in financing for new affordable development projects. First, the dominant tax credit investors over the past three to five years have been the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, and the large money center banks. The government take-over of Fannie and Freddie has negated the need for new tax credit purchases by these entities. The significant charge-offs by large banks and financial institutions have also negated the needs for investing in tax credits.Second, the credit crunch has diminished the magnitude of construction financing available to the affordable sector and finally, the decline of the credit ratings of major players in the affordable space – insurance companies, banks and the GSEs – have diminished the availability of credit enhancement that would enhance tax-exempt bonds on 4 percent tax credit deals. MHN: What are some of the challenges in getting finance for affordable housing?Carter: There are three challenges in the affordable housing sector:Availability and pricing of tax credit equity;Availability of soft debt and subsidies from public agencies as municipal revenues are declining; andAvailability of tax-exempt bond credit enhancement.MHN: You recently closed Avanath’s first major transaction, the acquisition of 26,00 affordable units, one of the largest affordable housing portfolio in the country. How did you pull it off?Carter: The Simpson acquisition was a culmination of several elements: co-operation among multiple constituencies—tax credit investors, project level lenders, public agencies, buying group and the seller. All these constituencies needed to “buy into” the business plan of the buyer. An acquisition lender, Citibank, that understood and endorsed our business plan and cultural compatibility between the buyer and the seller, relative to the employees of Simpson Housing Solutions. The buyer’s knowledge of the tax credit space and the key constituencies. Finally, of course, patience, tenacity and lots of luck!MHN: How is your company dealing with the credit crunch?Carter: We are dealing with the credit crunch by underwriting new deals assuming lower leverage and higher interest rates, underwriting exit cap rates at cap rates 150 to 200 basis points higher than today’s cap rates, and underwriting new acquisitions assuming less new construction over the next three years.MHN: Is demand for affordable housing rising in the current economy? Where?Carter: Yes, demand for affordable housing is rising in the current climate in many U.S. markets, especially on both coasts of the country. The various markets in these coastal regions, which are Avanath’s target markets, are high-cost housing areas exemplified by higher average home prices and higher rents relative to the rest of the country. These high-cost, or high barrier-to-entry markets include Southern California (Orange County, Los Angeles, San Diego), Northern California (S.F. Bay Area), the Pacific Northwest and the tri-state area (including New York). With the downturn in the residential market and in the broader economy, fewer people are able to buy homes and/or afford to pay market rent in these high-cost areas. Market rents are significantly higher than affordable housing (restricted income) rents in these high-cost areas. As such, demand for affordable housing will continue to be high.