Will That Be Cash or Credit?
- Apr 08, 2016
The affordable housing industry has evolved over the past several years, and an asset class that was once known mostly for tax benefits, management fees and nominal cash flow has become extremely competitive among investors.
Generally, there are two types of buyers for affordable properties: cash buyers and preservation buyers. Historically, cash buyers were relatively conservative, requiring proportionate leverage and decent yield thresholds. This often translated to lower pricing, when competing against acquisition/rehab executions acquired with LIHTC equity.
However, there has been a bit of a shakeup over the past few years as new, well-capitalized buyers have moved into the affordable market and chased existing product. These investors have access to seemingly endless buckets of cash and are willing to tolerate lower-leverage debt and modest returns in order to win deals.
Obviously, these transactions are appealing to sellers because pricing is just as strong, if not stronger, terms are better and the timeline to closing is usually much quicker than a LIHTC execution. These conditions are dictating not only project-based subsidized deals, but also Section 42 deals with no project-based subsidy.
As a result, an increasing number of Section 42 projects are being sold post credit delivery period, as opposed to post initial tax-credit compliance period. General partners and institutional equity partners are recognizing strong pricing in the market and are willing to exit early by selling to an aggressive cash buyer, rather than waiting for re-syndication or recapitalizing internally.
As cash buyers try to swallow up more and more of the affordable housing inventory, preservation developers are adapting their acquisition models in order to keep up with the cash-rich competition. Developers who have historically acquired properties only as LIHTC or bond executions are raising private equity or partnering with institutional equity partners in order to be as competitive on price and timing as conventional buyers.
Likewise, affordable lenders are rolling out new debt platforms to help preservation clients stay competitive in today’s market. Several types of bridge products are available from local banks, agency lenders and even state housing finance agencies, who are offering bridge loans in order to be more consumer-friendly, so they don’t lose out on future business opportunities.
The parameters of these bridge programs can vary greatly depending on the lender, sponsor, type of transaction and other factors, but they are giving preservation developers options and the means to be agile in a market dominated by cash deals.
Despite threats of rising interest rates and economists’ concerns about a market correction, investor appetite within the affordable space remains incredibly strong. We continue to see the majority of transactions closing with cash and conventional financing, either as long-term holds for yield buyers or inventory for preservation buyers to syndicate on their own timelines.
Gene Levental is managing director of SVN Affordable, a Cincinnati-based brokerage that specializes in the valuation, marketing and sale of Section 8 and Section 42 housing.