A panel of professionals answer questions pertaining to the current state of the LIHTC equity market

The good news is that in 2020, unlike 2009, closing is still taking place. Circumstances may be shaky, but the truth is that deals are still coming to fruition. The bad news is that deals are taking place at a slower speed. People are working from home. Technology has added an additional barrier. People are busy and their lives are chaotic. With this in mind, it is important to be patient and to remain compassionate regarding the new pace of business and the current state of people’s personal and professional lives. In short, we are still reaching the same result at a reasonable rate. It is just taking longer and requiring more patience than ever before.

As an industry, we should feel good about our resiliency. Our industry is performing well. There is a lot of action – both in terms of deals and funds. Things may be slow, but they are moving forward and, as an industry, we are moving forward too.

As we shift into a post-COVID-19 world (hopefully), we are going to start examining deals through a new lens. We will start scrutinizing the profile of a deal and the profile of a developer more closely than ever before. Additionally, sensitivity analyses are taking up more of our time than ever before. In short, though, the types of deals we’re seeking are easier, smoother deals that can be easily simplified. On the other end of the spectrum, deals surrounding senior living construction deals are making many people nervous, primarily due to the concerns around keeping seniors safe. As banks compete for business, they are being very selective with their money. They, like all of us, are looking for deals that are right down the fairway.

It’s important to remember that investors’ tendencies vary from state to state and sometimes from municipality to municipality, now more than ever due to the impact of COVID-19. Some investors will not do a senior rehab. Other investors are refusing to do any rehabs at all. Some will do rehabs, but only if every occupant in the building moves into a hotel. Some will do a rehab, but only if nobody is leaving for a hotel. More than ever, it is important to match the deal with the investor.

A lot has changed in the world of underwriting and we will continue to see a lot more scrutiny. To begin, we are doing a deeper dive on the sponsor, their portfolio, the impacts of COVID-19 on their portfolio and generally their ability to be a strong sponsor, both now and down the road. If we have delays of three or six months, we’ll run some adjuster analysis and some construction loan interest carry to see what happens to the deal, as we examine questions such as:

• Do we have enough developer fees to hold it together?
• What are some of the extensions on the construction line?
• Do we run into any timing issues, or place in service issues with the state agency?

With rehab deals, we need to understand the developers’ COVID-19 plan. Are you distancing your construction workers? Are you moving the tenant out completely? Are you doing outside renovation first and then moving inside later? How can you ensure safety and security?

The other big unknown is what the impact of unemployment caused by COVID-19 will be in the future. Stimulus packages have disguised, to an extent, what the market will look like with flat or low AMI growth. We’ll see if rent remains flat (or low growth) over the next year or two – or maybe longer. We are keeping our eye on all these factors.

From an underwriting standpoint, we are back to where we were from 2012-16. There is so much uncertainty that everyone is looking for a cushion. A two- or three-month reserve period – anything under six months, really – is no longer feasible. Additionally, we need to be mindful of interest rates and make sure there is sufficient cushion in case rates take a drastic shift.

Looking ahead to 2021, we are expecting a six-to-nine month lag period to continue regarding LOIs. Some economic buyers have and will continue to pull back because their income has decreased or their insurance companies are being heavily affected by hurricanes and wildfires. Other buyers are expecting tax rates to go up and are looking to take advantage of lower rates at the moment.

The key is communication. We recommend holding weekly or biweekly calls with banks/lenders and ask them what they’re thinking, what their budget looks like, what their allocation looks like and what their needs are. Gather that information, process it, and buy based on their guidance.

We have no idea about so many critical factors. We don’t know who our president will be. We don’t know what the Senate or House of Representatives will look like. We don’t know what the recession will ultimately do. We don’t know what the pandemic ultimately will do. We don’t know what our tax code will look like, or what our tax liability will be. We just don’t know. This uncertainty is creating conservative pricing, generally speaking, as 2021 begins to approach.

The silver lining is that these significant factors are priced into the market right now. We expect at least one of the four aforementioned factors to have a positive uptick in the near future, but there are so many moving parts that it’s tough to assess. Patience, to the extent that you can afford to be patient, is probably the best advice we can give at this point.

Despite all the lingering questions, the bottom line is that our industry remains dynamic and efficient. Not every deal will get done, but the straightforward deals will and the more complex deals may have to wait until 2021. COVID-19 will remain an area of high uncertainty, of course, but the political climate will provide more clarity after the election and the picture of what 2021 will look like will begin to crystalize in the next month or so.