The Affordable Housing Finance Live Summit 2023 was held in Chicago, Illinois in November, bringing together many developers, syndicators, financial experts, and government agencies that make up the Low-Income Housing Tax Credit (LIHTC) industry. Read on for our team’s key takeaways from the event, which may help inform your strategic priorities for 2024.
Big Picture Housing Outlook
Presented by Lisa Sturtevant, Chief Economist, Bright MLS, this economic update evaluated the housing market trends of years past compared to where we are right now. Specific updates of interest included the stabilization of inflation in most facets of the economy, with the major exception of rents, a prediction of a slight decline in interest rates in 2024, though never getting back to the early pandemic rates. There is the expectation of a possible minor recession in early 2024, one that could possibly pass quickly and without major impact to the general population.
Developer Challenges Roundtable
Moderated by Tom Tomaszewski, President of the Annex Group, this panel was made up of Vince Bennett, President of McCormack Baron Salazar; Kimberly Black King, Chief of Real Estate Development for Volunteers of America National Services; Jeffrey L. Kittle, President and CEO of Kittle Property Group; and Diana McIver, President of DMA Cos. This veteran panel led an honest discussion on the challenges that they face as developers. A frequently mentioned challenge included rising development costs and insurance premiums. In addition, other challenges were brought up such as malware or cyber risks, unfair underwriting without the matching risk, and cash flow issues from the lack of gap financing.
Modular Momentum
Presented by Caleb Roope, CEO of The Pacific Cos., this session was a discussion on modular construction, along with a breakdown of the value that can be realized by building with modular units and when this makes the most sense project by project.
Regarding modular construction, notable highlights include the following:
- Most construction takes place in a factory and is then completed on the job site.
- Modules typically make up 40% of your total costs.
- Double-loaded corridor building is most commonly used.
- Though you want to pay attention to a factory-friendly design for your units, the building exterior is uninhibited in design.
The value created from building with modular construction includes:
- Reduction in construction costs, with a good target being a 20% reduction
- Compressed schedule, up to 25% shorter
- Ability to build in difficult climates
- Improve production quality
- Address labor shortages
Modular construction makes the most sense in the following scenarios:
- While working in high-cost urban centers
- Operating in limited building seasons
- When temporary storage is readily available
- Working within 800 miles of a factory location
- Larger projects with more than 100 units
Other considerations include whether your site has adequate street frontage and suitable crane reach locations as modules are being pieced together on the site itself. Roope also highlighted the importance of at least two of three of your architect, factory, or general contractors having prior modular construction experience.
Filling the Finance Gap
During this session, the panel discussed how they have been working to get deals completed while financing has been a challenge for the industry. Moderated by Amy Dickerson, Managing Director of Investors Relations at Hunt Capital Partners, the panelists included Maria Barry, National Executive of Community Development Banking at Bank of America; Brian Swanton, the President and CEO of Gorman & Co.; Jesse Elton, the Vice President of Finance at The Community Builders; and Richelle Patton, the President of Collaborative Housing Solutions. These developers and finance experts talked about several avenues they have been utilizing to manage their project financing:
- Utilizing American Rescue Plan Act (ARPA) funds
- Working with local governments
- Working with the Green and Resilient Retrofit Program (GRRP) through HUD
- Income averaging
- Engineered utility allowance studies
- Project-based vouchers
The panel also discussed the increased maximum of $5,000 per 45L credit to potentially help fill this gap, along with the Inflation Reduction Act EPA funds.
Bond Financing
During this session, the panelists commented that the industry seems to have older developments that are hoping for some future interest rate cuts and stabilization in the bond market. The hope is that this future change will allow the market to adjust and development activity to increase in 2024. General consensus is that deal terms are getting better. More interest rate swap transactions are appearing than in the past, as they allow rates to be 65 to 100 points less than permanent financing rates. Capital investors seem to have a strong appetite for bond purchases.
Insurance Cost Considerations
This specific panel did not surprise the attendees when they shared information on the continued increase in insurance costs, which hit the market and have been passed on to consumers and property owners. The panel shared that the increase in the premium charged by the carrier and the decrease in number of reinsurance providers caused major issues for companies, including large increases in premiums overall cost and extremely late last-minute renewals. The panel shared that the premium for insurance is calculated by replacement costs per square foot plus rate change equals the premium increase. Also, specifically, the industry’s value for replacement costs was historically too low, so to rebalance the replacement costs with the increased rate has really driven the costs charged.
This panel also focused on ways to control the premium increase. Several of these items were spending money to help install products or monitoring devices to reduce overall risk. There are a few other items such as fire stops and other products used to reduce fire or water risk specifically in kitchens.
State Housing Finance Agency Roundup
This session included state directors from Arizona, Illinois, Ohio, and Virginia. Some of the highlights included:
- Ohio has bond cap available. They also have state LIHTC and state single-family credits available to assist with sourcing. The 2024 QAP will increase the maximum credit allowed per property to attempt to develop properties with at least 60 units. The agency is experiencing staffing shortages, so they are trying to simplify the QAP for competitiveness and ease administration with fewer staff.
- Virginia is looking at a bond shortage for next year, so they are attempting to keep bonds for more shovel-ready new development properties that can be completed in 24 months. They are going to two deadlines annually for bond allocation. Half of their current properties in construction have had to be refreshed for credits. Virginia has sued some owners because of deteriorating conditions at properties. These are inexperienced owners within the LIHTC program who buy older properties, thinking they can run the site however they want.
- Arizona has increased the credit allocation amount per property. The state is prioritizing sites that are ready to begin construction, i.e., have site plans ready and permits in hand. Arizona is giving more QAP points to developers who waive their right to a qualified contract price or agree to a thirty-year extension on rent limits. The state is looking at extending or expanding the state credits.
- Illinois has a lot of credits being turned back into the agency in 2023. The state is considering increasing the allowed developer fee. Illinois has also experienced staffing issues with retirement and retention. The state wants to add 1,600 new supportive housing units in the next four years. There is also movement to pass more favorable property tax legislation.
The construction and real estate team at Forvis Mazars combines sound accounting and financial performance with long-range vision to help build your asset value and operating income, which is critical for success. If you would like to learn more about our Construction & Real Estate Practice, reach out to a professional at Forvis Mazars today.