State of the Market: Affordable Housing Equity Outlook

Stacie Nekus, National Team Leader, KeyBank Equity Growth Initiative, October 2020

The affordable housing crisis preceded the COVID-19 pandemic, and it will likely persist long after. The mission to provide quality affordable housing for American communities is more critical than ever.

To discuss this and other trends, KeyBank, one of the nation's leading affordable housing capital providers, welcomed industry leaders in equity investment to a virtual panel discussion on the state of the affordable housing industry. Hear from these experts about the critical role that equity plays in the success of the sector.

Affordable housing need is great, and so is opportunity for equity investors

Low-income populations in the United States were experiencing crisis-level housing insecurity long before COVID-19, and now the pandemic’s impacts on public health and the economy have made the need for affordable housing even more dire.

While disruption and uncertainty in 2020 has led some affordable housing investors to hesitate, the opposite is true for mission-driven lenders and developers who are more staunch than ever before in their commitment to addressing the shortage and getting affordable housing deals done.

Stacie Nekus, national team leader, Investor Relations for KeyBank, and Rob Likes, national director, Community Development Lending and Investment for KeyBank, led a conversation with industry experts active in affordable housing finance and development:

  • Leigh Ann Merchant, senior credit manager, Ally Financial
  • Carly Wiltshire, head of tax credit originations, Nationwide Insurance
  • Keith Dragoon, managing director, investments, Standard Communities

The panelists discussed a series of topics ranging from rates and pricing, to the Low-Income Housing Tax Credit (LIHTC) market and considerations for developers and investors as they seek out capital and aim to increase the much-needed housing supply.


Has the pandemic suppressed appetite for affordable housing investment?

The economic shockwaves of the COVID-19 pandemic – rising unemployment, business closures, rent collection stress – have put all real estate investments under greater scrutiny, but they haven’t stopped activity in the affordable housing sector.

“Our investment volume for 2020 has actually gone up. We started the year with the goal to do $330 million of LIHTC equity. We have increased that to $355 million; there were a couple opportunities in the market that had really good yields, so we got approval to do additional capital,” said Merchant about Ally’s strategy. “We’re focusing a similar level of investment capital for 2021.”

Wiltshire notes that the investment committee at Nationwide has a heightened focus on pandemic impacts on construction schedules, the financial strength and portfolio performance of the sponsor and operational requirements for the building. For all new deals, they factor a three-month increase in the construction schedule and conduct a sensitivity analysis on construction cost looking at factors such as lumber price increases.

Dragoon noted that Standard Communities focuses primarily on acquisition, rehabilitation and 4% preservation projects, along with Section 8 housing (about two-thirds of its portfolio), which has put them in a strong position in this economic environment. In a trend that is counter-intuitive to many in the industry, Section 8 properties have proven attractive to affordable housing investors because there hasn’t been an issue with elevated delinquencies.

Merchant notes that portfolio performance for multi-manager real estate funds and syndicators has been better than expected at the beginning of the pandemic. “Our percentage of watch-list properties has gone down since June. There are definitely some properties that have struggled more than others, and others have been surprising. During the pandemic, Section 8 has been what everyone has wanted to have. The subsidy has been helpful for keeping rental rates and yields up at those properties.”


How terms are being affected by the market

One way equity investors, lenders and developers are offsetting the turbulence in 2020 is by carefully managing deal terms.

From the developer perspective, Dragoon explained, “Syndicators and investors are paying attention to how much you have in reserves, how much you have budgeted for relocation and they’re staying more firm on deal terms in general. Agency lenders have some requirements for reserves on non-Section 8 or non- LIHTC deals where they want a year of principal and interest set aside.”

He adds that when evaluating letters of intent from capital partners, his firm pays special attention to guarantees and when they burn off, having optionality on the back end of the deal and being able to get the investor out after the credit period if possible.

Merchant and Wiltshire agreed that from an investor perspective, this is not a time when we’re likely to see any loosening of terms that add risk. When asked about year 11 exits, they both indicated they’re not out of the question, but would require the right conditions.

“If it’s an exit in year 11 that drives a large capital loss, we’d have to make sure we have capital gains to offset that loss, and also understanding the overall structure and type of reporting would we receive, all of those things we would consider with a year 11 exit,” said Wiltshire.

“We’re pretty conservative in terms of structure and underwriting and year 11 exit adds a layer of risk that we want to keep to a minimum,” added Merchant.

The panelists agreed across the board that a request for a reduction in either tax credit guarantees or operating reserves is not something an investment committee would likely accept.

“When we have a personal guarantee in place, those sponsors step up to the plate and are a part of the solution when we run into trouble,” said Wiltshire.


The pandemic pressure on pricing

Nekus pointed out that in past economic downturns, we’ve seen a flight to quality. In 2020, there appears to be a move toward more stable, lower-risk investments. Likes asked the panelists if players should anticipate more difficulty placing equity and lower pricing in 2021, particularly in tertiary or rural markets.

Merchant said in markets where there is less of a play from Community Reinvestment Act (CRA) participants, equity investors will be more yield focused. She said, “What we have seen are the yields are going up. At the start of this year, most multi-funds had a 5% return for a $15 million deal; now that’s at a 5.5%, and I’ve seen some recent proposals as high as 6%.”

Wiltshire pointed out that when Nationwide is looking at deals in tertiary markets, they’ll place emphasis both on the structure of the deal and the overall return. They look at: how much debt there is, what discount there is to market, and the discount to LIHTC maximum.

“From a developer perspective, we stress deals that we have slated to close in 2021 a lot in terms of tax credit pricing and interest rate,” said Dragoon. “No one knows what the world is going to look like, so we build in cushion where we can, to make sure we have a path forward in case there’s another shock to the market.”

He says their pipeline was able to withstand a reduction in equity pricing because of the drop in interest rates. With highly leveraged bond deals, the reduction in credit pricing is less impactful than an increase or decrease in interest rates.

A reduction in pricing has had a bigger impact on the ability to finance ground-up development and certain types of projects such as mixed-income and mixed-use buildings. These comparatively more complex projects have struggled to gain investor interest because of the downturn.

Wiltshire points out another factor for economic investors: “When you think about an insurance company, we’ve had an increase in the frequency and severity of natural disasters recently, and as a result they have seen large losses. Those large losses have translated into a reduction of tax liability, so that reduces their ability to invest in LIHTC. They’re more cautious about the deals they’re doing and more limited in tax capacity.”


Will the 4% credit price fix happen?

The panelists also discussed the likelihood of a fix for 4% bond pricing and whether the potential has led to requests for a change to the upward adjuster caps. While the topic has been getting attention in recent years, it was not included in the tax deal at the end of 20191. Both Wiltshire and Merchant said investors would likely not be willing to put in an increase in the upward adjustment cap, and even if the credit fixed rate was passed, whether it would apply to closed deals is still in question.

“We’re seeing the most attention to this issue that we’ve seen in the industry, people have recognized the 4% credit has become more and more important,” said Merchant. “With a huge gap and need for affordable housing in every market in the country, it gets a lot of support in the marketplace, but it’s not the priority for legislators today.”


Advice for getting deals done

2020 is an atypical affordable housing market for both investors and participants. The market is contracting, and some syndicators have not been able to get enough capital to move forward with funds. We’ve also seen some syndicators consolidate and new ones form. Factors such as the 2020 election – and how soon after it we know the outcome – and ongoing pandemic-related factors will continue to have an effect on supply and demand into 2021, the panelists said.

Dragoon recommends that while turning to existing relationships can be beneficial when all things are equal, developers may have to expand the number of investor groups they talk to attract enough capital to meet community demand.

Merchant agrees, “Call people you haven’t always called, don’t assume a no is still a no.” Both Merchant and Wiltshire have seized opportunities in which deals have faltered or other investors have pulled out. Managing relationships is imperative, as deals can come down to the “luck of the draw.”


KeyBank: A steady commitment to affordable housing

Despite the uncertainty clouding the 2021 outlook, the affordable housing sector may still be a safe harbor for equity investors. During the 2008 downturn, affordable housing performed very well compared to market rate, and in 2020, portfolios continue to perform well despite the pandemic.

As one of the nation’s leading affordable housing lenders, KeyBank is committed to helping communities thrive by financing much-needed affordable housing in rural and urban communities in all 50 states. To increase equity participation in the affordable housing sector, Key’s LIHTC equity initiative is a robust one-stop solution for owners and investors nationally; providing tax credit equity, construction and permanent financing, including Freddie Mac, Fannie Mae and Housing and Urban Development (HUD) executions.

For more information, and to discuss our next project, contact:

Stacie Nekus
Connect on LinkedIn

Robert Likes
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Affordable Housing Finance, “LIHTC Provisions Left Out of Tax Deal."

This document is designed to provide general information only and is not comprehensive nor is it tax or legal advice. If legal advice or other expert assistance is required, the service of a competent professional should be sought. KeyBank does not make any warranties regarding the results obtained from the use of this information. is a federally registered service mark of KeyCorp. KeyBank is Member FDIC. Credit and Lease products are subject to credit approval and may be subject to collateral approval.

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