GAO Report – The Role of Syndicators in the LIHTC Program – February 16, 2017

GAO Report – The Role of Syndicators in the LIHTC Program – February 16, 2017

 

The Government Accountability Office (GAO) has issued its third and final report on the Low-Income Housing Tax Credit Program (LIHTC). The two prior GAO reports detailed how the IRS and State Housing Finance Agencies (HFAs) administer and oversee the program. These reports were issued on July 15, 2015 and May 11, 2016, respectively. Neither of these reports was complimentary to the IRS or the allocating agencies, and both offered recommendations for program approval.

 

This final report is basically an informational report on what syndicators in the LIHTC program do and how they do it. It also provides basic statistical information on the activity of syndicators for the period 2005 to 2014.

 

All three reports were prepared at the request of Senator Chuck Grassley (R-IA), a member of the Senate Finance Committee.

 

Syndicators act as intermediaries between developers and investors, and manage funds that invest in LIHTC projects. Along with the developers and State HFAs, they are one of the major players in the LIHTC program. Syndicators include specialty firms and large financial institutions.

 

Overall Results of the Study

 

19 for-profit and 13 nonprofit syndicators were studied. All the syndicators operate in multiple states and average more than 20 years of LIHTC experience.

 

Syndicators play several roles in the market place.

1. They bring together developers and investors; and
2. They oversee the development and management of the projects.

 

Syndicators are compensated through an acquisition fee (generally 2-5% of gross equity raised) and an annual asset management fee.

 

Why do Investors Use Syndicators?

 

There are a number of advantages to the use of syndicators by investors:

 

1. The investor may not have the capacity or expertise to directly acquire and manage a LIHTC investment;
2. Syndicators may have exceptional knowledge of local or regional markets. This plays a role in the ability of banks to benefit from Community Reinvestment Act (CRA) requirements. Investment in LIHTC projects may help a bank receive positive consideration.

 

Background

 

Once a project is awarded tax credits from an HFA, the developer will often attempt to obtain funding from investors who will contribute equity in return for the tax credits.

 

The developers sell an interest in the project – either directly to investors or to a syndicator managed fund. Most investors are corporations.

 

Direct Investment

 

Investors own a “Limited” partner interest in the partnership that owns the property, with the developer normally being the “general” partner.

 

Only a few larger institutional investors have the capacity to fund and manage the acquisition, underwriting, and management of these complex projects. In these cases, the investors may invest directly in the project, without going into a syndicator sponsored “fund.”

 

Syndicated Approach

 

Use of syndicators enables investors to invest in a fund organized and managed by a syndicator. The funds are Limited Partnerships (LPs) in which investors own the LP interest in the fund and the fund owns the LP interest in various property partnerships. Syndicators manage two types of funds:

 

1. Proprietary Funds: typically a single investor who has great control over the location of the properties; and
2. Multi–investor funds: these funds allow an investor to diversify risk because there are several investors in the fund and the risk is shared among the investors. They also share the rewards based on the proportion of investment.

 

In both cases, the syndicator originates the investments, performs underwriting, and presents the investment to investors.

 

Most syndicators are for-profit firms that operate in multiple states. Since 1986, syndicators have closed more than $100 billion in LIHTC equity. 71% of this was raised between 2005 and 2014. About 51% of equity raised during this period was in multi-investor funds, but the majority of the funds were proprietary.

Properties funded by for-profit syndicators tend to be larger than the nonprofit funded projects, and the GAO estimates that about 75% of projects placed in service from 2005 to 2014 had equity raised by syndicators.

 

Foreclosures

 

The foreclosure rate for LIHTC projects is very low (there have been no LIHTC foreclosures for funds created by regional nonprofit syndicators).

 

Role of Syndicators in Developing and Monitoring LIHTC Projects

 

Syndicators play a major role in the success of the LIHTC program, including:

1. Connecting investors to projects;
2. Evaluation of deals and acquisition of properties;
3. Monitoring of projects during construction;
4. Ongoing asset management (inspection, monitoring, and reporting on properties);
   1. Syndicators report regularly, usually through quarterly and annual financial statements, and prepare tax forms for investors.
5. Work with underperforming projects;
   1. This includes replacement of poor-performing general partners and management agents.
   2. Some syndicators use their own funds to resolve issues, rather than allow the investors to incur losses.
6. Dispose of interest in properties at the end of the 15-year compliance period.

 

Why do investors use syndicators?

 

1. Need for expertise – most investors are not experts in the LIHTC program;
2. Lack of staff resources or interest in ongoing asset management – only a few investors have this expertise in-house;
3. CRA considerations – banks have very limited expertise and investments in LIHTC projects may help a bank receive positive consideration toward its regulatory rating; and
4. Size of investment – large investors use syndicators to efficiently invest large amounts of money; smaller investors may lack the capital to invest in a LIHTC project independently and will instead invest through a multi-investor fund.

 

 

 

 

 

How are syndicators selected?

 

1. Previous experience with the syndicator – this is a factor for both developers and investors;
2. Tax-credit pricing;
3. Strength of syndicator’s business and quality of the portfolio;
4. Geographic presence and expertise;
5. Diversification of risk; and
6. Mission – e.g., non-profit syndicators may focus on particular population groups.

 

The report outlined syndicator participation by state. The number of syndicators operating in each state ranges from 8 to 24. Indiana and Michigan have the most operating syndicators (24) and Hawaii the fewest (8).

 

For-profit syndicators raise the majority of money through proprietary funds and nonprofit syndicators raise most of their proceeds through multi-investor funds.

 

As noted earlier, this report was informational only. The GAO made no recommendations relative to syndicator operations or the raising of equity for LIHTC projects. The two prior GAO reports are more likely to impact upcoming comprehensive tax reform as it related to the LIHTC program.