The effects of syndicators and risk management on equity pricing of the Low Income Housing Tax Credit

Abstract

A study was carried out to examine the impacts of risk characteristics on equity pricing of tax credits issued under the Low Income Housing Tax Credit Program (LIHTC). The results indicate that credit pricing is not correlated with most traditional real estate risk factors. We hypothesize that risks are mitigated by the services of syndicators, who act as intermediaries between developers and investors, thus managing the perceived risk of the investment. We tested this theory by examining the impact of individual syndicators on credit prices. Additionally, we tested the effect of syndicator fees and other syndicator-specific fixed effects on credit prices. Findings suggest that syndicator fixed effects and fees impact pricing, as do certain tax structure characteristics of the LIHTC developments. Developers appear to be less pricesensitive than investors, reflecting perhaps different levels of negotiating power in their relationships with syndicators, as well as lack of perfect information. Investors appear to focus more on internal rate of return than on price per unit of credit in their investment decisions, thereby confusing the relationship between syndicator effects and credit prices for investors. Housing policy implications and directions for future research are also discussed.