November 12, 2009
Low Income Housing Advocates Call on Congress to Strengthen Tax Credit Program
by Robert Kropp
A new report finds that the market for low-income housing tax credits declined by more than
one-third due to the economic crisis, and proposes legislation for strengthening the program.
The market environment for the low-income housing tax credit (LIHTC), which has been an important
component of the community investment mission of responsible investors since it was first
introduced as a temporary program in 1986, has, as a result of the impact of the economic crisis on
major banks and government-sponsored enterprises (GSEs), experienced a dramatic decline in
The decline in the size of the market for the LIHTC,
according to a report written by Ernst & Young for Enterprise Community Partners and the Local Initiatives Support Corporation (LISC), is
estimated by the authors to have been 34.5% from 2007 to 2008. The resulting equity gap cannot be
"quickly closed absent legislation designed to stimulate new investment activity," the report
For the report, entitled Low-I
ncome Housing Tax Credit Investment Survey, Ernst & Young surveyed institutional investors,
syndicators, and brokers that are active in the housing credit industry. Syndicators pool capital
to create funds comprised of multiple investors, and then sell the investment capital to developers
in exchange for the tax credits. Enterprise Community Partners is one example of a syndicator.
Over $75 billion has been invested in low income housing tax credits between 1987 and 2008. By
purchasing low-income housing tax credits, investors gain equity in the housing development, as
well as ten years of tax credits based on construction or rehabilitation costs. Investors also
enjoy a return on investment for providing capital for the housing projects.
SocialFunds.com spoke with Peter Lawrence, a Senior Policy Director for Enterprise Community
Partners, where his responsibilities include advocacy on the Low Income Housing Tax Credit and the
New Markets Tax Credit.
"Low-income housing tax credits are responsible for the
construction of more than 2 million apartments built since the program began in 1986," Lawrence
said. "Ninety percent of all affordable housing built every year relies on these credits."
The report reveals that in the early years of the program, the majority of equity capital came
from individual investors, whose investments were pooled in funds raised and managed by
syndicators. By 1994, however, institutional investors had come to dominate the market.
"Congress made the program permanent in 1993," Lawrence explained. "When the program was made
permanent, it attracted many more institutional investors."
According to the report,
"While investors came from a diversified base of industries in the early 1990ís, the core of
corporate investment has increasingly been concentrated in the financial services sector." Reasons
for the shift include declining yields on investment, which reached a low of 4.25% in 2006. Despite
the low returns, financial institutions found such investment attractive because it enabled them to
comply with the Community
Reinvestment Act (CRA).
"Because most investments are now motivated by CRA
considerations, they tend to finance projects in major metropolitan areas," Lawrence said, leaving
areas outside those areas underrepresented in low income housing development.
crisis levied some of the heaviest financial losses on Fannie Mae, Freddie Mac, and the 25 largest
commercial banks in the US, which together provided as much as 85% of the housing tax credit equity
capital raised in 2006.
"By the end of 2007, Fannie and Freddie began to exit the
market," Lawrence observed. "They represented 40% of the market. Then, the large banks cut back as
a result of the economic crisis. Where there had been plenty of demand but relatively little
supply, now the situation is reversed."
According to the report, "In order for the housing
credit market to return to vitality, and remain so over the long term, the program cannot be
reliant" on the small number of very large banks that currently dominate the market for housing
The report describes four legislative proposals for stabilizing the
market. The first would extend the current credit exchange program allowing states to convert
credit allocations to grant dollars.
"The program was placed by Congress as part of the
economic stimulus," Lawrence explained, resulting in $2.25 billion in resources through the Tax
Credit Assistance Program (TCAP), administered by the Department of Housing and Urban Development
(HUD). He continued, "The program exchanges some of tax credit authority for grants, in order to
replace the investors that have exited as a result of the crisis."
"The investment market
has not rebounded yet, so we advocate that the exchange program be kept in place for another year,"
A second proposal would allow investors with existing investments in
housing credits to carry those credits back for up to five years in exchange for commitments to
reinvest the funds in new housing credit investments. The proposal would also allow new project
investments to carry the credits back for up to five years without requiring re-investment in the
"Permitting new investors to carry back that credit five years enables them to
project out five years instead of ten," said Lawrence.
Other proposals whose objectives
are to increase investor demand for credits include an accelerated credit delivery period, and
liberalizing passive loss rules to permit individual investors to join corporate investors in the
market. Passive loss rules limit the deductibility of losses from rental real estate to $25,000 of
real estate rental losses if other income is less than $100,000.
"Among the four
proposals, the ability to carry-back tax credits for up to five years was ranked the most
attractive option for investors and syndicators, followed by an accelerated credit period," the
report found. The institutional investors surveyed for the report indicated that they are ready to
finance an additional $5 billion in affordable rental housing, if Congress enacts legislation.
Advocates for increased investor demand for credits hope that the proposals result in an
expansion of the investor base, by encouraging individual investors to participate in the housing
"Investment in the program has become so concentrated," Lawrence said.
"Many organizations that want to invest are prevented from doing so, such as community banks that
under the current tax code are treated more like individuals than corporations."
has been so focused on health care and climate change, that it's hard to raise the profiles of our
proposals," Lawrence concluded. "But we're hopeful that a number of these proposals will be
addressed in congressional rewrites of tax codes by the end of the year."