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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 investment activity.

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 states.

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. 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.

The economic 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 credit investment.

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," Lawrence added.

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 program.

"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 credit market.

"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."

"Congress 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."


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