The State Of The Low-Income Housing Tax Credit Market

There is currently no county in the U.S. in which a full-time minimum-wage worker can afford a one-bedroom apartment at fair-market rent. This startling finding, along with an array of similarly concerning statistics, appears in a newly released report from the National Low Income Housing Coalition (NLIHC).

Not surprisingly, high unemployment numbers and the fallout from the housing crisis have worsened the chances of securing affordable rental housing for large groups of U.S. residents. Among other recommended policy measures, NLIHC has urged Congress to fund the National Housing Trust Fund, which was approved in 2008 but has yet to be capitalized. This fund provides communities with money to build, revitalize and provide affordable housing.

Although not directly discussed in NLIHC's recent report, the low-income housing tax credit (LIHTC) market also factors heavily into the availability of affordable housing. Not too long ago, LIHTCs were a vital, vibrant component of the multifamily property development and finance market.

‘Once developers receive tax credits, they choose to either offset their own tax liabilities (in the case of for-profit entities) or sell the credits to investors,’ explains Amy Roden of the American Enterprise Institute in a policy paper titled ‘Building a Better Low-Income Housing Tax Credit.’

‘Developers often sell the credits to an intermediary in return for up-front financing,’ she continues. ‘The intermediary, in turn, facilitates the market for credits by pooling investor capital, usually through the creation of a limited partnership. Investors usually view the credit as their return on investment, rather than expecting a return from projects themselves.’

However, given the state of the capital markets and the entire U.S. economy over the past couple of years, the LIHTC market's dwindling activity levels and plummeting equity prices should come as no surprise.

During the economic downturn in 2008 and 2009, investor demand for LIHTCs fell precipitously. Investors whose profit levels previously created sufficient tax liability for the credits to be claimed had no use for the credits when their profits fell, as Michael J. Novogradac of Novogradac & Co. explains in the April issue of the company's Journal of Tax Credits.

‘A domino effect followed: Tax-credit prices fell, funding gaps were created in LIHTC projects that had received tax credits, and thousands of units were stalled or abandoned,’ Novogradac continues.

Other initiatives – such as the Tax Credit Assistance Program (TCAP) helped push some affordable multifamily development projects to the finish line, but these measures are did not address the lack of LIHTC investor appetite, he says.

Meanwhile, according to executives at major finance firms, many former investors who still carried enough tax liability to utilize tax credits became skittish about commercial real estate and directed their tax-credit investment dollars to other sectors, particularly renewable energy.

To lure investors back to the LIHTC space and reinvigorate the market, revisions of the existing model and other actions by policy-makers may be necessary.

Calling the affordable multifamily housing situation a ‘larger and more worrisome housing crisis’ than the U.S.' single-family foreclosure problems, Sen. Jeff Merkley, D-Ore., and David Abromowitz, a senior fellow at the Center for American Progress and partner at Goulston & Storrs, penned a February AOLNews editorial summarizing stakeholders' ideas for LIHTC revival.

Specifically, Merkley and Abromowitz, citing the backing of over 160 national and regional groups, called for the extension of ‘a successful short-term tax credit exchange program created through the American Recovery and Reinvestment Act to maintain the development of affordable rental housing.’

In addition, they urged Congress to permit investors with existing LIHTC-financed housing use their credits against previous years' profits, as well as to expand LIHTC's investment base.

Novogradac, who has proposed a five-year carryback of unused tax-credit amounts as a means of reinvigorating the LIHTC investor base, reported in his April article that neither the LIHTC five-year carryback nor any changes to passive-activity rules to improve LIHTC investment were included in President Obama's fiscal-year 2011 budget.

The best hope for this five-year carryback may be in H.B.4109 and S.3141, both of which contain this measure. H.B.4109, introduced by Rep. William Pascrell, D-N.J., has been introduced and referred to the House Committee on Ways and Means. Its next step remains to be seen.

S.3141, introduced by Sen. Jeff Bingaman, D-N.M. in March, is also designed to increase private investment in the LIHTC market. ‘To ensure that this benefit flows only to investors who are committed to creating additional housing, all 'carried back' proceeds must be invested entirely in new housing developments,’ Bingaman's office noted. ‘The bill also introduces new flexibility into the program by allowing future investment credits to be carried back up to five years.’ S.3141 also awaits further review in Congress.

As we track the fate of these bills and other measures that may help the LIHTC market, a bit of good news for the sector arrived last week. PNC Real Estate announced the successful completion of PNC Real Estate Tax Credit Capital Institutional Fund 42. This $71 million investment limited partnership involves multifamily properties in eight states that target residents earning 60% or less of the area median income.

PNC says an institutional investor has acquired the limited partnership interests in the fund and plans to derive its return primarily on the receipt of LIHTCs, along with passive losses from real estate depreciation. This fund was the company's first tax-credit equity fund closing this year.

As a side note, expect to hear more about new strategies for revitalizing the LIHTC market later this month, when industry professionals convene in New Orleans for ‘Working with LIHTCs in an ARRA World.’ This Novogradac & Co. conference is scheduled to include discussion of investor scarcity, developer strategies and TCAP integration, along with the latest from lenders on underwriting guidelines.


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