With all the attention recently on the effects of the tax credit for first-time homeowners, it's easy to forget there's one on the multifamily side as well. The Low Income Housing Tax Credit, after a bad couple of years, is poised to return to its former status as the premier production conduit for affordable multifamily housing.
The LIHTC was gored in recent years by investors getting out of the market altogether or lying low. This included Fannie Mae and Freddie Mac, two of the biggest investors in the credit. Many investors rolled up big losses, meaning they had no use for a tax credit, having no tax liability to offset. Yields on tax credit investments soured, and the lack of competitive bids drove bid prices down, meaning the proceeds for the deals declined.
The decline put a crimp in a program Jon Sheiner, a Democratic staff person on the House Ways and Means Committee, called "a monumental success" at the recent affordable housing forum held in Washington, DC by the National Housing & Rehabilitation Association, the trade group of for-profit affordable housing developer.
The LIHTC is the linchpin of a process that has many moving parts, the results of which have financed hundreds of thousands of units of low income housing over the years. It is authorized by a section in the federal tax code, but the Internal Revenue Service does not administer it. Rather, it is administered by state housing finance agencies. The amount of money available is a multiple of each state's population and can vary, but $1.25 per person and $1.75 both have been used in recent years.
Commercial banks have been big investors in the tax credit, since it is an eligible activity for their Community Reinvestment Act obligations. But other companies like life insurers and agencies like Fannie and Freddie have been active as well.
On the development side, non-profit developers have been an active part of the market as well as the for-profit ones the NH&RA represents. Non-profits supplement tax credit equity with sourced like the Department of Housing and Urban Development's HOME program and the Federal Home Loan Banks Affordable Housing Program. LIHTC equity has been a significant factor, for instance, in multifamily rental projects in hard-to-finance areas like American Indian reservations.
Probably the best thing about the tax credit is that it provides equity, rather than debt. (Also, many units are eligible for conversion to home ownership, after a 15-year rental term.) The equity keeps the debt service on the projects low, enabling affordable rents. But the money is not awarded directly to developers. The credits are offered to investors through syndications. And the proceeds they raise are variable. A dollar of tax credits can generally be bought at a discount-sometimes a substantial discount, if there aren't many active bidders.
Speakers at the recent forum of the NH&RA said that while prices were holding up well in active areas like New York City, where 90 cents on the dollar is possible, many other areas of the country are seeing returns between 55 and 75 cents. The effect of this is dramatic: $1 million in tax credits could produce as little as $550,000 in equity.
Jim Carlisle, senior vice president at Bank of America, said his bank remained a committed investor in the tax credit, having bought some $500 million in tax credits last year. And his colleague Daniel Devin, also an SVP of Bank of America in its Tax Credit Originations group, said his unit did $30-40 million in equity deals in the fourth quarter of last year and has "a substantial pipeline" this year.
Carlisle noted that the past two years have been "a crisis period" for the LIHTC, but said his giant bank "is not talking about leaving." He said the downturn has been a temporary thing, and that "as the industry returns to profitability there will be an appetite going forward" for tax credit deals.
Some deals unraveled during the past couple of years, leaving development money by the side of the road. NH&RA officials are hoping that "extender" legislation pending in Congress will be passed to approve an exchange of unused credits for cash to be used for development money.
Another helpful thing on the legislative front would be an amendment of a one-year carryforward to five years, according to Peter Bell, the founding executive director of NH&RA. Sen. Jeff Bingaman, D-NM, has introduced a bill to do that in the Senate. Rep. Bill Pascrell, D-NJ, introduced similar legislation in the House of Representatives.
