Multifamily Tax Credit Appears Set for Rebound

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American Banker
By: Mark Fogarty
May 28, 2010

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 suffered big net losses, meaning they had no use for a tax credit, having no tax liability to offset. The lack of competitive bids drove prices down, meaning the proceeds for the deals dropped.

The decline put a crimp in a program that Jon Sheiner, a Democratic staff member on the House Ways and Means Committee, called "a monumental success" at the affordable housing forum held last week in Washington by the National Housing and Rehabilitation Association, the trade group of for-profit affordable housing developers.

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 of the federal tax code, but state housing finance agencies, not the Internal Revenue Service, administer it.

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 Community Reinvestment Act obligations. Other companies such as life insurers have also been active.

Nonprofit developers have been an active part of the market as well as the for-profit ones the NHRA represents. Nonprofits supplement tax credit equity with sources 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 homeownership, after a 15-year rental term.) The equity keeps debt service on the projects low, enabling affordable rents.

The credits are offered to investors through syndications. The proceeds they raise are variable. A dollar of tax credits can generally be bought at a discount - sometimes a substantial discount if there are not many active bidders.

Speakers at last week's NHRA forum said that while prices were holding up well in active areas like New York, where 90 cents on the dollar is possible, many other areas of the country are seeing returns between 55 cents 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, a senior vice president at Bank of America Corp., said the company remained a committed investor in the tax credit, having bought about $500 million in tax credits last year.

And Daniel Devin, a senior vice president in B of A's tax credit originations group, said his unit did $30 million to $40 million in equity deals in the fourth quarter of last year and has "a substantial pipeline" this year.

Carlisle said that the past two years have been "a crisis period" for the LIHTC, but said B of A "is not talking about leaving."

He called the downturn temporary. "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.

NHRA 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.

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 the NHRA. Sen. Jeff Bingaman, D-N.M., has introduced a bill to do that in the Senate. Rep. Bill Pascrell, D-N.J., has introduced similar legislation in the House.

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