Tax-credit Increase Should Draw Investors

Good news is on the way for commercial practitioners who work with owners and developers of apartment properties.

March 1, 2001

President Clinton in late December signed into law the first expansion of the low-income housing tax credit since that program was created almost a dozen years ago.

That expansion, which NAR has long advocated and helped push through Congress, should give a boost to the housing market by providing a 40 percent increase in the amount of tax credits that states can allocate to developers of eligible rental projects.

What makes that boost doubly effective is the impact it will have on the price investors pay to become equity investors in low- and moderate-income rental projects, says Michael Pitchford, senior vice president of Bank of America in Charlotte, N.C., and president of the National Housing Conference.

NHC is an umbrella organization for groups (including NAR) concerned about the availability of affordable housing for rental and homeownership.

Under the expansion, beginning this year, the federal government will give $1.50 in annual federal tax-credit authority for each person in a state, up from $1.25 per person. The allocation increases to $1.75 per person beginning in 2002 and is indexed for inflation thereafter.

The program spurs affordable rental project development by making the credits available to developers for constructing new buildings or acquiring existing rental projects for use as low- and moderate-income housing.

The developers pass the credits through to investorswho, in return, provide project equity capital. This equity capital makes it possible for lenders to make loans profitably to projects that otherwise wouldn’t generate a sufficient income stream to repay the debt service.

The double boost to the program stems from the state of the tax credit equity market.

Every year since the program was created, investors have been bidding up the price of the tax credit, so at the end of 2000, investors were paying an average of 85 cents for every dollar in credit they received, says Pitchford.

That’s a far cry from just five years ago, when investors could get a dollar of tax credit for about 65 cents.

That 20-cent difference has been driven partly by the scarcity of credits, and has led to an erosion in investor returns--from double-digit returns to single-digit returns. That erosion has led to an exodus of investors who, for single-digit returns, would rather put their money into safe bond investments, Pitchford says.

Currently, most tax credit investors are financial institutions, which accept the single-digit returns because their involvement gets them highly coveted points toward meeting their federal requirements under the Community Reinvestment Act (CRA). That act requires them to make a minimum amount of financing available to under-served areas in their market.

Having a program loaded with CRA-motivated investors, however, "is not what the program was designed for, and I don’t think it’s a healthy trend for the industry," Pitchford says.

Five years ago, investors as diverse as Chevron, USAA Insurance, and Microsoft were heavy tax credit investors. This gave the full breadth of corporate America a stake in affordable housing. That’s the kind of investment pattern that program supporters want to see again--and could if the boost leads to the expected easing of equity prices.

"There's no question we have a growing housing crisis," Pitchford says. "Finally, Congress has recognized the need to boost the only good production tool we’ve had since the late 1980s.”

The increase is expected to spur development of 140,000 more apartment units over the next five years, which means good business opportunities for apartment specialists in the real estate community.

Robert Freedman

Robert Freedman is the former director of multimedia communications at NAR.

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