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The low-income housing tax credit (LIHTC) has been the federal government's most successful program for producing quality rental housing for low-income families and individuals. It has created jobs, revitalized lowincome communities, and expanded low-income families' and individuals' access to geographic areas that offer relatively good employment and educational opportunities.
Historically, the financial services sector has provided 80 to 90 percent of LIHTC investments, a result of its real estate financing expertise and regulatory mandates to address low-income needs. Fannie Mae and Freddie Mac have provided about 40 percent of LIHTC investments, and banks motivated by the Community Reinvestment Act (CRA) have also provided about 40 percent, led by the largest banks. Insurance companies and other investors have provided additional LIHTC investments.
However, the substantial losses that many financial institutions have recently incurred have eliminated or reduced their ability to use tax credits. Since these credits are payable over a 10-year period, and the future tax liability of financial institutions has become more uncertain in the current environment, the risk that the investment will not be profitable because the tax credits cannot be claimed as scheduled is problematic for some financial institutions.
Fannie Mae and Freddie Mac had stopped making new investments even before entering federal conservatorship last year. While some banks have kept investing, others have cut back substantially. Overall, in 2008 LIHTC-based investment dropped to about one-half of the $9 billion invested in 2007. Many observers expect about the same level of investment or less in 2009. Moreover, current investors that cannot use tax credits are reportedly trying to sell their portfolios, and the mere prospect of such divestment is further destabilizing an already weak investment market.
The nonprofit Alliance for Building Communities used a $3.5 million LIHTC investment to convert a historic 1902 knitting mill into 27 apartments for older people in Hamburg, Pa. The investment came from a multi-investor fund organized by the National Equity Fund, a subsidiary of the Local Initiatives Support Corporation, which also provided a loan and grants to the nonprofit. The rehabilitation complemented $1.6 million in streetscape renovations to the commercial district.
The investors still in the market can take their pick of projects and command much higher rates of return. From a public policy perspective, however, that means each dollar of tax credit generates less capital for housing, and many high-priority deals are not getting done because they now have financing gaps, are perceived as too complicated or risky, are in locations that get less attention from CRA examiners, or involve potential bank investors that already have enough investments to meet their CRA needs. Although there is a shortage of LIHTC investment in most places, rural areas and smaller cities tend to be especially disadvantaged. Similarly, most investors would rather avoid complex projects that provide housing for the homeless or other special needs populations, as well as those that would preserve federally assisted housing or otherwise use federal rent subsidies.
The recently enacted American Recovery and Reinvestment Act provides temporary grant funds to jump-start stalled projects but does nothing to reactivate the investment market.
Three ways to attract private investment from both experienced and novice investors are:
A $16.8 million low income housing tax credit investment from JP Morgan Chase helped finance the rental units shown above as part of an 11-phase HOPE VI redevelopment plan in Camden, N.J. The project, Carl Miller Homes, was completed in December 2008 and used solar panels to help meet power needs. Michaels Development was the developer, and the Camden Housing Authority provided significant additional funding.
The LIHTC has been the linchpin in numerous successful public-private partnerships for over 20 years. As a public policy instrument, it has also helped to rehabilitate the reputation of federal housing production policies and was the model for new markets tax credits and other policy innovations.
Problems with home mortgages and commercial real estate have created a financial crisis and touched off a deep recession. LIHTC investments continue to perform well economically, but the financial crisis has curtailed new investments. A few new policies could go a long way to restoring the LIHTC investment market and the housing, economic vitality, and partnerships that depend on it.
The American Recovery and Reinvestment Act (ARRA), approved by Congress in February, provides two resources to states to help start low income housing tax credit (LIHTC) projects that stalled because equity investments became less available.
HUD is administering $2.25 billion through the Tax Credit Assistance Program (TCAP). Under TCAP, Pennsylvania is receiving $95.1 million, New Jersey $61.2 million, and Delaware $6.6 million. Information on TCAP is available at http://www.hud.gov/recovery/
In addition, each state can convert into cash a portion of the LIHTC authority the Treasury Department allocates by formula. Each state can exchange up to 40 percent of its 2009 allocation and 100 percent of its unused 2008 allocation. States would use the HUD funds and cash received in exchange for LIHTC authority to fund housing development projects that meet LIHTC requirements. For further information, go to http://www.treas.gov/recovery/LIH-grants.shtml.