Investors pay premium for affordable housing tax credits

Community Reinvestment Act driving demand in select urban areas

By Inman News Feed
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Community Reinvestment Act driving demand in select urban areas

Steve Bergsman
Inman News®

There's a whole lot of budget slashing going on in Washington, D.C., and depending on whether you are a Republican or Democrat, you're thinking there should be more or less done in the coming years.

Sometimes, however, you have to stop, look around and consider whether some needful things have been trimmed enough already. Such is the case with affordable housing.

According to the Center for American Progress (CAP), a nonpartisan educational institute, budget cuts have hit affordable housing programs especially hard, including a 38 percent cut to the Department of Housing and Urban Development's HOME Investment Partnerships program and a 12 percent slice of the Community Development Block Grant program.

CAP also reports total federal funding for public housing decreased by more than 20 percent between 2010 and 2012.

None of this comes at a good time, because as CAP noted, "The need for affordable rental housing continues to rise, with 5 million more low-income renters than there are affordable rental units."

To make matters worse, an August report by HUD has determined that more than a million low-income housing tax credit (LIHTC) units could leave the affordable housing stock by 2020, which it reported was "a serious setback for efforts to provide housing for low-income households."

As I explained in a column last year, the way the LIHTC works is that each state is awarded a set amount of tax credits based on census information. Then, in a competitive process, for-profits, not-for-profits, and housing authorities apply for an award of credits for their projects.

If won, credits flow to the developer entity for a period of 10 years or until the project is completed. The actual financing comes from the selling of credits to investors, generally for less than they are worth.

With all this in mind, I checked in with Beth Mullen, office managing principal in the Sacramento, Calif., office of the Reznick Group PC, an advisory firm that specializes in tax credit services.

First I asked Mullen about about the state of LIHTC.

Mullen began by saying that on the East and West coasts -- especially in California and New York City -- there's "incredible demand" demand for the tax credits, driven by the Community Reinvestment Act (CRA) needs of large financial institutions.

That's interesting, I thought, but don't folks in the middle of the country need affordable housing as well?

Yes, of course, Mullen explained: Noncoastal areas have as strong a need for affordable housing as in New York or San Francisco. But the challenge is that investors, mostly the large financial institutions, have much higher CRA needs in the larger cities as opposed to rural areas and even in secondary cities.

In California, Sacramento is considered less desirable than San Francisco in regard to funding affordable housing development.

None of this means affordable housing isn't being developed in Cincinnati or St. Louis.

"From the developer's perspective, the good thing is, housing is being built all around the country because the quantity of tax credits depends on the number of people who live in a state," Mullen said. "They will be building tax credit developments in Iowa or Kansas and everywhere else because the tax credits are available. It's just that corporate investors don't pay as much."

Here's where things get divergent.

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