LIHTC Investment Down But Carryback Would Help, Report Finds
By Caitlin Jones
6 min read
Tax Credit Advisor, November 2009: A revealing new report by Ernst & Young LLP quantifies the sharp decline in federal low-income housing tax credit (LIHTC) equity investment in the recent past, and suggests that passage of a legislative “carryback” proposal would likely boost future investment significantly.
The study was prepared for Enterprise Community Partners, Inc. and the Local Initiatives Support Corporation, two of numerous organizations pushing specific proposed tax law changes designed to make the LIHTC more attractive to investors.
Extensive New Data, Analysis
The new Ernst & Young report contains extensive data, information, and analysis on many aspects of the housing credit program, including historical levels and patterns of annual equity investment, credit pricing, and investor yields. It also presents data and analysis based on 55 responses to a summer 2009 survey sent by Ernst & Young to 155 LIHTC investors (current, former, prospective), syndicators, and investment brokers. Respondents reported on their equity volume, investment motivations, and preferences among specific legislative proposals intended to enhance the credit program. The report also provides information, data, and a description of current market conditions for other syndicated federal tax credits: historic rehabilitation, new markets, and energy.
The study, which estimates more than $75 billion in total LIHTC investment during 1987-2008, says the typical investor profile for the program has changed over the years, from predominantly individuals in the early years, to mainly institutions with a mix from different industries in the early 1990s, to primarily financial services institutions – mostly major banks – today.
According to the report, many analysts believed that Fannie Mae, Freddie Mac, and the nation’s 25 largest commercial banks accounted for as much as 85% of all LIHTC equity raised in 2006. “Some of these companies have left the housing tax credit equity market completely and now seek to sell some or all of their existing investments,” the report says. “Others are no longer in business or have been absorbed by other institutions. The remaining companies remain as active investors but are doing so, as a group, at a pace far below their 2006 levels.”
The report explains, “Housing credit investment levels declined significantly in 2007 and 2008 due to the severity of financial losses suffered in the banking sector, recession in the broader economy and their collective impact on the narrow financial services investor base, which accounts for the majority of active housing credit investors. This reduction has affected the ability of sponsors to raise sufficient capital, which has in turn caused housing credit projects already in the “˜pipeline’ to either stall or become economically infeasible. Affordable housing developments financed through the use of tax-exempt bonds and associated housing credits have been even more adversely affected. These conditions are expected to persist from 2009 through 2011, absent additional legislative stimulus.”
Equity Investment Volume
The survey’s 55 responding organizations included 35 investors, 18 syndicators, and two investment placement firms. The largest single segment was banks, all with assets over $1 billion.
The respondents projected that that their total LIHTC investment in 2009 by year-end, assuming no passage of new housing credit stimulus legislation, will be about $4.5 billion, down 22.4% from their actual 2008 volume, which itself was 14.8% below 2007. The respondents’ actual 2009 volume through June was $1.1 billion.
Ernst & Young also estimated actual past LIHTC equity investment volume for the entire industry, based on analysis of estimated market size data and interviews with program participants. Ernst & Young estimated a 34.5% drop in overall equity volume in 2008 compared to 2007, from an estimated $8.4 billion industry wide to $5.5 billion. A chart shows annual LIHTC investment peaked at nearly $6.9 billion for the respondents, during 2007, and at an estimated $8.9 billion for the entire industry, during 2006.
The percentage drop has been much greater for tax-exempt bond-financed (“4%”) LIHTC investments than for 9% allocated credit investments. Respondents invested 44.4% less in 4% credits in 2008 than in 2007, going from $1.575 billion to $876 million, compared to a 6% drop for 9% investments.
According to the report, numerous investors left the LIHTC market when they felt yield levels had fallen too low. Projected after-tax market yields on new LIHTC fund investments, near 18% in 1991, bottomed at 4.25% in 2006 but have since risen to 10%. The average net price paid for housing credits peaked at 95 cents per dollar of tax credit in 2007, declining to 74 cents among survey respondents in 2009. But the study says the pricing decline has varied geographically, due to stronger investor demand in some markets and a lack of demand in others. It says bank investors continue to focus their equity in areas for which they will receive positive consideration under the federal Community Reinvestment Act (CRA).
Motivations, Legislative Proposals
The survey asked the respondents to rank the importance to them of five possible objectives for investing in housing credits, and to note changes from two years ago. The top three objectives identified as extremely important today were: cash yield/return, 29%; financial statement earnings impact, 25%; and CRA or other regulatory community investment motivations, 25%. Seventy-four percent of respondents identified cash yield/return as more important today than two years ago, followed by financial statement earnings impact, 52%.
The survey asked respondents for their preferences among four specific LIHTC legislative proposals. Their top preference was for a two-part carryback proposal. This would allow investors to carry back unused portions of existing pre-2009 LIHTC investments to offset tax liability during the past five tax years, compared to one year currently. Investors, though, would have to reinvest the amount of their tax savings in new LIHTC investments during 2009-2011. The proposal’s second part, intended to entice new investors, would provide a rolling five-year carryback period for new LIHTC investments made during 2009-2011.
Were the carryback proposal enacted, survey respondents projected their aggregate LIHTC investment volume during 2009-2011 would be 37% greater ($5 billion more) than otherwise. With enactment, projected total investment was $5.083 billion in 2009, $6.562 billion in 2010, and $7.065 billion in 2011. Without enactment, projected investment was $4.445 billion in 2009, $4.405 billion in 2010, and $4.815 billion in 2011. The report says total LIHTC investment for the entire industry would be greater than these figures.
The other, less preferred legislative proposals were to shorten the tax credit delivery period, liberalize the passive loss rules, extend the current LIHTC credit exchange program, and other legislative changes.
(The report, Low-Income Housing Tax Credit Investment Survey, may be found at http://www.lisc.org/content/publications/detail/17728)
