II. Why Are LIHTCs of Interest to Banks?

Banks choose to invest in and lend to LIHTC-financed projects because this helps them in

• meeting the credit needs of their communities.
• receiving CRA consideration.
• earning competitive rates of return on investments.
• gaining opportunities to diversify into other credit products and services.
• providing a platform to leverage other tax credit investments.

Meeting Community Credit Needs

The National Association of Home Builders published a report that found that more than 19.4 million households, or 49 percent of total households renting homes in 2010, were “rent-burdened,” or paying more than 30 percent of household income for rent.¹³ They found the LIHTC to be an important program for financing housing that addresses this community need.

According to two other industry-sponsored reports, the private capital and market discipline provided by LIHTC investors, lenders, and developers have made LIHTC- financed housing among the most successful affordable rental housing production programs offered by the federal government.¹⁴ Decisions to develop and finance affordable housing using LIHTCs are based on local needs for housing and community development. The projects are often initiated by a community-based sponsor. All projects must have sufficient local demand to meet cash flow projections. Tax credit allocations must be consistent with state housing priorities.

Banks can participate in affordable housing developments as investors using LIHTCs, providing equity in exchange for the tax credits—or as lenders, providing short- or long- term financing. Because they are experienced in housing development and commercial real estate finance and are responsible for meeting the credit needs of their communities, banks are the primary investors in LIHTCs for affordable housing development.

Receiving CRA Consideration

An important incentive for banks investing in LIHTCs is the CRA consideration they may receive for making these investments. A bank may receive CRA consideration for community development activities related to LIHTC projects and funds, provided the activities benefit a bank’s assessment area or a broader statewide or regional area that includes the bank’s assessment area(s) (AA). The bank’s AA(s) need not receive an immediate or direct benefit from the bank’s participation in the activity, provided the purpose, mandate, or function of the activity includes serving geographies or individuals located within the institution’s AA(s). Examiners consider these activities even if they do not benefit the bank’s AA(s), as long as the bank has been responsive to community development needs and opportunities in its AA(s).¹⁵

Examples of activities that may be eligible for CRA consideration include direct investments in LIHTC projects, predevelopment financing or construction/permanent financing to LIHTC projects, investments in funds that specialize in funding and managing LIHTC projects, and technical assistance to nonprofit organizations that help identify and counsel potential low- or moderate-income residents. Investments in state and municipal obligations, such as revenue bonds that specifically support affordable housing (including 4 percent LIHTC projects), also meet the CRA definition of qualified investments.

In addition, a bank may receive CRA consideration for activities that revitalize or stabilize designated disaster areas and designated distressed or underserved nonmetropolitan middle-income geographies. Activities in these specially designated areas must benefit the bank’s AA(s), or a broader statewide or regional area that includes the bank’s AA(s), in order to receive CRA consideration. In limited and specific instances, as determined by the federal financial regulatory agencies, a bank can make qualified investments in disaster areas that are outside these areas, provided the bank has adequately been responsive to needs in its AA(s). ¹⁶

Earning Financial Returns

A bank’s return on an LIHTC investment depends on a number of factors, including the bank’s underwriting and management of the investment. As an asset class, historic returns on investments and loans in LIHTC projects have been competitive with similar alternative investment opportunities. Figure 3 illustrates the after-tax yield on LIHTC investments as compared with the after-tax 10-year U.S. Treasury yields from 1991 through 2013.¹⁷

Source: Carlisle Tax Credit Advisors, 2013

Note: Tax credits are shown by month where one or more multi-investor funds were available. Treasury bond data are plotted monthly.

Foreclosures of LIHTC projects have been relatively rare, according to a CohnReznick study of participating syndicators who reported a 0.57 percent cumulative foreclosure rate of LIHTC properties placed into service from 1997 through 2010.¹⁸ This compares favorably to the foreclosure rate of market-rate multifamily properties and other real estate asset groups.¹⁹

Source: CohnReznick

Gaining Additional Commercial Lending Opportunities

Participating in LIHTC projects provides banks with opportunities to expand existing customer relationships and to develop new customer relationships. LIHTC-financed projects often require additional loan products and bank services, including:

• pre-development and acquisition loans.
• bridge loans.²⁰
• construction loans.
• permanent mortgage financing.
• letters of credit.²¹
• warehouse lines of credit.²²

Leveraging Other Tax Credit Investments

Depending on the age and location of the properties, LIHTCs may be combined with historic tax credits (HTC)²³ or renewable energy tax credits (RETC).²⁴ Projects using multiple types of credit, referred to as “twinned” transactions, are popular with some project sponsors/developers and bank investors. Additionally, some states have established housing tax credit programs, and these state credits may be twinned with LIHTCs. Blending federal LIHTCs with HTCs, RETCs, or state housing tax credits can improve the internal rates of return on these transactions for investors.

¹³ Data are from the American Community Survey,Census Data Reveal Geography of Rent Burdened Families, National Association of Home Builders, October 25, 2011. See http://eyeonhousing.wordpress.com/2011/10/25/census-data-reveal- geography-of-rent-burdened-families.

¹⁴ The Low Income Housing Tax Credit: The Most Successful Affordable Rental Housing Production Program in Our Nation’s History, National Association of Home Builders, October 26, 2011, www.nahb.org/fileUpload_details.aspx?contentID=151606. See also See also Low-Income Housing Tax Credit: Assessment of Program Performance & Comparison to Other Federal Affordable Rental Housing Subsidies , Novogradac, May 2011, www.novoco.com/products/special_ report_lihtc.php.

¹⁵ “Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice,” Fed. Reg., no. 2013-27738, pages 69671–69680, November 20, 2013. There may be several ways to demonstrate that the financial institution’s investment in a nationwide investment fund meets the geographic requirements, and the agencies will employ appropriate flexibility in this regard in reviewing information the institution provides that reasonably supports this determination. In making this determination, the agencies will consider any information provided by a financial institution that reasonably demonstrates that the purpose, mandate, or function of the fund includes serving geographies or individuals located within the institution’s assessment area(s) or a broader statewide or regional area that includes the institution’s assessment area(s). Typically, information about where a fund’s investments are expected to be made or targeted will be found in the fund’s prospectus, or other documents provided by the fund prior to or at the time of the institution’s investment, and the institution, at its option, may provide such documentation with its CRA evaluation.

¹⁶ See “Interagency Questions and Answers Regarding Community Reinvestment,” 75 Fed. Reg. 11642, .12(g)(4)(ii)-1, March 11, 2010. See also OCC Bulletin 2012-8, “Community Reinvestment Act Consideration for Gulf Coast Disaster Area Activities: Extension of Deadline,” February 27, 2012; and the OCC’s Community Developments Fact Sheet: Designated Disaster Areas and Consideration Under the Community Reinvestment Act , October 2012, www.occ.gov/ topics/community-affairs/publications/fact-sheets/fact-sheet-designated-disaster-areas-cra.pdf.

¹⁷ From Treasury Department and industry survey data compiled by Richard Floreani, Carlisle Tax Credit Partners, June 2011.

¹⁸ See The Low-Income Tax Credit Program at Year 25: An Expanded Look at its Performance , CohnReznick, December 2012, www.cohnreznick.com/insights/low-income-housing-study. The report suggests the number of foreclosures has been underreported as a result of incomplete data, for example, nonresponders to survey, missing data from inactive firms, cases of cured defaults, debt restructure strategies, or where additional capital calls may have been undertaken in lieu of foreclosure.

¹⁹ See the Low Income Housing Tax Credit Program at Year 25: A Current Look at Its Performance, CohnReznick, August 2011, www.cohnreznick.com/sites/default/files/reznickgroup_lihtc_survey_2011.pdf. The authors note that “while the number and rate of foreclosures increased incrementally from 2008 through 2010, the incidence of foreclosures in housing tax credit properties continues to compare very favorably with the foreclosure rate of market-rate multifamily properties and other real estate asset groups.”

²⁰ Bridge loans are short-term credit facilities provided by banks to tax credit investors to cover their capital calls during construction periods. Also known as subscription obligation financing, these credit facilities are typically secured by the unconditional commitment of investors. These credit facilities are used by syndicators to generate higher internal rates of return required to attract investors as well as to better manage the capital call process.

²¹ Banks can enhance the credit ratings of state HCA-issued tax-exempt bonds by providing letters of credit. on bonds. Tax- exempt bonds are often used to finance 4 percent LIHTC transactions.

²² Banks provide warehouse lines of credit to syndicators to finance the acquisition of LIHTC properties. The repayment source is equity from fund investors.

²³ The Federal Historic Preservation Tax Incentives program is jointly administered by the IRS and the National Park Service. For more information, see www.nps.gov/tps/.

²⁴ Investing in Solar Energy Using the Public Welfare Investment Authority , OCC Community Developments Investments, July 2011, www.occ.gov/static/community-affairs/community-developments-investments/solar11/2011-solar-cdezine-final. pdf. See also “Rural Housing Initiatives at Work,” OCC Community Developments, 2003, www.occ.gov/static/community-affairs/2003spring03.pdf.