VII. What Barriers Have Constrained the Growth in the Use of LIHTCs?

Restrictions on the Supply of LIHTCs and Private Activity Bonds Available

The supply of 9 percent credits available each year is limited. While the demand among investors for LIHTCs dropped during the financial crisis, by 2010, the demand once again outstripped LIHTC supply. In some high-demand areas, LIHTC-financed projects have been consistently oversubscribed. Increased competition for tax credits raises the price for credits and lowers the yield, which in turn has reduced the number and range of investors in the market. While the supply of 4 percent credits is not similarly constrained, the availability of private activity bonds is subject to volume caps and is therefore a limiting factor in 4 percent transactions.

Length of Investment Period

LIHTCs require a long-term, 15-year commitment by investors. Some investors may be reluctant to enter this business if they need to maintain short-term liquidity, or if they have concerns about their needs for federal tax credits over the entire credit period.

Size of Investments

Minimum investment amounts for LIHTC funds often start at about $1 million for multi- investor funds. Minimum amounts for direct investments can be much higher. This can be a barrier for smaller community banks, especially those with limited federal tax liabilities. Some regional LIHTC equity funds have lowered their minimum investment to $250,000 and have been very successful in attracting new investors, especially community banks.

Market Transparency

The market for LIHTC investments is not well publicized. Housing financed with LIHTCs tends to attract sophisticated investors with a strong understanding of real estate development. Because of the complexity of the benefits, it can be difficult to compare how different investors are pricing risks and rewards.

Transaction Complexity

The LIHTC is an important program for addressing the nation’s affordable housing needs; however, the transactions can be quite complex with regard to substantial regulatory, financial, and tax issues. While a direct investment into an LIHTC project can be challenging for a new investor, investments in multi-investor equity funds can often be a more appropriate starting point, especially for smaller banks. In addition, as the industry has developed, there are now a considerable number of public- and private- sector organizations that can assist new investors. While each transaction is unique, each transaction is structured on a foundation of industry standardization and experience.

VIII. Conclusion

The LIHTC is an important resource in the development of affordable rental housing. Since 1987, when the LIHTC program was first authorized, more than 2.4 million affordable rental housing units have been developed using the tax credits. Banks can invest in LIHTCs either directly or through syndicated funds. In addition, banks can participate as lenders with short- or long-term financing products.

Since 1987, the LIHTC industry has developed a sophisticated array of resources to help new and experienced participants effectively identify and manage the risks inherent in project financing. National, regional, and community banks have made important investments in their communities using LIHTC. By investing in or lending to LIHTC- financed projects, banks have met the needs of their customers and communities. In the process, banks have earned competitive rates of return and favorable CRA consideration.