The largest single variable in housing tax credit pricing is a function of the Community Reinvestment Act’s investment test value of a given property’s location, according to a new report.
The report, from the accounting, tax and advisory firm CohnReznick, found pricing spreads as wide as $0.35 per $1.00 of housing tax credit, primarily attributable to the CRA.
The report argues that the Community Reinvestment Act of 1977 has become the most powerful engine of capital formation for developing affordable housing in the U.S. , and the CRA’s investment test is largely responsible for motivating U.S. banks to become the largest investors in affordable housing developments. The study also finds that bank capital can be more efficiently deployed by revising CRA regulations.
“Based on our research, we encourage the adoption of more flexible rules for measuring bank performance under the CRA’s investment test,” said CohnReznick principal Fred Copeman, who is national director of the firm’s Tax Credit Investment Services practice. “CRA assessment areas should be the principal, rather than the exclusive areas in which banks make their community development investments. To the extent investment test targets are based on deposit volume, deposits from overseas customers or corporations and institutional investors domiciled outside the bank’s assessment area should be excluded. Moreover, banks should be permitted to invest in broader statewide and regional areas that could include bank assessment areas.”
The report found a significant mismatch between the management in which CRA investment goals are set and the methodology under which housing credits are allocated. As a result, the banking sector’s demand for housing credit investment is not proportionately aligned with the location of housing credit properties. State housing credit agencies award credits based on their assessment of wherever there is a critical shortage of affordable housing and those shortfalls exist in communities of all kinds, not only major cities. The allocation of credits to other parts of the state exacerbates the demand vs. supply imbalance in hot real estate markets and drives pricing even higher. As a result, the investment test tends to drive capital to areas that already have sufficient capital to finance projects located in such areas.
As investors have become more confident in the risk/reward profile of housing tax credit investments, prices have steadily increased for most of the past 20 years. The study found that the most sought-after CRA markets had the strongest resistance to steep decreases in tax credit prices, even in the midst of market uncertainty. When the equity market was at its historical peak in 2006, housing tax credits were trading more or less at ”dollar for dollar” in many locations.
Copeman noted that banks are permitted to invest outside their CRA footprints, “but only if they can demonstrate that they are ‘adequately addressing the community development needs of their assessment areas.’“Since no one knows what this means, the provision has had very little practical value,” he said. “The regulators have recently proposed new guidance that would considerably relax the ‘qualifier’ and permit banks that invest outside their assessment areas to receive full consideration for such investments. CohnReznick applauds the introduction of greater flexibility in the supervision of CRA investment test compliance.”
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