Citi Community Capital, which significantly slashed its investments in low-income housing tax credits (LIHTCs) in 2008, is showing signs of getting back in the market.

This is good news for the industry, which has been hard hit by a lack of investor capital in the market. A prominent LIHTC investor, Citi invested about $1.8 billion in 2007. Its activity then dropped to approximately $200 million last year.

The reduction “was a response to our tax position and need for tax credits as well as the volatility in the marketplace,” says Managing Director Andrew Ditton.

He describes 2008 as “the most difficult year that participants have faced since 1987, the beginning of the LIHTC era.”

He expects Citi to be an active investor in 2009. As the year began, the company had about $450 million in “buy letters” out, which outline the conditions under which the firm will buy tax credits.

Although Citi has historically participated in multi-investor funds, Ditton anticipates the firm will be investing more through proprietary funds, where it will be the sole investor in a fund.

He is optimistic that several moves being considered for inclusion in a new stimulus package will make a significant difference in bringing back investors in 2009.

One idea is to allow investors to “carry back” the credit for up to five years, which is significant because if a company’s tax liability declines, it would have flexibility in using the credits for prior years. Another proposal calls for making the housing credit refundable, reducing the risk for an investor who may not be able to use all of his credits.

 “The carryback proposal can give us flexibility to clean up the balance sheet and give us room for new investments,” says Ditton.

The stimulus package will determine the direction of the LIHTC market, according to Ditton.