There are two main points of view about the future investor base for the low-income housing tax credit (LIHTC), according to a new policy brief by the Joint Center for Housing Studies of Harvard University.

One view holds that banks and financial service companies are best suited of all investors to invest in the credits. This is because the 15-year tax credit recapture period and investor commitment makes the credit best suited to financial institutions that have a low cost of capital, are used to underwriting real estate risk, and expect to invest in long-term assets with relatively fixed returns. In addition, banks have used LIHTCs to meet their Community Reinvestment Act (CRA) obligations, according to Long-Term Low Income Housing Tax Credit Policy Questions.

“The second point of view is that the financial crisis demonstrated the need for a more diversified investor base, and that a narrow, specialized investor pool limited to a small number of firms in a single sector is too fragile and too subject to market volatility,” said the brief.

Ideas to restore demand and bring in new investors include reforming CRA rules so banks would receive credit for LIHTC investments outside of their assessment areas and modifying tax regulations to allow for a broader group of investors to participate.

The tax credit is the nation’s primary program for producing affordable rental housing. Even as it goes on its 25th year, there are a number of long-term issues facing the program.

The principal authors of the paper are Joint Center Managing Director Eric S. Belsky and research assistant Meg Nipson.

 “I hope the paper is useful in generating a dialogue about ongoing capital investment needs and where the LIHTC program fits in a larger housing policy landscape,” said Nipson.

 The new paper has three parts: a discussion of LIHTC policy issues, including program targeting; second, a look at current issues surrounding the investment demand; and third, a discussion of ongoing capital needs and asset management for LIHTC properties.

 “Even given the national success of the program and its widespread popularity, there remain differences of opinion about whether the federal tax expenditures devoted to LIHTC are targeted deeply enough, are flexible enough to create mixed-income developments, and should be directed to pursuing spatial goals, including transit-oriented development, inclusionary development in rapidly growing and moderate- and higher-income areas, and anchoring neighborhood revitalization,” said the paper.

The policy brief can be downloaded at: