Housing advocates may be on the defensive this year if deficit-reduction efforts gain traction because housingrelated tax incentives ranging from the low-income housing tax credit (LIHTC) to the home mortgage interest deduction could be targets.

Erskine Bowles and Alan Simpson, co-chairmen of the deficit reduction commission appointed by President Obama, came up with a sweeping proposal for about $4 trillion in reductions by 2020 that includes the elimination of most tax expenditures, including the housing tax credit.

Tax expenditures are the special deductions, exclusions, and credits in the Internal Revenue Code that are aimed at encouraging certain types of social and economic activity, such as the development of low-income housing.

While specific tax expenditures often come under fire—the housing tax credit, for example, has been criticized as an expensive alternative to direct subsidy programs— they generally survive because supporters are more focused and more determined than opponents.

This time, however, things could be different because of the perceived nature of the threat and the proposed solution.

Ironically, the housing tax credit could be in more jeopardy precisely because no one is pointing a finger at it—the credit wasn't even mentioned in the Bowles- Simpson report. As a result, if there is a concerted effort to eliminate most or all tax expenditures as part of a broad deficit reduction plan, affordable housing advocates may have a hard time pushing for special treatment for the housing credit.

By comparison, Bowles and Simpson did recognize the special status of the mortgage interest deduction, offering an option that would reduce, but not eliminate, the tax break for homeowners.

Under that option, the mortgage interest deduction would be converted to a 12 percent tax credit on up to $500,000 in interest on the mortgage on a principal residence. No credit would be allowed for interest on second-home mortgages or home equity loans.

The odds are still against adoption of such a sweeping plan, and Bowles and Simpson failed to get the 14 votes from the 18-member commission that would have mandated action on their proposal.

Nevertheless, they did get 11 votes from representatives of both parties, and Obama has also promised to put forward a serious deficit-cutting program.

Accordingly, prospects for radical action can't be dismissed out of hand.

While considering long-term deficit-reduction options, the 112th Congress will also have to fund the government for the rest of fiscal 2011, which ends Sept. 30.

Before adjouSeveral new low-income housing tax credit (LIHTC) syndicators have emerged with plans for their first funds to hit the market early this year.

IFG Capital and Hunt Capital Partners are the newest entrants in the field. In addition, The Churchill Cos. and Stateside Capital recently announced the formation of Churchill Stateside Group (CSG), which also plans to syndicate tax credits.

All led by familiar industry names, the firms are breaking into the scene as the industry seeks to rebound from several rough years marked by major LIHTC investors reducing their activities as the economy plunged. During the same time, several syndicators have been forced to scale back or restructure.

“There's been a change in the marketplace," says Neil Socquet, president and CEO of IFG, which will focus on LIHTC equity placement and asset management. “Many large players are no longer in the market, and it has created an opportunity for a smaller startup to come in."

Just recently, the market has been seeing renewed investor interest. More capital began to flow in the second half of 2010 as new investors, including Google and Waste Management, Inc., emerged and existing or returning investors upped their LIHTC activities.

For the first time in about three years, there's a demand for tax credits equal to the supply, says Socquet, who has more than 20 years of experience in affordable housing. He was senior vice president at AIG SunAmerica Affordable Housing Partners, where he was responsible for debt and equity investments. In addition to his nine years at SunAmerica, he worked at MuniMae Midland, Alliant Asset Management, and Boston Financial Group.

He is joined at the Century City, Calif.-based firm by CFO Tom Riha, who served for 16 years as CFO and senior vice president of asset management at WNC & Associates, a longtime LIHTC syndicator.

Other members of the IFG team include Timothy Young, COO; Chaz Seale, senior vice president of investor and community relations; and Sarah Gosler, director of marketing.

Hunt's plans

Hunt also emerged at the end of 2010, with plans to focus on LIHTC syndication and offer some proprietary debt products.

Hunt Capital Partners is a wholly owned subsidiary of Hunt Cos., Inc., a leading real estate investor, manager, developer, and contractor specializing in military and multifamily housing. Its investments include ownership interests in more than 44,000 multifamily housing units across the country.

Hunt Capital is headed by Alan Fair, who was senior vice president of finance and senior managing director at SunAmerica.

He is joined by three other senior executives— Jeffrey Weiss, investor relations; Dana Mayo, acquisitions; and Bryan Townsend, credit and underwriting.

They are familiar names in the industry.

Weiss was senior vice president, investor relations, at Alliant Capital.

Prior to that, he oversaw syndication and asset management at Simpson Housing Solutions. Mayo also comes from Alliant Capital, where he was vice president of acquisitions. He also worked as senior vice president at SunAmerica. Townsend has been a consultant to the LIHTC industry.

“I think there's a very good opportunity in the market for a new syndicator who is willing to utilize its own balance sheet,” says Weiss, senior vice president. “There's a lot of excitement now in the market. A number of deals got completed last year that were on the ropes the previous two years."

Insurance firms and other non-Community Reinvestment Act investors continue to show a high level of interest in the market, and the economy has started to improve, both positive signs for the LIHTC market, notes Weiss.

Hunt Capital is actively looking for transactions in which to invest. The firm plans to market and close its first multi-investor fund by mid-year, with a second fund expected out by the end of 2011. Hunt will also prepare single-investor funds.

“I don't look at us as a start-up,” says Weiss, noting that its parent company has more than 60 years in the multifamily housing industry.

According to Weiss, Hunt Capital will be able to use Hunt Cos.' balance sheet “to make project commitments and otherwise bring certitude to the syndication process for both the developer and investor."

The firm has offices in Century City, Calif., and Alexandria, Va.

CSG Forms

Keith Gloeckl leads CSG as president and CEO. He founded The Churchill Cos., a mortgage banking firm in Clearwater, Fla., in 2005.

Gloeckl has more than 25 years of syndication and multifamily housing finance experience. He was previously president and COO of The Midland Cos. from 1988 to 1999, when it was sold to MuniMae.

In announcing the formation of the new company in December, officials reported that they are raising equity for tax credit transactions and pursuing lending opportunities.

CSG also involves Atlanta-based Stateside Capital led by Richard Beachman. It is a leading syndicator of state tax credits in Georgia.

“The combination of Stateside's syndication platform with Churchill's extensive history in the tax credit equity and debt markets is a logical progression to develop a stronger platform for both developer and investor clients," said Gloeckl in a statement.

The CSG team includes Executive Vice President Christopher Martiner, who leads the developer originations group. He founded CayCap Advisors, Inc., an origination and advisory firm for direct tax credit investors and developers.

He has also worked at Alliant Capital, Boston Capital, Raymond James, and Ocwen Financial.

Marcus Griffin is CFO; Tom Vandegrift, director of asset management; and Devin Sanderson, senior vice president.

LONG-TERM LIHTC ISSUES EXPLORED  

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 at 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," says 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,” says 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,” says the paper.

The report can be found at www.jchs.harvard.edu.