In 2008, the economic crisis eliminated the appetite of Freddie Mac, Fannie Mae, Bank of America, Citibank, and AIG (as well as many other Investment Banks in the United States) for the acquisition of Low-Income Housing (LIH) Tax Credits. These financial institutions were the major equity investors in LIH Tax Credit developments. CRA Investments, LLC (CRA) is a Missouri limited liability company born from this crisis for the sole purpose of finding alternative investors in LIH Tax Credit developments. CRA expanded the use of a syndication model first developed by Stephen Holden in 2003. This model works well by enlisting Community and State Banks and other investor corporations as Investors in equity funds. This model provides substantial after tax returns on an investment that has a historical loss ratio of less than 0.14% from the inception of the program in 1986. In addition, a participating Bank receives Community Re-investment Act credits.
Tax credit solutions.
Dollar-for-dollar reduction in federal tax liability.
The low income housing tax credit (LIHTC) is an indirect federal subsidy used to finance the development of affordable rental housing for low to moderate income households. The LIHTC program, enacted by Congress in 1986, is regulated by Section 42 of the Internal Revenue Code and administered by state agencies typically referred to as housing finance agencies (HFAs). Each year, the IRS allocates housing tax credits to designated HFAs based on $1.75 per capita. HFAs allocate credits to developers of qualified affordable housing developments through a competitive process outlined in the state’s Qualified Allocation Plan (QAP). Credits awarded to developers are then sold through syndicators to groups of investors to raise capital (equity) to subsidize eligible development costs, thus allowing units to rent at below market rates. The LIHTC provides a dollar-for-dollar reduction in federal tax liability in exchange for equity.
Community Reinvestment Act.
The Community Reinvestment Act (CRA) encourages financial institutions to help meet the financial needs of communities through community development activities such as lending, investing and providing services. According to OCC Bulletin 2006-6 dated February 9, 2006, “Banks may receive positive consideration for CRA-related activities that benefit designated disaster areas such as those areas affected by hurricanes Katrina and Rita”.
Investment property owners maximize their return on investment through professional asset management services. As asset managers, we provide expert professional oversight of all phases of development, construction and operations. This oversight provides a layer of protection to the investor.
Historic Preservation Tax Incentives.
Historic preservation tax incentives are designed to promote urban and rural revitalization by encouraging private investment in the rehabilitation of historic buildings. Buildings that qualify as certified historic structures with a planned substantial rehabilitation may qualify for a credit equal to 20% of the qualified rehabilitation expenditures as set forth in Treasury Regulation §1.48-12 . This program is an effective means of leveraging private investment in adaptive reuse and preservation of income-producing historic properties.
Low Income Housing Tax Credits (“credits”) are claimed annually over an accelerated 10-year period. The value of the credits is converted to equity raised through the sale of the credits. The equity raised is needed immediately to fund development costs. A syndicator, or credit purchaser, acting as an investment group representative, assembles a group of investors interested in purchasing the rights to future credits in exchange for immediate cash. The syndicator screens all potential investments and monitors the ongoing compliance of the investment portfolio. The investment group invests in funds established by the syndicator allowing for diversification across several rental markets. A fund is formed as a limited liability company owning 99+% of the property through a limited partnership. Limited partners are typically limited to passive investment roles, thus utilizing asset management services to maximize their return on investment.