Posted: October 30, 2009

By Philip Newswanger

philip.newswanger@insidebiz.com

The CEOs of Bank of America, CitiGroup and AIG Insurance and their companies have grabbed headlines and most of the bailout money.

But little attention has been paid to programs that have been altered or affected by the upheaval on Wall Street and needed an infusion of cash.

One of those programs is the low- income tax credit program, which was in jeopardy last year when Fannie Mae and Freddie Mac were taken over by the federal government.

These two government-sponsored entities were responsible for buying tax credits from state housing agencies. In fact, they bought 40 percent of total available tax credits meant to finance housing for low-income citizens.

In return, the agencies invested in low-income housing or provided cash for the tax credits they bought from state housing agencies, such as the Virginia Housing Development Authority.

By the end of 2008, the market for low-income tax credits nearly dried up when the two government-sponsored agencies left the market.

That changed with the American Recovery and Reinvestment Act of 2009.

Until then, state housing agencies couldn't exchange their tax credits for cash.

But language in the bill changed that. The legislation also set aside money to buy the tax credits.

A coalition of the state agencies that allocate the credits, the development community and Congress tweaked the law to allow for a cash-for-tax credit exchange, said Jim Chandler, director of the low-income housing tax credit program for Virginia's housing agency.

So Virginia is able to exchange 40 percent of its tax credit allocation, or $112.5 million, for cash from U.S. Treasury.

Chandler said this isn't a new source of funding.

"Instead of being sold to investors, it's been turned into Treasury," he said.

By exchanging the tax credits for cash, Chandler said, six developments that weren't able to find investors will now proceed.

The state will take funds from the cash it gets and blend that with the remaining tax credits to stretch deals further.

The program works likes this: The state issues the tax credits to developers on a competitive basis. Then the developers try to sell the tax credits, good for 10 years, to raise cash to build low-income housing.

Syndicates, banks and corporations are typical buyers.

Depending on demand, investors may pay anywhere from 60 to 85 cents or higher on the dollar for the tax credits.

"The investors are now paying less for the credits than they have in the past," Chandler said. "They have been more selective about the projects."

A number of banks are interested in buying the tax credits because they get Community Reinvestment Act credits, Chandler said.

The government mandates that banks invest in low-income communities, the essence of CRA.

"I think Virginia has been a little more fortunate than other states," Chandler said.

"We still have interest from other investors. A number of states have found it difficult finding investors."

Mostly financial investors that will get CRA credits, such as Capital One, TowneBank, BB&T and Bank of America, are buying the tax credits, Chandler said.

To date, 45 state housing authorities have been awarded a total of $3.1 billion in payments in lieu of tax credits for affordable housing projects, Treasury said in an official statement.

This is an ongoing program open to additional state applications through 2010, Treasury said.nibb