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Special Report: The Community Reinvestment Act and Its Effect on Housing Tax Credit Pricing

CohnReznick is pleased to provide our third in a series of reports focused on low-income housing tax credit properties. This report, The Community Reinvestment Act and Its Effect on Housing Tax Credit Pricing, examines the relationship between housing tax credit pricing and banks investing in geographies under the Community Reinvestment Act (CRA) of 1977.

According to the research, The Community Reinvestment Act (CRA) of 1977 has become the most powerful engine of capital formation for developing affordable housing in the United States. Accordingly, the CRA’s investment test is largely responsible for motivating U.S. banks to become the largest investors in affordable housing developments. The study also finds that bank capital can be more efficiently deployed by revising CRA regulations.

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Key Findings

  • The largest single determinant of housing tax credit pricing is based on the CRA investment test value of a given property’s location. The data collected for this study indicates large pricing spreads as wide as $0.35 per $1.00 of housing tax credit. This cannot be explained sufficiently by factors other than the CRA.

  • There is a significant mismatch between investment objectives and the manner in which housing credits are allocated. The banking sector’s demand for housing credit investment is not proportionately aligned with the location of housing credit properties. This has led to a phenomenon of overlapping CRA assessment areas in highly populated markets. As a result, the investment test tends to drive capital to areas that may have a disproportionately small number of investment opportunities.

  • The most sought-after CRA markets had the strongest resistance to steep decreases in tax credit prices, even in the midst of market uncertainty.  When the equity market was at its historical peak in 2006, housing tax credits were trading more or less at ”dollar for dollar” in many locations.

  • The more the market is dominated by CRA-motivated investors who invest only in certain areas of the country, the wider the pricing spread is in areas with intense CRA compliance demand compared to areas without.

Related CohnReznick Reports

The Low-Income Housing Tax Credit Program at Year 25: An Expanded Look at its Performance (December 2012)

The Low-Income Housing Tax Credit Program at Year 25: A Current Look at its Performance (August 2011)

Additional Resources

Tax Credit Advisory

Affordable Housing Industry

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