We have seen opportunities for community foundations to improve the effectiveness of their efforts to improve low-income housing availability. The expanding availability of Low-Income Housing Tax Credits [LIHTC] has made low-income housing developments into attractive portfolio investments for taxable institutional investors. Private investments in LIHTC developments have been surging. This trend offers community foundations a transformational opportunity to act as catalysts to facilitate the availability of development properties, rather than as the primary equity investor.
Community foundations should not compete with private investors using LIHTC for several reasons. LIHTCs provide a powerful tax subsidy that is about 30%, or 70%, of the cost of a project to taxable investors, depending on the nature of the housing project. Additional tax-exemption benefits accrue to bond investors in LIHTC properties. Why forego powerful incentives offered to taxable equity investors and taxable bond investors, which tax-exempt community foundations could never realize on their own?
Instead, community foundations could facilitate the creation of zoning and available properties with local officials, accelerating the path for developers to create low-income housing. We could easily see such an approach creating 5x more effectiveness in a community foundation’s impact investing for low cost housing, when compared to making direct investments in properties.
It is also important to understand LIHTC market considerations, participants, and time lines.
- Tax credits
Tax treatment is the central driver, both for LIHTC-driven investment strategies and for the broader affordable housing construction market. Any changes in tax treatment either for affordable housing bonds or for municipal bonds more generally could have a material adverse effect on this strategy.
Equity investors receive federal low-income housing tax credits (LIHTC). Also, interest on bonds issued in support of affordable housing construction or rehabilitation is mostly or entirely exempt from federal taxes. Equity investors receive valuable tax credits that they can apply to offset current income elsewhere in their portfolios. These tax credits can be worth more than the remaining equity value of the property being built, and they are the primary economic incentive for equity investors in the affordable housing marketplace.
2. Rent Roll Profile
Renters pay below-market rates to rent affordable housing apartments. Because of this, waitlists tend to be as large as 10x the number of units available. Thus, even if a sharp curtailment in rental assistance payments to some renters were to occur because of changes in fiscal policies, having occupancy rates below 95% is unlikely unless there are very unusual circumstances.
3. Equity investors
While demand from low-income renters is not likely to be in question, the actual cash flows from managing the low-income housing properties can be challenging. Often, these properties are barely breakeven after operating costs and interest expense, and in about 20% of cases they incur modest losses.
Instead of seeking operating profits on these properties, equity investors look to the LIHTCs created to reach their effective equity return targets. Investors with high current income, like banks and insurance companies, often have the highest direct tax benefits from acquiring LIHTCs and are thus the dominant participants in the affordable housing marketplace.
A corollary of the importance of LIHTCs to equity investors is that the market value of low-income properties without these credits is far below the properties’ replacement values. For instance, a new $50 million property that is 50% financed each by equity and debt, may only have a market value of less than $40 million. Even so, the equity owners of these properties could lose their LIHTCs retroactively if adverse events like defaults or severe property degradation occur. This rule incentivizes the equity owners to cover deficits and otherwise to maintain the properties until their LIHTCs expire, usually in 15 years. The equity holders’ backstopping of the performance of low-income housing projects serves to reinforce the creditworthiness of projects to bondholders. Moreover, the cumulative default rates of LIHTC-linked bonds is very low, typically under 1% over the expected life of the bonds, and with high recovery levels.
About $30 billion in new equity investments were made into affordable housing projects in 2025, doubling from $15 billion in 2017. Since the debt/equity ratio of these projects tends to be close to 1:1, it is likely that the annual supply of LIHTC-linked mortgage debt is over $30 billion and growing.
4. Debt investors
Tax treatment is a primary driver for investors purchasing debt issued for low-income housing developments. Interest on these bonds is mostly to entirely treated as exempt from federal income tax.
Spreads on LIHTC-linked bonds can be as high as 3% over comparable municipal bond rates when they are issued. These spreads exist because bondholders incur material risks at the start of the housing construction [or rehabilitation] project, both from construction risks and risks of delays leasing up the apartment properties.
Having a strong partner to manage these risks is an important part of any development, these developments, and they should understand permitting, contracting, construction, leasing, and property management. Skilled development partners effectively convert economic exposures into a manageable operational risk cycle for each new multifamily development. Consequently, the actual risk of LIHTC bonds tends to be less than what would be implied by the observed credit spread, creating opportunity for taxable investors.
Summary
We urge community foundations to redirect as much of their low-income housing investing activities toward cooperation with taxable equity investors and their developers. Momentum from the very large capital base of large, taxable investors can greatly magnify the effectiveness of community foundations’ talents, while allowing community foundations to preserve their resources for their many other worthy causes.
Chris Cutler CFA
Manager Analysis Services, LLC
917-287-9551