Giving shelter

Back in 1986, Congress provided a tax incentive to increase investment in affordable housing for low-income families. Part of then­president Ronald Reagan's tax system overhaul, the measure essentially empowers the federal government to allocate tax credits to the states: Developers bid to receive the credits and then resell them to investors, who can use them to reduce their federal tax liability over a ten-year period. Each year the program attracts more than $6 billion of private capital to develop affordable housing.

In the past year, such institutional investors as Bank of America, the John D. and Catherine T. MacArthur Foundation, the General Board of Pension and Health Benefits of the United Methodist Church and several insurance companies have launched or stepped up efforts to partner with real estate developers to build affordable housing.

In October, for example, Related Capital Co., a subsidiary of New York­based CharterMac, a real estate finance company specializing in multifamily housing, acted as a syndicator and raised $23.9 million from institutional and high-net-worth investors. The capital was invested with a partnership that is building the first phase of a 2,441-unit, mixed-income housing development on Chicago's Near West Side, a project estimated to cost $650 million.

"By forming limited partnerships with institutional investors, we as the general partner identify a series of investments that are going to generate tax credits," explains Related CEO Marc Schnitzer. "We then pass the credits to our limited-partnership investors." About 60 percent of Related's deals come from clients' leads.

BofA, one of Related's limited partners, also receives regulatory credit under the Community Reinvestment Act when it invests in low-income housing. The act requires banks to demonstrate that they are helping to meet the credit needs of their communities. Charlotte, North Carolina­based BofA has increased its investments in affordable housing from some $200 million in 2000 to $750 million in the first ten months of 2004.

"The bank has a mandate to reinvest in neighborhoods in which it has received deposits, so we have an opportunity to do good and make money at the same time," says Christopher Long, senior vice president for community development banking.

BofA forms an alliance with syndicators that purchase a variety of interests in affordable housing partnerships; the resulting tax benefits flow up to the corporate parent. Long estimates that internal rates of return on these investments average 6 percent to 8 percent after tax.

The $12.5 billion pension arm of the United Methodist Church has moved about $900 million into affordable housing since it first invested $25 million in the sector in 1990. The Evanston, Illinois­ based pension fund uses the investment to help match assets to projected liabilities.

"There is no better match than a 20-year mortgage," says chief investment officer David Zellner. "The mortgages we write are 20-year term, noncallable."

Since the General Board is a mortgage lender and not an equity investor, it cannot make use of the tax credits itself. "The fact that we are doing good is a bonus," Zellner adds.

The philanthropic MacArthur Foundation in Chicago directs capital into affordable housing through grants and ten-year, low-interest loans to nonprofits that develop, acquire or operate affordable rental housing. It also extends loans to intermediaries like Related Capital, which act as syndicators to raise capital to finance low-income housing.

"A grant is money out the door to achieve a charitable goal," says Julia Stasch, vice president of the foundation's program for human and community development. "But our loans, although also made to advance our philanthropic goals, are creative investment tools."