NEW YORK, NY - The Community Reinvestment Act (CRA) of 1977, has become the most powerful engine of capital formation for developing affordable housing in the United States, according to research conducted by CohnReznick LLP, the nation’s 11th largest accounting, tax, and advisory firm.
“To the extent investment test targets are based on deposit volume, deposits from overseas customers or corporations and institutional investors domiciled outside the bank’s assessment area should be excluded. Moreover, banks should be permitted to invest in broader statewide and regional areas that could include bank assessment areas.”
According to the new study, 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.
CohnReznick’s report: The Community Reinvestment Act and its Effect on Housing Tax Credit Pricing is available for review at www.cohnreznick.com/cra-study.
“Based on our research, we encourage the adoption of more flexible rules for measuring bank performance under the CRA’s investment test. CRA assessment areas should be the principal, rather than the exclusive areas in which banks make their community development investments,” said Fred Copeman, CohnReznick Principal and National Director of the firm’s Tax Credit Investment Services (TCIS) practice. “To the extent investment test targets are based on deposit volume, deposits from overseas customers or corporations and institutional investors domiciled outside the bank’s assessment area should be excluded. Moreover, banks should be permitted to invest in broader statewide and regional areas that could include bank assessment areas.”
Other key findings of the study include:
The largest single variable in housing tax credit pricing is a function of the CRA investment test value of a given property’s location. The data CohnReznick collected finds that 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 the management in which CRA investment goals are set and the methodology under which housing credits are allocated. As a result, the banking sector’s demand for housing credit investment is not proportionately aligned with the location of housing credit properties. State housing credit agencies award credits based on their assessment of wherever there is a critical shortage of affordable housing and those shortfalls exist in communities of all stripes – not just our center cities. The allocation of credits to other parts of the state exacerbates the demand/supply imbalance in CRA Hot markets and drives pricing even higher. As a result, the investment test tends to drive capital to areas that already have sufficient capital to finance projects located in such areas.
As investors have become more confident in the risk/reward profile of housing tax credit investments, prices have steadily increased for most of the past 20 years. The study found that 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.
“Banks are permitted to invest outside their CRA footprints but only if they can demonstrate that they are ‘adequately addressing the community development needs of their assessment areas.’ Since no one knows what this means, the provision has had very little practical value. The regulators have recently proposed new guidance that would considerably relax the ‘qualifier’ and permit banks that invest outside their assessment areas to receive full consideration for such investments. CohnReznick applauds the introduction of greater flexibility in the supervision of CRA investment test compliance,” Copeman added.
These findings form the last phase of CohnReznick’s multi-part housing study. The first study, published in August 2011, offered the first comprehensive review of housing credit property performance data since the 2008 economic downturn began. The second study, released in December 2012, provided an in-depth geographic state-by-state analysis of the operating performance of apartment properties financed with low-income housing tax credits. That analysis confirmed the striking imbalance between the supply and demand of affordable rental housing.