The syndication of low-income housing tax credits

Abstract

The low-income housing tax credit is the primary governmental incentive for the development of affordable housing. This public policy initiative has become attractive to investors because in exchange for an equity investment, they receive tax credits, which serve to reduce their federal income tax liability. Widely held C corporations, due to specifications of the tax code, can utilize tax credits better than any other investor class. Serving as financial intermediaries, syndicators complete the low-income housing tax credit market by bringing together developers, who sell tax credits, and corporations, who purchase these credits. This thesis addresses the role of the for-profit syndicator as the financial intermediary in this market. Syndicators add value by filling informational gaps, providing diversification, and managing risk for investors. In exchange for these and other services, investors pay syndicators a load, which covers fees and expenses. Boston Financial, one of the nation's largest syndicators, has provided information and data for this study. As a means of addressing the value of the syndicator, a performance analysis of Boston Financial's first ten tax credit funds has been performed. This analysis shows that these funds are returning impressive yields. Stated objectives are being met both in terms of yield and tax credit delivery. As this market has matured, pressure on syndicator loads has increased due to competition and falling yields. In such an environment, a syndicator's track record and reputation for delivering yield and managing risk gain importance. As the market continues to evolve, downward pressure on fees is expected to continue.