Corporations see upside in affordable housing investment.

Affordable housing has always been one of the nation's most stable real estate investments. Below market rents, high occupancies, and government-backed incentives offered to spur construction have correctly fostered this belief.

In 1987, Congress created tax credits in order to promote the development, rehabilitation and maintenance of privately-owned affordable rental housing. This was a response to the Tax Reform Act of 1986, which eliminated nearly all tax-advantaged investments - a potentially crippling blow to the affordable housing industry.

Initially, individual investors responded by providing most of the affordable housing industry's equity capital. Through publicly-registered partnerships, individuals invested fairly small sums of money to stimulate affordable housing construction, and in return, earned low-income housing tax credits which allowed investors to subtract from their net, rather than gross, bottom line tax bill. Recently, affordable housing has begun to appeal to corporations which are seeking to reduce' their tax liabilities through investing in federal tax credits.

Corporate investors, noticing the market's impressive yields (at one time as much as 20 percent on an after-tax, internal return basis), began entering slowly. Where individual investors once dominated the market for affordable housing tax credit properties, corporations now account for approximately 75 percent of the dollars being raised. Fortune 500 corporations typically invest $10 million to $20 million in the market per year, but some are opting for far greater allocations.

Corporations invest in tax credits through one of the nation's four large sponsors of product, such as Related Capital, headquartered in New York City. Related Capital is the largest supplier of equity to developers of affordable housing tax credit properties.

Corporations gain some significant advantages: Besides yields and tax benefits, corporations, unlike retail investors, can invest an unlimited amount of money in tax credits. Plus, any passive losses generated from a tax credit partnership can be used by corporations to reduce taxes and increase cash flow.

Yields have drastically changed due to recent competition for tax credits. Corporate investors no longer see yields near 20 percent, more like 12 to 14 percent yields on an after-tax basis. In relation to the risk, however, this is still highly attractive. Achieving a comparable return would mean taking on far more risk, something most corporations are unwilling to do.

Strong yields. High occupancies. Lower risk. Social good. These are the favorable risk-reward characteristics increasingly attracting high-profile corporations to low-cost housing today.