a new social enterprise
The Minnesota Equity Fund (MEF) is designed to help socially-motivated corporations and banks invest in affordable housing and community development in Minnesota. MEF will raise capital from corporations and financial institutions and invest these resources into real estate development partnerships, with the goal of providing investors with a sound investment that will produce positive social and economic outcomes for families and communities throughout Minnesota.
THE LOW-INCOME HOUSING TAX CREDIT (LIHTC)
The LIHTC program makes federal tax credits available for the financing of affordable rental properties. LIHTCs account for nearly 90% of all affordable rental housing created in the United States today. Over the past two decades, the Low-Income Housing Tax Credit program has financed over two million affordable housing units nationally, including over 30,000 new homes in Minnesota since its inception in 1987.
INVESTING IN LIHTC
Corporations and banks are important contributors to affordable housing development through their investments in LIHTCs. These transactions are typically organized as limited partnerships or limited liability companies, and investments are made through those entities.
Despite the effectiveness of this program, many companies may be unfamiliar with the mechanics of investing in LIHTCs. Investors can earn a solid economic return on their capital, and bank investors can receive positive consideration toward their rating under the Community Reinvestment Act (CRA).
LIHTC funds managed by the Minnesota Equity Fund (MEF) will help investors minimize the risk by investing in a variety of LIHTC projects. MEF will provide multiple services including underwriting, asset management and annual compliance.
HISTORY OF MINNESOTA LIHTC MARKET
- Tax credits worth $110 million are awarded each year in Minnesota
- LIHTC awards split approximately 60% to Metro and 40% to Greater Minnesota
- Statewide tax credit housing development volume: 15-20 deals per year
- Typical equity raised: $1M-9M per development
Development size: Average 40 to 70 units
ADVANTAGES OF TAX CREDIT INVESTING
- Provides competitive internal rate of return (IRR) and diversification of risk
- Is a double bottom line investment opportunity
- Offers a range of investment options and opportunities, including investment size and geographic location
NATIONAL SYNDICATION TRENDS
- Many national syndicators have been inactive in Minnesota in recent years, particularly in Greater Minnesota
- National syndicators demonstrate growing desire to serve larger metropolitan areas only
- Fannie Mae and Freddie Mac, historically the largest investors in non-metro developments, are now out of the LIHTC market
- CRA oriented banks have established (or are establishing) proprietary funds with discrete geographies and requirements for developers
- Limited investor competition results in increased demand for scarce public & charitable subsidies
- The IRR for investors offers a competitive return and provides exceptional economic benefits
MINNESOTA EQUITY FUND GOALS
- Improve access to equity for developers, improve pricing, and conserve public and charitable subsidies
- Create a more robust tax credit investor market
- Build on past relationships with funders, agencies, corporations and lenders, and leverage GMHF financial strength to secure private equity investments
- Offer Minnesota corporations the opportunity to invest in local community development
- Provide competitive economic returns plus the social return of housing working families in well designed, green, energy-efficient and healthy housing
- Better address local affordable housing production and preservation goals
PROJECTED MARKET SHARE
The Minnesota Equity Fund seeks to serve a modest portion of the total Low-Income Housing Tax Credit investor market in Minnesota. Each year, over $110 million in tax credit equity is syndicated. Additional details on the market include:
- Market share anticipated to raise up to $25 million in equity every 18-24 months
- Estimated niche for the Minnesota Equity Fund is
10-15% of the total annual tax credits awarded in Minnesota
- Equity is pledged to developments over two annual state funding cycles
- Investments will be made in 5-10 developments of 24- 60 units each cycle
- Equity commitments will be secured from investors throughout 2012 and 2013