Fred Copeman

8 min read

The Johnny Appleseed of LIHTC

It is no exaggeration to say that the progress of Fred Copeman’s career mirrors, tracks and helped foster the ascendancy of the housing and energy tax credit programs from their beginning following the 1986 Tax Reform Act – the legislation that overhauled the entire real estate tax shelter business.  An attorney who now leads CohnReznick’s Tax Credit Investment Services practice from the firm’s Boston office, Copeman was largely responsible for figuring out the compilation of appropriate data that would attract investors and create a capital market for affordable housing.  Therefore, Vision is a particularly appropriate term for an award bestowed on him by the National Housing & Rehabilitation Association.

Copeman began his career at “the last place on earth I ever thought I’d work: the Internal Revenue Service,” he says.  “I hated it. But at the time, there just weren’t any jobs for someone with a degree in American Government from Georgetown.

“Imagine going to a party and someone asks you where you work. ‘Well, I work for the Treasury Department.’

“’What do you do for them?’

“’Well . . . I’m on the revenue side.’”

At IRS, Fred was a tax shelter revenue agent, which he says “was almost like being a criminal investigator” back in the “Wild West” tax shelter days of the 1970s. And despite the fact that he didn’t like working for “The Man” in those socially rebellious times, “I ended up really liking income taxes. I enjoyed the complicated rules that required some creativity, and I learned a lot about tax shelter offerings, partnership tax and partnerships in general.” What he could not have known was that this would all be preparation for his critical role in literally creating a new capital market for Housing and Historic Rehabilitation Tax Credits.

Once he left IRS, Fred went to work for Ernst & Whinney public accounting firm (In 1989 it would merge with Arthur Young to form Ernst & Young), “and over the next 10 years, I went to night school almost continuously,” earning a Master of Taxation degree from Bentley College and a J.D. from New England School of Law.

“In the 1980s I left to seek my fortune in the syndication business, syndicating Historic Tax Credit investments for Boston Bay Capital.” Here Fred demonstrates his scrupulously honest self-appraisal, leavened as usual by his characteristic humor: “We made every mistake you could possibly make. We learned everything not to do in the real estate business. At that time, there was no barrier to entry. Anyone who could put together attractive offering materials could raise capital. This experience made me a more effective due diligence guy than any of my graduate work.”

In the late 1980s and early 1990s, typical real estate tax investors were consumer products companies and public utilities, as well as Fannie Mae and Freddie Mac. “But we were also raising money for public offerings, which meant small amounts and was a really expensive way to go. Brokers were getting eight percent commissions because it was so hard to convince people. I could see this was not the way to go.”

He returned to Ernst & Young, where his first corporate client was Ben & Jerry’s Ice Cream, and found he was one of the few people who knew anything about tax credits.

“These were very sophisticated investments and most community development bankers were not necessarily trained in real estate underwriting. Those in their corporate tax departments wanted to manage tax credits but really needed third-party help with the investment side.” The problem was that there was generally no budget line to pay for this necessary help.

In 1993, Fred went to Jenny Netzer at Boston Financial – she is now founding CEO of TCAM Asset Management – and together they came up with the concept of using “O and O,” a normal corporate budget line, to meet the challenge. “Offering and Organizational Expenses” became a standard means to pay for third party due diligence work on tax credit funds. “We kind of invented that,” Fred admits after some prodding.

Following that, he compares himself to Johnny Appleseed, “going around the country, educating and explaining the program to clients. By 2003, there was still so little demand for housing credits that they were trading for 40 to 45 cents on the dollar. That meant a corporate investor would be getting a 27% after-tax internal rate of return.”

“Invariably, people would say to me, ‘That all sounds great, but what’s the track record for this investment?’ And I would say, ‘Well, it’s pretty good.’ But that’s not enough. Anyone with a sophisticated financial background would say, ‘This has got to be like a Panamanian junk bond. Why would I do something this risky?’ At the time, we didn’t have any performance data, so there was no offset to the argument that this must be a very risky investment. There was a lot of wariness of tax shelters going back to the 1980s when people did a lot of stupid things.”

Fred knew that large corporations were the right clients, but the only way to make this work was to build an efficient capital market, which did not exist. “We had to have professional due diligence, track records, better reporting. In other words, the industry had to grow up.”

So frustrated was Fred with the lack of usable data, “I finally said, ‘I’ll just do it myself!’” Again calling on Jenny Netzer, he asked her to give him data on a blind basis. “I want to know the status of the entire industry,” he said. “It took a long time to convince the presidents of all those funds to share data and get it out, but eventually we did.”

Out of Fred’s efforts came a series of tax credit investment reports that showed the reality of the investment performance over time. “It took a long time to even get people to meet with us. In just about every case, we had to identify and build an internal champion who had the guts to go to the boss and say, ‘I think this is a really smart thing and we ought to take a look at it.’”

He also notes, “I was extraordinarily lucky to be at Ernst & Young. Those in the national tax organization listened very carefully and gave me the authority to staff the business. Them giving me this opportunity was the key to my being able to explore all these areas and put out the studies to defend the industry.”

Since 2000, Fred and his team have compiled data on more than 20,000 housing credit properties that conclusively proves the quality of the investment. “There was a natural bias against affordable housing, thinking the cash flow is not very good because you’re dealing with low-income renters. But we’ve been able to refute that with hard data. In fact, the reality is that the unmet demand is so high that people won’t take the risk of not paying rent.”

He also cites “the remarkable confluence of housing tax credits with CRA” – the Community Reinvestment Act – that was instituted to prevent loan and mortgage redlining, but which has become a powerful engine of community redevelopment since its passage in 1977. “Banks love the program because the performance is so strong.”

In January 2010, Fred joined CohnReznick as a principal in its national real estate consulting practice and founded and headed a new Tax Credit Investor Services practice. He remains among the industry’s greatest boosters; able to back up everything he says with his detailed studies – they now number nine. This year, he is leading a CohnReznick team in the first comprehensive analysis of operating expenses in housing tax credit properties.

“We now have capital market efficiency that is the envy of the investment industry,” he declares. “Though the take-up rate in the housing credit program has been very long and slow, over the years we built an increasingly institutional market where we reliably know where the capital is going to come from. We now have a tremendous amount of equity compared to debt to finance these projects: 70 to 80% equity and 20 to 30% debt. That is the genius of the program.”

An active member of NH&RA’s Board of Directors, Fred Copeman sums up his career thus far: “Without ever really knowing that this is what I wanted to do, I was helping to make a capital market work. And it’s been an extraordinary privilege for me to be in this situation.”