Housing USA: When LIHTC is an Opportunity for ESG

6 min read

 The growth of “socially responsible” investing means tax credit developers can expect higher scores and more institutional support.

As activism has pushed investors to consider social goals, the concept of ranking companies by their contribution to said goals has led to an “Environmental, Social and Governance” (ESG) score. Much like LEED certification, which encourages developers to construct energy-efficient buildings, ESG is a private metric system scoring a company’s commitment to the most pressing issues of today, from environmental sustainability to worker’s rights to charitable giving and diversity and inclusion.

This financing strategy has been around for some time, but has really become a trend the last few years. Research by the US SIF Foundation finds that ESG-driven assets under management in the U.S. jumped from $12 trillion to $17.1 trillion between 2018 and 2020. The field has become a well-accepted component of the finance world, with firms, such as Blackstone and Morgan Stanley, providing ESG investment guidance, and MSCI, Thomson Reuters and other companies providing ratings.

Many investors, meanwhile, look at ESG scores before investing to assess a company’s desirability. The more “progressive” a firm’s activities are, the higher its score; while purportedly “non-progressive” firms like oil companies or Amazon (with its rough treatment of workers) tend to have mediocre scores. For real estate development firms looking to improve their scores, tax credit investments are a good way to go.

As Dori Nolan and Marge Novak with Berkadia write, “Federal programs, such as the Low Income Housing Tax Credit (LIHTC) program, New Markets Tax Credit program and the Qualified Opportunity Zone program have made it easier for institutional investors to evaluate affordable housing investment opportunities in order to make ‘impact’ investments in underserved neighborhoods.” Forbes correspondent Sonny Kalsi further notes that “socially responsible” investing can include real estate projects that meet goals, such as well-being and sustainability, but also economic growth. This suggests that LIHTC projects, in particular, would be an ESG boost, as they’re often geared to achieve neighborhood revitalization goals beyond just providing affordable units.

Many firms are making these investments in new affordable housing with the explicit intent to improve their ESG scores or engage in similar sorts of “impact investing.” Kaiser Permanente recently announced a major investment in affordable housing through a $400 million “social impact investment fund.” The firm’s aspiration is to “create or preserve 30,000 units before 2030, while also advancing inclusive economic development in communities to address systemic economic disadvantage and discrimination that underpin the housing crisis.”

Monarch Private Capital’s investment portfolio includes over 300 affordable projects, and invests in both four and nine percent projects, and single-family, as well as senior housing. “When you invest in affordable housing, you invest in the livelihood and well-being of the communities themselves,” Monarch’s LIHTC Director Brent Ballinger argues in a company blog post outlining the firm’s ESG strategy.

Addy Burr with Walker & Dunlop observes that its acquisition of Alliant Capital will bolster its affordable housing mission. “A critical component of thriving communities is ensuring that people of all income levels have access to safe housing,” Burr writes to me in an email. “We now have the capability to finance debt and syndicate equity for the creation and preservation of LIHTC properties…As an added benefit, this also furthers our ESG goals of originating $60 billion of affordable and workforce housing over the next five years.”

Blackstone has made affordable housing a substantial part of its investment strategy to meet ESG goals. When I asked what specifically the firm was doing, a representative mentioned the 5,000 affordable units it preserved as part of its $300 million renovation of StuyTown in New York City. One entity that it invests in, April Housing, focuses on maintaining affordable housing; for instance, the firm recently guaranteed that a 238-unit complex in Missouri would remain affordable.

“April Housing’s commitment to preserving the affordability of this critical housing stock on a long-term basis is made possible by Blackstone Real Estate Income Trust’s (BREIT) perpetual capital structure,” the Blackstone rep continued. In addition, Blackstone acquired in June 2021 an affordable housing business line from American International Group.

Fairstead CEO Jeffrey Goldberg notes by email that LIHTC projects in urban areas help meet ESG goals because they often involve upgrading buildings and providing transit accessibility.

“Cities across the country are facing affordability crises. Residents, especially vulnerable groups, are being priced out of vibrant communities that are walkable and have access to public transit. This has been exacerbated by the COVID-19 pandemic,” Goldberg says. “By investing in affordable housing, you are helping to not just preserve but improve homes so people can stay in the neighborhoods they love. You are also investing in upgrading these properties, and in doing so, reducing their carbon footprints.”

Fairstead, which Goldberg describes as “a purpose-driven, vertically-integrated real estate developer specializing in creating sustainable, high-quality housing”— most of it affordable—will soon release a report on its ESG progress.

Environmentally-friendly projects are major targets for ESG investments, under the premise that ignoring environmental degradation will negatively impact overall economic growth. Given this focus, investors will want to put money into developments that reduce carbon emissions – concerning both how the buildings are designed and where they’re located. ESG, thus, overlaps with shifts that have already been happening in state QAPs, wherein more points are given to LIHTC developments that promote environmentally-friendly outcomes. The Internal Revenue Service requires all states to weigh energy efficiency in their allocation, and in several states, LIHTC projects must meet LEED or comparable standards.

Looking broadly at affordable housing projects, Fannie Mae’s move into the green securitization realm reflects ESG goals. Fannie is issuing mortgages for developers to give their apartment buildings green retrofits, and issuance of these products eclipsed $100 billion late last year, according to National Mortgage News. Fannie, in fact, has its own strategy for meeting ESG objectives, highlighting environmentally-thoughtful improvements, as well as alternate means of credit checking.

In sum, projects with an environmental focus seem particularly well-poised to attract ESG-minded investors. But the overarching tax credit regime—whether it’s for affordable housing, revitalization of distressed areas or maybe even historic preservation—meets a lot of these goals. Developers, investors and syndicators who work with such credits would do well to tout that work for higher ESG scores.

This article featured additional reporting from Market Urbanism Report content manager Ethan Finlan.