Fannie Mae 2004 Annual Report Download - page 21

Community Investment Group
HCD’s Community Investment Group makes investments that increase the supply of affordable housing. Most
of these investments are in rental housing that qualifies for federal low-income housing tax credits, and the
remainder are in conventional rental and primarily entry-level, for-sale housing. These investments are
consistent with our focus on serving communities in need and making affordable housing more available and
easier to rent or own.
The Community Investment Group’s investments have been made predominantly in low-income housing tax
credit (“LIHTC”) limited partnerships or limited liability companies (referred to collectively in this report as
“LIHTC partnerships”) that directly or indirectly own an interest in rental housing that the partnerships or
companies have developed or rehabilitated. By renting a specified portion of the housing units to qualified
low-income tenants over a 15-year period, the partnerships become eligible for the federal low-income housing
tax credit. The low-income housing tax credit was enacted as part of the Tax Reform Act of 1986 to encourage
investment by private developers and investors in low-income rental housing. To qualify for this tax credit,
among other requirements, the project owner must irrevocably elect that either (1) a minimum of 20% of the
residential units will be rent-restricted and occupied by tenants whose income does not exceed 50% of the
area median gross income, or (2) a minimum of 40% of the residential units will be rent-restricted and
occupied by tenants whose income does not exceed 60% of the area median gross income. The LIHTC
partnerships are generally organized by fund manager sponsors who seek out investments with third-party
developers who in turn develop or rehabilitate the properties and subsequently manage them. We invest in
these partnerships as a limited partner with the fund manager acting as the general partner.
In making investments in these LIHTC partnerships, our Community Investment Group identifies qualified
sponsors and structures the terms of our investment. Our risk exposure is limited to the amount of our
investment and the possible recapture of the tax benefits we have received from the partnership. To manage
the risks associated with a partnership, we track compliance with the LIHTC requirements, as well as the
property condition and financial performance of the underlying investment throughout the life of the
investment. In addition, we evaluate the strength of the partnership’s sponsor through periodic financial and
operating assessments. Furthermore, in some of our partnership investments, our exposure to loss is further
mitigated by our having a guaranteed economic return from an investment grade counterparty.
As of December 31, 2004, we had a recorded investment in these LIHTC partnerships of $6.8 billion. We earn
a return on our investments in LIHTC partnerships through reductions in our federal income tax liability as a
result of the use of the tax credits for which the partnerships qualify, as well as the deductibility of the
partnerships’ net operating losses. The tax benefits associated with these partnerships was the primary reason
for our effective tax rate in 2004 being 17% versus the federal statutory rate of 35%.
In addition to its investments in LIHTC partnerships, HCD’s Community Investment Group provides equity
investments for rental and for-sale housing. These investments are typically made through fund managers or
directly with developers and operators that are well-recognized firms within the industry. Because we invest as
a limited partner or as a non-managing member in a limited liability company, our exposure is generally
limited to the amount of our investment. Most of our investments in for-sale housing involve the construction
of entry-level homes that are generally eligible for conforming mortgages. As of December 31, 2004, we had a
recorded investment in these equity investments of $1.3 billion.
Community Lending Group
HCD’s Community Lending Group supports the expansion of available housing by participating in specialized
debt financing for a variety of customers and by acquiring mortgage loans. These activities include:
• helping to meet the financing needs of single-family and multifamily home builders by purchasing
participation interests in acquisition, development and construction (“AD&C”) loans from lending
institutions;
• acquiring small multifamily loans from a variety of lending institutions;
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