Washington, DCFannieMaeEnterprise CommunityPartners

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The deal between Fannie Mae and the Citigroup Inc.subsidiary sparked debate about the emergence of a secondary marketfor LIHTCs. There is little mystery why one hasn't developed beforenow since, at 20 years or so, the industry is still quite young.Citibank, for one, though, would like to see such a developmentoccur sooner rather than later.

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"One of the great things about this transaction is that itdemonstrated the liquidity in the LIHTC market," says Andy Ditton,managing director of Citibank Community Development, a businessunit of Citigroup. "That has never really been demonstrated before.Until now, there have largely been one-off secondary market saleson an idiosyncratic basis."

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He says he hopes this transaction will bring more players to themarket, especially if they believe a secondary market isdeveloping. "Investors that don't feel comfortable with a 15-yeartime horizon for their tax needs will not invest, but if there wasa secondary market, they might step in," he says.

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Other observers are more cautious. "Let's wait and see if otherlarge buys are made before we start saying a secondary market hasarrived," Werhane says.

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It is difficult to say when another large portfolio will come tomarket. The portfolio Citibank acquired from Fannie Mae consists of12 funds that own 382 properties with a total of 31,050 units. EdNeill, senior vice president of Tax Advantaged Equity for FannieMae, reports the agency is talking to a number of other investorsabout additional transactions, but cannot predict timing, size oreven whether another similar sale will take place.

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Stephen Ryan, a partner with Cox Castle & Nicholson'sSan Francisco office, is betting that one will. "Fannie Mae hastraditionally been a buyer and a holder. I think we will see otherfinancial institutions making similar acquisitions from FannieMae." His reasoning? For starters, LIHTCs are becoming increasinglyattractive investments. "LIHTC investing is now a maturing industrywith a marketplace that has become much more efficient," he says."The relatively low returns presently available in the public debtmarkets make LIHTC investments, which recent studies show to havehistorical default rates well below the average for real estateinvestments, a sound economic alternative on a yield drivenbasis."

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Werhane adds, "From the investor's perspective, LIHTCs willlikely offer better opportunities for a little extra yield goingforward. These credits are becoming an entrenched part of theinvestment landscape."

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Ryan says another factor driving investment for some financinginstitutions is the desire to fulfill regulatory requirements foraffordable housing and community investments created by theCommunity Reinvestment Act. Specifically for Citibank, he adds, itmay well be more than coincidence that its $676-million investmentfollows its recent acquisition of what was once GMAC'snational affordable housing lending platform, headed by StevenFayne, and GMAC's affordable housing investment banking arm, run byHal Kuykendall and Larry Dale.

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"Adding this equity component on such a large scale certainlydemonstrates a comprehensive commitment to affordable housing inall its facets," Ryan says. "We have heard Citibank's traditionalcompetitors have taken note of this new capacity and are working tobeef up their own affordable housing platforms."

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For its part, Citibank is also continuing to ratchet up itsplatform. The institution was rather late to the game, Ditton says,and did not begin investing serious volumes until the early 2000s.The bank expects to make an additional $600 million to $700 millionin new LIHTC investments this year, he says. "Because ouroperations are highly profitable we can use the tax benefits. Atthe same time we are also stepping up our general involvement inthe affordable housing market."

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