Residual Value

A customer whose stated objective is current income asks his representative about an affordable housing program. Why is the program a poor match for that objective?

1. A.Interests in such a program may not be sold to individual investors seeking incomeWrong. No eligibility bar of that kind exists; the mismatch here is economic rather than regulatory.
2. B.It distributes monthly, but every dollar distributed is taxed as ordinary incomeWrong. This invents a distribution pattern and answers a tax question the stem did not ask.
3. C.The return is built on credits and passive losses, and cash distributions are limited by designCorrect. The payoff is designed to arrive through the tax return, not through the cash distribution.
4. D.Residual value is guaranteed by the subsidy, which caps the customer's eventual upsideWrong. Residual value in these programs is uncertain rather than guaranteed, and no such cap applies.

Why: The outline describes an affordable housing program's benefits as tax credits and passive losses, and lists limited cash distributions and uncertain residual value among its risks. Rents in subsidized housing are constrained, so there is little surplus cash to distribute; the investor is paid mainly in tax benefits, which are worth something only to someone with the liability and the passive income to absorb them. A customer who needs spendable cash each quarter receives very little of it here. Were the same customer sitting on substantial passive income with no need for current cash, the program could be a reasonable fit.

An affordable housing program tells prospective investors that its principal economic benefit is a stream of housing tax credits rather than cash distributions. Which risk is specific to that benefit rather than to real estate ownership generally?

1. A.Occupancy at the properties could fall below the level the sponsor projectedWrong. Occupancy risk attaches to any rental real estate and would exist even if the program claimed no credits.
2. B.Maintenance and replacement costs could rise faster than the rents allowedWrong. Rising operating costs squeeze net operating income in every rental program and leave the credit stream untouched.
3. C.A change in government housing policy could withdraw or reduce the subsidies and creditsCorrect. The credits exist by legislative choice, so a policy reversal reaches the benefit at its source.
4. D.The sponsor might be unable to arrange long-term financing to replace construction debtWrong. Take-out financing risk belongs to programs that build, and it does not bear on the credits.

Why: An affordable housing program's return is built on credits and rent subsidies that exist because government policy creates them. A credit offsets tax liability directly rather than merely reducing taxable income, which is why it can dominate the program's economics, but the same fact makes the return dependent on a policy that can be changed. The outline lists government policy changes and loss of subsidies or credits as risks peculiar to this program type, alongside limited cash distributions and uncertain residual value. If the program's return came from market rents instead, the analysis would shift to occupancy and operating costs like any other rental property.