As the low-income housing tax credit (LIHTC) program matures, thousands of properties are becoming eligible to opt out of the program and no longer be affordable to low-income residents.
In the worst-case scenario, more than 1 million LIHTC units could leave the affordable housing stock by 2020.
Fortunately for those in need that’s unlikely to happen as most LIHTC properties continue to remain affordable, according to a new study commissioned by the Department of Housing and Urban Development (HUD) and prepared by Abt Associates.
“Maintaining physical asset quality turns out to be a larger policy issue for older LIHTC properties than maintaining affordability,” according to “What Happens to Low Income Housing Tax Credit Properties at Year 15 and Beyond?”
During the first 15 years of a LIHTC property’s compliance period, owners must report annually on compliance with LIHTC leasing requirements. After 15 years, the obligation to report to the Internal Revenue Service on compliance issues ends, and investors are no longer at risk for tax credit recapture. For properties built before 1990, this requirement also marked the end of the affordability required by federal law. Beginning in 1990, tax credit projects were required to remain affordable for a minimum of 30 years, for the 15-year initial compliance period and a subsequent 15-year extended-use period, explains the report.
In addition, some states have their own extended-use requirements that keep properties affordable for even longer.
Still, as more and more LIHTC properties are reaching the end of their restriction periods, the concern grows.
“This report is a wake-up call to all of us interested in preserving our nation’s affordable housing,” said HUD Secretary Shaun Donovan in a statement. “AS LIHTC properties age, especially in high-cost areas with escalating market demand, state housing finance agencies (HFAs) must do everything they can to protect the opportunities for working families to live in neighborhoods they might otherwise not be able to afford.”
The new report says that 11,543 properties with 411,412 units placed in service between 1987 and 1994. Between 1995 and 2009, there were 20,567 proper ties with 1.5 million units.
The later year developments are much larger, averaging about 75 units per project compared with 36 units. Twenty-two percent of the properties placed in service between 1995 and 2009 featured nonprofit sponsors compared with 10 percent of the early developments.
According to report authors, LIHTC properties likely will follow one of three paths. “Some will maintain their physical quality through cash flow and periodic refinancing in much the same way that conventional multifamily real estate does,” says the study.
Others will maintain their physical quality by being recapitalized by a new allocation of tax credits or another source of public subsidy. And in the third route, other properties will deteriorate over the second 15 years, which will affect their marketability and financial health.
The state HFAs that allocate tax credits will be under great pressure as a large number of LIHTC properties age. These older developments will be competing with other projects for the limited supply of tax credits.
“We suggest that HFAs place the highest priority on the developments that are most likely to be repositioned in the markets—as higher rent housing or conversion to homeownership or another use,” says the report. “HFAs could benefit from additional data and tools from HUD to help identify the most appropriate properties.”
Report authors do not recommend that states extend use restrictions beyond 30 years because that will likely come at a price. They say that the longer the use restrictions last, a higher initial subsidy will be needed.
The report can be found at http://www.huduser.org/portal/publications/hsgfin/lihtc_report2012.html.