Low-income housing tax credit (LIHTC) properties continue to demonstrate strong performance nationwide, reports CohnReznick, which analyzed data from more than 21,000 housing credit properties.

Cindy Fang
Cindy Fang

“The demand for quality affordable housing remains evident as shown by a 97.8% median physical occupancy rate reported on the surveyed portfolio for the year 2018,” says Cindy Fang, a partner and the firm’s Tax Credit Investment Services leader. “Pent-up demand, combined with quality underwriting and effective oversight, led to strong financial and investment performance reported on the national housing tax credit portfolio.”

In 2018, the surveyed portfolio reported, on a median basis, a 1.40x debt-coverage ratio (DCR), and more than $700 per unit per annum net cash flow (cash flow available after paying for operating expenses, mandatory debt service, and required replacement reserve contributions), according to CohnReznick’s “Housing Tax Credit Investment: Investment and Operational Performance” report.

The median DCR is a new high-water mark for this metric, which was about 1.15x between 2000 and 2008 and then increased to 1.24x in 2010.

Despite some recent years’ disruption to the housing tax credit program, the program remains very strong from a demand—both demand for the affordable housing supply and investor demand for the credits—and performance perspective, according to Fang.

“As an industrywide trend, we are seeing more complex projects and more projects that struggle with limited soft debt,” she says. “That said, we haven’t seen a downward trend in operating performance, which speaks to the sophistication level that our industry collectively built through its 30-plus year history.”

Data from the respondents shows just a 0.65% cumulative foreclosure rate since the inception of the housing credit program. That’s “a very meaningful data point for regulators who rate the risk of housing tax credit investments,” says the report. “The favorable risk rating affects the amount of capital that regulated financial institutions like banks hold in reserve to offset the risk of their investments. The low foreclosure rate of housing tax credit properties is also important as investors seek credit approvals to make equity investments in housing tax credit transactions.”

At $16.4 billion, 2018 also witnessed a new high-water mark for investor equity. The presence of banking institutions motivated by the Community Reinvestment Act continued to dominate the investor base while the return of Fannie Mae and Freddie Mac as investors served to provide further diversification to the marketplace, along with other economic-motivated nonbank investors, says the report.

In years 2015-18, on average $15.2 billion in equity was invested in housing credit-financed developments annually. After reaching a historical high in 2016, housing tax credit equity volume decreased by 7.5% in 2017 amid the nearly yearlong prospect of reduced corporate tax rates before bouncing back.

This year’s report includes an analysis on mixed-income projects given the increased focus on workforce housing as well as the recent income-averaging rule; a closer look at chronically underperforming projects for leading risk factors; and a suggested risk rating system for investors that encompass both project-level and fund-level performance, according to Fang.

The firm’s online Affordable Housing Portfolio Performance Indicator allows users to access county-level operating performance stats, operating expense data, and other information.