Low-income housing tax credit properties are operating better than in any period in the program’s 31-year history, according to a new report from CohnReznick.

The surveyed portfolio of more than 22,000 properties reported, on a median basis, a 97.8% physical occupancy rate in 2016, demonstrating that nearly all units financed under the program are occupied. The rate is the highest seen by CohnReznick since it began collecting data.

Cindy Fang
Cindy Fang

Housing Tax Credit Investments: High Performance and Increased Need, the sixth in a periodic series of studies examining LIHTC property performance, also finds that properties are in better financial position than they’ve been in the past.

“Performance continues to be strong for many reasons,” says Cindy Fang, partner at CohnReznick and leader of its Tax Credit Investment Services practice, which wrote the report. “The growing need for affordable housing supports high rates of occupancy for housing tax credit properties and strong operating performance. Virtually all housing tax credit properties are fully occupied barring normal turnovers, many with lengthy waiting lists. And, the unique public-private partnership structure of the housing tax credit program supports a very low rate of foreclosures compared to any other type of real estate.”

Overall, LIHTC properties are in strong financial position to keep up with their debt payments. Developments had a median 1.35x debt-coverage ratio (DCR) last year, the strongest DCR recorded for the properties surveyed. The median DCR hovered around 1.15x between 2000 and 2008.

In another sign of the properties’ strong performance, the latest study found that the median cash flow was more than $600 per unit in 2016 (cash flow available after paying for expenses, mandatory debt services, and required replacement reserve contributions).

While the stronger cash flows are good news for the properties, they are still tightly budgeted.

Because the median tax credit project comprises 77 units, the total sum of positive cash flow per property—also on a median basis—is less than $49,000 per year. The report also points out that cash flow is not necessarily provided to the partners who own the property. Instead, the use of excess cash flow is typically spelled out under a partnership agreement to pay deferred developer fees, asset management fees, and soft loans.

Fang and her colleagues note that prices for housing tax credits fell sharply at the end of 2016 as investors worried about potential comprehensive tax reform reducing the value of housing credits. The price at which housing tax credits trade has generally fallen by over 10 cents per dollar of credit between the end of 2016 and the third quarter of 2017, according to CohnReznick.

“If this trend continues, properties financed with housing tax credits may be forced to borrow more money from other sources to make up the difference,” cautions the report. “That could eventually weaken debt-coverage ratios and cash flows for tax credit properties.”

As a result, it will be important to see if debt levels increase if credit prices remain low.

The LIHTC industry has had an extremely low foreclosure rate of less than 1%, and that continues to be the case. The recently surveyed properties had a cumulative foreclosure rate of just 0.71%, according to CohnReznick.

The annual rate of foreclosure for LIHTC properties is even lower than the cumulative rate—less than 0.1%. Developers and their financial partners have often cited the low foreclosure rate as evidence of the program’s low risk and its successful track record.

In comparison, conventional apartments are much more likely to suffer foreclosure, says the report.

Thirty-three LIHTC syndicators and two of the nation’s largest investors participated in the survey, allowing CohnReznick to analyze 2015 and 2016 data from more than 22,000 housing credit properties. The firm believes that the study covers more than 70% of the housing credit properties placed in service since the inception of the program and that are being actively asset managed by syndicators and/or investors.