Low-income housing tax credit (LIHTC) properties reported strong performance during the recent economic downturn.
There was no material deterioration in property performance and certain operating performance metrics significantly improved from 2008 to 2010, according to CohnReznick, which analyzed data for 17,118 housing credit properties with more than 1.2 million units.
CohnReznick released its updated report on LIHTC property performance at the end of last year.
Although the study wasn't driven by the scrutiny that is expected to fall on the housing credit and other tax expenditures, its findings may be part of the discussion as tax reform efforts heat up. The data provides key information for assessing the LIHTC program.
"There is a shortage of affordable housing everywhere," says Cindy Fang, senior manager with the tax credit investment services practice of CohnReznick. "For everyone who says there may be an oversupply of rental housing, we disagree."
In one of the study's main takeaways, the data shows that "LIHTC projects reported stronger performance during challenging times," Fang says.
There are many reasons for this, but one of the most important is more sophisticated expense underwriting across the board, according to Fang.
The median debt coverage ratio (DCR) has floated between 1.13x and 1.15x for much of the past decade. The latest analysis shows that the DCR climbed to 1.21x in 2009 and 1.24x in 2010.
The term "debt coverage" relates to the relationship between net income (effective gross rental income less operating expenses and replacement reserve deposits) and mandatory debt service payments.
No states reported a median DCR of below 1.0x in 2010, another positive change, Fang says.
Recent projects have also benefitted from high equity prices and low hard debt, helping to reduce their debt burden, says Fang.
For investors, the percentage of properties operating below breakeven has been the statistic of greatest concern, notes the report. This figure has been as high as 35 percent, but it has declined in the last few years, falling to 24.7 percent in 2010. Most of the developments that fall into one of the underperforming categories do so for just a year and return to profitable operation the following year, according to the analysis.
"The decrease in properties operating below breakeven from 2008 to 2010 is clearly a favorable trend, all the more so because it was achieved during an economic downturn," according to the study.
Developers and others in the affordable housing industry often cite the very low foreclosure rate of LIHTC properties. The latest research shows that the rate continues to remain low, but it appears that it may have been understated in the past because syndicators helped support some troubled properties to avoid foreclosure.
The respondents CohnReznick surveyed reported that 98 of the total property count of 17,118 experienced foreclosure through the end of 2010, an aggregate foreclosure rate of 0.57 percent measured by property count.
Fang points out that tax credit properties were foreclosed on average around year 11 of the 15-year compliance period.
Although the study found that foreclosures increased incrementally, the rate still compares very favorably with market-rate apartment properties and other asset groups.
The "Low-Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance" can be found at www.cohnreznick.com.
