The numbers don’t look good. The nation’s affordable housing deficit is worsening. Almost 10 million renter households earn less than $17,500 a year, and they outnumber the supply of available affordable housing by two to one, according to the National Housing Trust (NHT), a national nonprofit that works to preserve multifamily housing. That ratio is growing, while “tens of thousands of affordable apartments” are lost each year, noted NHT.

In fact, since 1995, the nation has lost 300,000 apartments—including mostly Department of Housing and Urban Development (HUD) units but also a few low-income housing tax credit (LIHTC) units—from its affordable housing stock, representing more than 15 percent of its inventory of housing serving the poor, NHT added. Looking ahead to the next 10 years, NHT says 180,000 LIHTC units and an additional 640,000 units receiving Sec. 8 funding or other subsidies are at risk.

The problem of endangered low-income housing is not uniformly spread, and the resources available for saving those units also vary. Developers seeking to recapitalize their affordable properties have much more success in cities like New York or Chicago with strong local housing markets, but in smaller towns and rural areas, “you’re not seeing that level of success,” said Van Vincent, senior manager in the Chicago office of Virchow Krause & Co., LLP, a public accounting firm. The larger cities also tend to have more resources available in the form of bonds, tax increment financing, and other gap funding.

David Fournier, managing director of the Atlanta office of Holliday Fenoglio Fowler, L.P., is a broker who focuses on affordable housing and who has seen a decrease in the number of HUD properties being remarketed and an increase in the number of LIHTC properties.

Most of his activity with remarketing LIHTC properties that have reached Year 15 of their initial compliance period is in the South or the Midwest, the regions that saw the lion’s share of LIHTC development in the program’s early years and that continue to see the majority of it today.

In 1995, 77 percent of the LIHTC units placed in service were in the Midwest or the South, and only 12 percent were in the West, according to Fournier. By 2003, the Midwest and the South combined for 65 percent, and the West’s portion had grown to 23 percent. The South has always been the most active region for LIHTC projects, mainly because it has more land available, he said.

The first batch of Year 15 properties have only just begun reaching the end of their compliance periods in the past few years, and if there’s a silver lining in this, it’s that LIHTC properties don’t yet account for any significant losses of affordable housing stock, according to Virchow Krause’s Vincent. Citing an informal Virchow survey about the recent experiences of several major tax credit syndicators, he reported that:

• in 76 percent of the cases, the general partner (GP) assumed the limited partner’s (LP) interest, did not refinance the debt because of existing favorable terms, and maintained the property’s affordability;

• in 14 percent of the cases, the GP assumed the LP’s interest, refinanced the debt, and maintained affordability;

• in 5 percent of the cases, the GP assumed the LP’s interest and announced that it would consider resyndication;

• in only 2 percent of the cases were the projects actually resyndicated; and

• in less than 1 percent of the cases, the project was sold to a third party.

(For more on Year 15 disposition strategies, click here for article on Proven Disposition Strategies.)

Signs of LIHTC progress

Though the problem is concentrated in certain regions, help from state housing finance agencies is becoming widespread. In 2001, only six states had preservation set-asides in their 9 percent tax credit programs; today, 45 states either have set-asides or prioritize preservation through awarding points in their 9 percent tax credit competitions. Seven states that did not make any allocations of 9 percent LIHTCs for preservation in 2004 did so in 2005. “In general, there’s a moderately positive trend in states using tax credits more and more for preservation,” said Michael Bodaken, NHT’s president. “I don’t expect that to reverse this year.” State set-asides range from a high of 40 percent in Wisconsin and 35 percent in Massachusetts to 10 percent in New York and North Dakota.

But Bodaken would like to see states come up with innovative ways to assist preservation efforts.

For example, Minnesota and Montgomery County, Md., make state and local tax revenues available for preservation. Virginia and Washington have developed nonprofit Community Development Financial Institutions to provide predevelopment or bridge financing. Fairfax County, Va., raises $18 million a year for preservation from a small portion of its real estate tax levy; it has a goal to preserve 1,000 affordable units by 2007. And a number of other places use state or local housing trust funds for this purpose, including Arizona, Illinois, Los Angeles, Ohio, and Rhode Island.

Signs of HUD progress

In July, the Senate passed an appropriations bill for HUD that includes reauthorization of the Mark-to-Market program through fiscal 2011. (Similar legislation was previously passed by the House of Representatives.)

Mark-to-Market restructures properties’ debts and adjusts their rents down to market levels from the inflated levels they had achieved over years of operation. The extension would allow the program to help about 800 properties with 78,000 affordable units, according to Theodore Toon, HUD deputy assistant secretary. Those properties “represent the most at-risk properties in HUD’s insured mortgage portfolio because of the required reductions in rents” to bring them in line with market rates, Toon told the Senate Subcommittee on Housing and Transportation in June.

The new lease on life for the program is due to a lot of lobbying by affordable housing owners and advocates in the nonprofit community, said Bodaken. As a result, it has strong support in both chambers of Congress. Vincent is also confident the reauthorization will become law. He estimates that there are still 9,000 “decent, safe, sanitary, and financially strong” properties that could benefit from the Mark-to-Market program.