Low-income housing tax credit (LIHTC) properties have shown their resilience during the COVID-19 pandemic, according to a new CohnReznick report.

The latest study finds that most LIHTC properties are fully occupied, with healthy financial performance and extremely low foreclosure rates.

In 2020, the surveyed stabilized properties reported, on a median basis, 97.7% physical occupancy and 1.52x debt coverage, a new high-water mark, according to CohnReznick, a leading advisory, assurance, and tax firm. “As of year-end 2020, only about 10% of properties were on the ‘watch lists’ of our data providers, who generally follow criteria adopted by the Affordable Housing Investors Council as a baseline for measuring underperformance,” reports the company.

Some observers had expected the percentage of watch-list properties to be higher due to the added challenges from COVID-19.

Across the national portfolio, roughly 10.1% of properties were on the watch list as of year-end 2020, down from approximately 10.9% in 2018 and approximately 12.5% in 2016.

“Interestingly, 24% of the properties that were in lease-up as of Dec. 31, 2020, were on the watch list, followed by 17% of the pre-stabilized properties and 15% of the properties in construction. In comparison, for those properties that already achieved stabilization, only 8% were on the watch list,” says the 2021 Affordable Housing CRedit Study. “This dynamic confirms that very generally speaking, the construction and lease-up periods tend to be the riskiest phases of development; and proper underwriting is the best defense against unpleasant surprises.”
Survey respondents reported a cumulative foreclosure rate of just 0.57%, including only one new foreclosure reported in 2020. This is consistent with the historically low number of housing tax credit properties that have fallen victim to foreclosure.

“Our analysis in the 2021 CRedit Study shows what we have always believed to be true: The ongoing need for affordable housing and the superb manner in which most of these properties are managed create a stable financial opportunity for institutions investing in housing credits,” notes Cindy Fang, partner and tax credit investment services leader. “In the face of the global pandemic, the affordable housing community—developers, investors, syndicators—achieved near-normal returns throughout the surveyed period despite the realities of lockdown and modest increase in uncollected rents.”

The study also looks at other key areas of LIHTC property performance, including annual net revenue growth and operating expense trends.

CohnReznick reports that repair and maintenance expenses account for about 21% of the total gross operating expenses on average across the national LIHTC portfolio since 2013.

“Median national per unit repair and maintenance expenses have increased by 1.9% annually since 2013 but decreased by 1.3% between 2019 and 2020,” says the study. “The 2020 trend supports the anecdotal evidence we have heard from our data providers, who represented that repair and maintenance expenses have been lower during COVID-19 because of fewer unit turnovers and a reluctance among tenants to report items needing repair.” While it is still too early to tell, officials say there may be a “catch-up” period in 2021 and 2022, where properties address deferred maintenance items built up throughout the pandemic.

Overall, the housing credit program produced approximately 130,000 affordable rental homes annually in 2019 and 2020, estimates the report.

“With Congress’ passage of the infrastructure bill, and with other legislation pending that could boost production of LIHTC-financed housing, there is strong optimism for the future of the industry in the months and years ahead,” says Beth Mullen, affordable housing industry leader at CohnReznick. “Despite a global economic and social crisis, the housing credit program has proven to be incredibly resilient, with performance metrics remaining very strong and production largely uninterrupted.”

This year’s report is dedicated to retired CohnReznick principal and housing advocate Fred Copeman, who passed away earlier this year and founded the study in 2002.