WHAT HAPPENS
TO LOW–INCOME
HOUSING TAX CREDIT
PROPERTIES AT YEAR
15 AND BEYOND?
SUMMARY
U.S. Department of Housing and Urban Development | Office of Policy Development and Research
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? SUMMARY WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? SUMMARY
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e Low-Income Housing Tax Credit (LIHTC) Program has been
a signicant source of new multifamily housing for more than 20
years, providing more than 2.2 million units of aordable rental
housing. LIHTC units accounted for roughly one-third of all
multifamily rental housing constructed between 1987 and 2006.
As the LIHTC matures, however, thousands of properties nanced
using the program are becoming eligible to end the program’s
rent and income restrictions, prompting the U.S. Department
of Housing and Urban Development’s (HUD’s) Oce of Policy
Development and Research (PD&R) to commission this study. In
the worst case scenario, more than a million LIHTC units could
leave the aordable housing stock by 2020, leading to a potentially
serious setback to eorts to provide housing for low-income
households.
is study suggests that the worst case scenario is unlikely to be
realized. Instead, the answer to the question of whether owners of
older LIHTC properties continue to provide aordable housing
for low-income renters is a qualied “yes.” Most LIHTC properties
remain aordable despite having passed the 15-year period of
compliance with Internal Revenue Service (IRS) use restrictions,
with a limited number of exceptions. ese exceptions are closely
related to the characteristics of the local housing market, as well as
to events that happen at Year 15 and are addressed in this report.
In answering this question and understanding its causes and
implications, this study focuses on properties that would have
reached Year 15 by 2009—properties placed in service under
LIHTC between 1987 and 1994. Over the course of this study,
interviews were conducted with industry participants: tax credit
syndicators, direct investors, brokers, owners, and Housing Finance
Agency (HFA) sta, as well as experts on multifamily nance and
the LIHTC program. Quantitative data, including property-level
records, HUD databases, and a survey conducted for this study of
rents of a sample of former LIHTC properties were analyzed.
e results of the analysis showed remarkably consistent impressions
of the outcomes for Year 15 properties:
• e vast majority of LIHTC properties continue to function
in much the same way they always have, providing aordable
housing at the same quality and rent levels to essentially
the same population, without major recapitalization. Some
rehabilitation of these properties occurred at or shortly after
Year 15, often in connection with a change of ownership or
renancing, but the amount of work done is not extensive
enough to be characterized as recapitalization.
• A moderate number of properties are recapitalized as
aordable housing funded by a new source of public subsidy,
typically a new round of tax credits, either at 4 or 9 percent.
ese properties underwent a substantial program of capital
improvements.
• e smallest group of properties were repositioned as market-
rate housing and ceased to operate as aordable. e risk of
such repositioning occurring is most likely in strong housing
markets.
WHAT HAPPENS AT YEAR 15?
Which of the three outcomes will be realized is linked to events
that happen at Year 15, including whether changes occur in the
property’s use restrictions, whether the property is sold to a new
ownership entity, and whether the property became nancially
or physically distressed before Year 15. e outcome may also be
aected by market conditions where a property is located.
CHANGE IN USE RESTRICTIONS
During the rst 15 years after a LIHTC property is placed in
service, owners must report annually on compliance with LIHTC
leasing requirements to both the IRS and the state monitoring
agency. After 15 years, the obligation to report to the IRS on
compliance issues ends, and investors are no longer at risk for
tax credit recapture. Beginning in 1990, however, federal law
required tax credit projects to remain aordable for the 15-year
initial compliance period plus a subsequent 15-year extended-use
period. Properties subject to an extended LIHTC use restriction
may seek to have that restriction removed. Using the Qualied
Contract (QC) process, owners may request regulatory relief from
use requirements any time after Year 15. In essence, the owner
requests the state agency to nd a buyer for the property, and the
state agency then has 1 year to nd a buyer who will maintain the
property as aordable housing. If the state is unsuccessful, then the
owner is entitled to be relieved of LIHTC aordability restrictions,
and those restrictions phase out over 3 years.
In practice, each state agency can dene its own regulations
for implementing a QC, so the process ranges from relatively
simple and straightforward to so complex and dicult—perhaps
intentionally—that the process is essentially unworkable. Further,
a number of states either require or persuade developers seeking
tax credits to waive their right to use the QC process in the future.
erefore, QC sales tend to be concentrated in a few states and are
not common.
CHANGE IN OWNERSHIP
A change in ownership for a LIHTC property can happen any
time. It is most likely to take place around Year 15, because it is in
the interest of limited partners (LPs) to end their ownership role
quickly after the compliance period ends. ey have used up the tax
credits by Year 10, and after Year 15 they no longer are at risk of IRS
penalties for failure to comply with program rules.
By far the most common pattern of ownership change around
Year 15 is for the LPs to sell their interests in the property to the
general partner (GP) (or its aliate or subsidiary) and for the GP to
continue to own and operate the property. is is overwhelmingly
the case for properties with nonprot developers but is also true in
many cases with for-prot developers. e minority of GPs who end
their ownership interest at Year 15 almost always do so by selling the
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? SUMMARY WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? SUMMARY
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property, almost always to a for-prot buyer. ese buyers may be
motivated by management fees, economies of scale, or the potential
for developer fees.
FINANCIAL DISTRESS AND CAPITAL NEEDS
Although the strong majority of LIHTC projects operate
successfully through at least their rst 15 years, some properties fall
into nancial distress. Poor property or asset management practices,
a problematic nancial structure, poor physical condition of the
property, and a soft rental market are the most common reasons for
the rare instances of failure.
Despite the fact that LIHTC properties tend to operate on tight
margins, the percentage of foreclosures is small, in the range of 1 to
2 percent. Owners are anxious to avoid foreclosure, because it would
be considered premature termination of the property’s aordability
and subject them to recapture of tax credits, with interest, and
forfeiture of all future tax credit benets from the property.
LIHTC properties are usually required to fund replacement reserves
annually to pay for capital repairs and renovations. ese reserves,
however, are usually insucient after 15 years to cover current needs
for renovation and upgrading. e most important determinant
of physical condition at Year 15 may be whether the property was
newly constructed or rehabilitated when it was placed in service,
and, if rehabilitated, the scope of the renovation work that was
done then. New construction and extensive rehabs are less likely
to need signicant upgrades at Year 15 than is a property which
received only moderate renovations when placed in service. Market
conditions may also aect property conditions over time. Properties
in strong markets are more likely to have high occupancy rates and
be rented at or near the maximum LIHTC rents and to generate
more operating funds that can be used for maintenance and repairs
than properties in weaker markets, and thus they enter Year 15 with
fewer deferred repair and maintenance needs.
OUTCOMES AFTER YEAR 15
After Year 15, properties take one of three paths: they remain
aordable without recapitalization, remain aordable with a major
new source of subsidy, or are repositioned as market-rate housing.
REMAIN AFFORDABLE WITHOUT
RECAPITALIZATION
All information gathered for this study shows that most LIHTC
properties that reached Year 15 through 2009 are still operating as
aordable housing, either with LIHTC restrictions in place or with
rents that nonetheless are at or below LIHTC maximum levels.
Even in the absence of use restrictions, at least two types of
properties will continue to provide aordable housing: those with
owners committed to long-term aordability (typically nonprot
owners, but also sometimes for-prot owners) and those located
where market rents are no higher than LIHTC rents.
is pattern of properties remaining aordable with their original
owners and without major recapitalization by Year 15 is common
in strong, weak, and moderate markets alike. Over the longer term,
however, developments are likely to fare quite dierently, depending
on the local market. For example, properties able to achieve high
occupancy levels and high rents—even if restricted to below-market
levels—can generate signicant cash ow and have real market
value. ese properties are more likely to eventually convert to
market rate and less likely to need new sources of subsidy to pay
for renovations.
REMAIN AFFORDABLE WITH NEW
SOURCES OF SUBSIDY
Some LIHTC properties are recapitalized as aordable housing
around Year 15 with a new allocation of tax credits. In addition to
receiving new tax credits, the property owner often renances the
mortgage, and acquires new soft debt. ese funds typically are
used to pay for renovation costs but sometimes also to acquire the
property from the original LIHTC owner.
When deciding whether to seek a new allocation of tax credits
to recapitalize a property—and accept a new period of use
restrictions—owners weigh a variety of factors. At a minimum, the
property must have some capital needs (at least $6,000 per unit) to
qualify for a new LIHTC allocation. Other factors include whether
the property needs to modernize to compete with new aordable
housing, whether an infusion of additional equity appears to be
the only way to bail out a distressed property, and whether new tax
credits and use restrictions aect protability.
State LIHTC policies also aect the decision to seek a new
allocation of tax credits. Some states reserve 9-percent LIHTCs for
aordable housing. Analysis of the HUD LIHTC database shows a
gradual rise in the second use of tax credits.
REPOSITIONED AS MARKET-RATE HOUSING
By far the least common outcome for LIHTC properties is
converting to market-rate housing after use restrictions have expired
or after a QC process or nancial failure. Foreclosure of the loan on
the property is followed by a property disposition by the lender to a
new owner who will operate the property as market-rate housing at
higher rents if the market will bear them.
e most likely properties to have been repositioned as unaordable,
market-rate housing are those in low-poverty locations. e study
found through a survey of the rents of a sample of properties no
longer reporting to an HFA, that, even for this group of properties
that should be at particularly high risk of becoming unaordable,
WHAT HAPPENS TO LOW–INCOME HOUSING TAX CREDIT PROPERTIES AT YEAR 15 AND BEYOND? SUMMARY
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nearly one-half had rents below the LIHTC maximum, and
another 9 percent had rents only slightly above LIHTC rents
(see exhibit below).
AFFORDABILITY OF PROPERTIES IN LOW-
POVERTY CENSUS TRACTS AND NO
LONGER MONITORED BY HOUSING
FINANCE AGENCIES
Property Rents Above
105 Percent of
LIHTC Rent
Property Rents Between
100 and 105 Percent of
LIHTC Rent
Property Rents
Below LIHTC Rent
42% 9% 49%
Source: HUD National LIHTC Database
LIHTC PROPERTIES AT YEAR 30
e properties studied have not yet reached year 30, when the
extended use restrictions for most of the properties will expire.
After Year 30, the three patterns observed at or somewhat after Year
15 are likely to continue, but with the balance shifting in favor of
the third pattern—repositioning and no longer aordable. Several
types of properties will almost certainly not be repositioned. ese
properties include those with a mission-driven owner, a location in
a state or city with use restrictions beyond Year 30, and the presence
of restrictions associated with nancing. Owners of the remaining
properties—non-mission driven owners of properties with no
use restrictions continuing beyond Year 30—are likely to make
a nancial calculation about what to do with the property that
depends on the housing market. e key consideration is whether
the location will support market rents substantially higher than
LIHTC rents.
CONCLUSIONS AND
RECOMMENDATIONS FOR POLICYMAKERS
Most older LIHTC properties are not at risk of becoming
unaordable, the notable exceptions being properties with for-
prot owners in favorable market locations. Maintaining physical
asset quality turns out to be a larger policy issue for older LIHTC
properties than maintaining aordability. Older LIHTC properties
likely will follow one of three distinct paths: (1) some will maintain
their physical quality through cash ow and periodic renancing,
in much the same way that conventional multifamily real estate
does; (2) others will maintain their physical quality through
new allocations of LIHTC or another source of major public
subsidy; and (3) some properties will deteriorate over the second
15 years, with growing physical needs that ultimately will aect
their marketability and nancial health. An increasing number of
owners are expected to apply for new tax credit allocations, either at
9-percent or for bond nancing and 4-percent credits.
In the coming years, state HFAs will come under increasing
pressure as the large stock of LIHTC housing ages. Restricted by
nite resources, state policymakers will have to make choices. e
study results suggest that HFAs should place the highest priority on
the developments that are most likely to be repositioned to higher
market-rate rents.
In general, state policymakers should recognize that the majority
of older LIHTC properties will, over time, become mid-market
rental properties indistinguishable from other mid-market rental
housing, and that this is a good result. e report also suggests
that policymakers revise Qualied Allocation Plan standards to
encourage higher priorities for those properties that need additional
use restrictions to keep them from becoming unaordable and lower
priorities for properties in locations where low-income renters have
other alternatives.
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June 2012
REPORT PREPARED BY ABT ASSOCIATES
