It’s a tough time for much of multifamily development, but the Low-Income Housing Tax Credit (LIHTC) program offers incentives that make much-needed affordable housing comparatively easier to achieve under the current economic conditions.
Building is expensive and financing is tight in the current multifamily market. However, as it has for the last 30 years, the LIHTC program provides solutions that increase the ease of creating and sustaining affordable housing, even when the overall multifamily market faces challenges. The program not only promotes the construction and acquisition of housing but also enforces conditions that help maintain the stability and preservation of affordable properties.
The program is also needed to address the demand for affordable housing. The National Low Income Housing Coalition estimates that extremely low-income households represent 25 percent of the nation’s 44.1 million renters and reports a shortage of 7.3 million affordable and available rental homes.
Historical Financial Resilience
“The LIHTC asset class is resilient, if not countercyclical, under challenging economic times,” says Katie Balderrama, executive vice president of affordable equity at Walker & Dunlop. The firm typically sees a foreclosure rate of under 1 percent on properties supported by LIHTC.
“Overall, our affordable housing assets tend to perform fairly well in a negative economic climate. And while it is true for our portfolio, I suspect it’s industry-wide,” Balderrama says. The sector performed well even during the extreme conditions of the Great Recession in 2008 and 2009, when “depending on which of our fundamentals you looked at, they were either flat or better.” It was an outstanding performance given what happened in so many other parts of multifamily at the same time.
Many assume that low-cost housing faces extreme financial risk, but that isn’t the case at all. With LIHTC credits, developers attract corporate investors whose financial investment is retuned through tax benefits with no required cash return from the developer or the project. The overall arrangement provides a strong economic advantage to the projects, facilitating the creation of more affordable housing.
These properties also benefit from market conditions and the shortage of affordable rental housing for people in the 60-percent-or-lower area median income (AMI) bracket that the LIHTC program serves. Given the dramatic shortage of affordable housing, an economic downturn does not translate into financial weakness in LIHTC deals.
“When you have a market downturn, more folks need affordable housing,” Balderrama says. “The occupancy at our properties either stays the same — because frankly, most of our properties are between 98 percent and 100 percent occupied — or it increases.”
Unfortunately, negative economic conditions mean more people need help. “You end up with a longer waitlist and more tenants,” she commented.
Maintaining Quality
To achieve and maintain the tax credits allocated, buildings and grounds must meet a host of quality and safety standards.
The LIHTC legislative structure enforces standards that contribute to the resiliency of the affordable housing sector. “A property has to comply with a long list of rules that essentially keep your rents at an affordable level and keep your property safe and attractive — a good place to live,” Balderrama says. The result is a private enforcement mechanism that creates pressure to maintain properties at a certain standard. If the developer and operators fail to fulfill the requirements, the investors lose their tax credits, which could result in legal action.
The quality requirement ends after 15 years, after which the private enforcement mechanism of potential loss of tax credit expires. At that time, a property could revert to an unencumbered status. However, the greater LIHTC market has developed a secondary market that can maintain the affordable status for longer.
“After the 15-year period, there is a ‘preservation market,’” Balderrama says. “Walker & Dunlop has a dedicated preservation group that can buy the apartment complex from the original LIHTC owner. We’ve created this preservation market with secondary investors who preserve all the earlier standards as part of their business model.”
Additionally, as the market loses buildings to the general pool of properties, the stock of affordable housing continues to shrink. This secondary market is another reason why the LIHTC market remains resilient and robust.
Need for More Credits
Despite all the positives, there aren’t enough credits available to appropriately expand the affordable housing market — even though the program typically receives bipartisan support. “Democrats like it because of the social good,” says Balderrama. “Republicans also understand that a social safety net is necessary as long as it is responsible, and [appreciate that] there are the inherent private enforcement mechanisms.”
An industry-wide lobbying group called the Affordable Housing Tax Credit Coalition (AHTCC) pushes for additional incentives. The LIHTC program currently costs the federal government an estimated $10.9 billion annually in reduced tax revenues. However, the program’s benefits outweigh the costs, in terms of increased overall tax revenue, job creation and economic activity. The National Association of Home Builders estimates that the program has generated over $688 billion in wages and business income since its start in 1986.
“At Walker & Dunlop, we feel confident that the broader LIHTC program will continue without significant changes. However, we still need more allocation,” explains Balderrama.
“For example, on the 4 percent tax credits, you need to get private activity bonds to go with them, and 50 percent of specific costs must be financed by these private activity bonds,” says Balderrama.
“One thing that that the AHTCC is lobbying hard for — and that I think has a good chance of getting through — is a plan to reduce that 50 percent test. That would significantly increase the amount of 4 percent tax credits that are available and could help build more 4 percent deals,” Balderrama stated. “There’s good support through the coalition’s lobbying efforts to make changes to the program, and that would increase the amount of credits available overall. The credit provisions have just passed in the House of Representatives and is currently making its way to the Senate.”
The historical financial resilience of the LIHTC program has played a crucial role in navigating the challenges of creating and maintaining affordable housing. Over the past three decades, LIHTC has proven instrumental in not only facilitating the construction and acquisition of affordable housing but also in upholding stringent conditions that ensure the quality and stability of these properties. As demand for affordable rental properties continues to dramatically outstrip supply, the need for more LIHTC tax credits is evident. In the face of a tough and expensive development landscape, the program stands as a beacon, reinforcing our commitment to preserving affordability and addressing the pressing housing needs of our communities.
— By Erik Sherman. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.