What Happens to LIHTC Properties After Affordability Requirements Expire?

What Happens to LIHTC Properties After Affordability Requirements Expire?

Launched in 1986, the Low-Income Housing Tax Credit (LIHTC) program uses tax credits to encourage private developers to create affordable housing. Typically, developers sell these tax credits to investors to raise equity for their construction or rehabilitation projects; this allows them to borrow less than they would have otherwise and to charge lower rents as a result.

Developers qualify for LIHTCs by agreeing to rent units to people with low incomes and to charge rents that are no more than a specified amount. Most tax credit developers choose the option under which the renters must have incomes below 60 percent of the area median income (AMI) and the rents must be no greater than 18 percent (30 percent of 60 percent) of AMI. From 1986 to 1989, federal law required developers to maintain these affordability provisions for at least 15 years. Beginning in 1990, however, new LIHTC properties were required to preserve affordability for 30 years. During the first 15 years, called the initial compliance period, owners must maintain affordability. The second 15 years are known as the extended use period, when owners can leave the LIHTC program through a relief process. Once the 15-year affordability period is over, LIHTC owners who seek and are granted regulatory relief from the program can convert their properties to market-rate units. Some states require longer affordability restrictions, and some LIHTC developments have local financing that comes with longer use restrictions.

From 1987 to 2009, approximately 2.2 million units were developed through LIHTC. During the program’s first 20 years, LIHTC properties represented nearly a third of all newly constructed multifamily rental housing. Therefore, the future of the 400,000 units that reached Year 15 by 2009 has significant implications for the affordable housing supply (see table 1 below). A recent report by Abt Associates and commissioned by the Department of Housing and Urban Development, What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond?, found that most of these properties remain affordable during the period immediately following the first 15 years. The focus of the research was LIHTC properties that entered the tax credit program between 1987 and 1994. Analysts interviewed people directly involved with the industry: developers of LIHTC properties, syndicators who act on behalf of equity investors, brokers involved in property sales, and housing finance agency (HFA) staff. They also talked with other experts and analyzed HUD’s database that describes the characteristics of each LIHTC property.

	1987	1988	1989	1990	1991	1992	1993	1994	All 1987–1994
Number of projects	812	1,726	1,784	1,410	1,472	1,425	1,452	1,462	11,543
Number of units	20,781	43,792	54,095	53,722	53,320	52,957	65,289	67,456	411,412
Project size distribution
0–10 units	42.3%	49.6%	44.4%	34.3%	30.7%	30.2%	19.4%	16.7%	33.5%
11–20 units	15.3%	13.3%	10.9%	11.8%	14.1%	14.0%	15.8%	12.2%	13.2%
21–50 units	31.7%	25.5%	29.0%	35.0%	38.3%	36.9%	40.3%	46.0%	35.2%
51–99 units	5.4%	5.5%	8.1%	9.2%	8.6%	10.9%	13.4%	14.0%	9.5%
100+ units	5.2%	6.2%	7.6%	9.8%	8.3%	8.0%	11.2%	11.2%	8.6%
Construction type
New construction only	51.2%	46.5%	49.3%	59.5%	56.5%	65.5%	62.3%	66.0%	56.7%
Rehabilitation	48.8%	53.5%	50.7%	40.5%	43.5%	34.5%	37.7%	34.0%	43.3%
Nonprofit sponsor	1.7%	2.7%	8.2%	6.3%	9.8%	14.0%	18.4%	18.1%	10.1%
RHS Section 515	32.1%	23.2%	26.9%	36.5%	33.6%	34.6%	32.1%	33.8%	31.1%
Tax exempt bond financing	3.2%	2.3%	4.0%	3.7%	3.2%	3.1%	1.8%	3.4%	3.1%

Of the 11,290 properties in the study, researchers found that, by 2009, 3,699 (about 32%) were no longer monitored by state HFAs, which means that they could be charging higher rents. However, despite the lack of affordability restrictions, the researchers found that “the vast majority” of these properties are still affordable. Some are owned by mission-driven entities (nonprofit or even for-profit owners committed to long-term affordable housing) and some are subject to other affordability mandates. Other properties remain affordable simply by default; by Year 15, the restricted rents for LIHTC units are the same as market rents for similar units in similar locations. To further explore the properties no longer monitored by HFAs, researchers surveyed rents on 100 properties of 20 or more units in low-poverty areas. They found that about half (49%) had rents less than the LIHTC restriction, and another 9 percent had rents within 105 percent of the LIHTC rent.

The researchers found that a moderate proportion of properties are recapitalized as affordable housing, made possible by such additional public subsidies as new 4- or 9-percent tax credits allocated to the properties following the first 15 years. These credits may be used for rehabilitation or for buying the property from the original developer. The least common outcome, according to the study, is transforming LIHTC properties into market-rate housing, a scenario that is most likely when the property is located in a low-poverty area.

The Future of LIHTC Properties and Affordability

Researchers also suggested what may happen to LIHTC properties that entered the program after 1994 and will not reach Year 15 until after 2009. Overall, they found that the estimated 1.5 million properties reaching Year 15 between 2010 and 2024 would be even less likely to be converted to market-rate housing than those that reached Year 15 earlier. The picture changes at the end of the 30-year affordability provisions. By 2020, when the first of the 30-year LIHTC properties still participating in the program become eligible for market-rate conversions, the authors expect that more properties will be repositioned as market-rate housing or will no longer be rentals. But they point out that HFAs, the federal government, and affordable-housing advocates can help drive the future of these developments by, for instance, providing additional 9-percent tax credits. They suggest that HFAs preserve as affordable those developments that are most likely to be converted to market-rate housing because of their favorable locations, as well as developments that provide supportive housing for people with disabilities or people who have been chronically homeless.