Preserving low-income housing tax credit (LIHTC) properties is crucial to addressing America’s affordable housing crisis, and a white paper published this week by Freddie Mac Multifamily highlights that while many of those properties remain reasonably affordable upon leaving the LIHTC program (more so than some had anticipated), their rents still increase and tenants in the most deeply targeted homes are most affected.
Freddie Mac Multifamily’s report, “Low-Income Housing Tax Credit (LIHTC) at Risk,” addresses the concern that the transition of LIHTC properties away from the incentive could result in rent levels that are beyond the affordability for low- and moderate-income households. The report says that those properties often serve as a valuable source of workforce housing– typically defined as housing that serves renters who are ineligible for LIHTC subsidy, but still make less than the AMI. That’s because rents remain more affordable than similar market-rate multifamily properties and remain affordable to tenants who earn below the area median income (AMI).
Rents at these properties have often been increased above LIHTC-restricted rents, but the average rents remained materially lower than market comparables in a sample of 133 former LIHTC properties across seven markets. Rents were lower by an average of 12%, but differences varied widely across the cities that were studied in the white paper. Former LIHTC properties in Dallas offered rents nearly 27% below market, but rents in Phoenix were just 3% below market.
The report says that despite ongoing affordability after exiting the LIHTC program, “the loss of affordable LIHTC units can still be very problematic.”
To be clear, there isn’t a stampede away from LIHTC status: Of the properties studied in the report, 86.8% are still part of the LIHTC incentive and subject to rent restrictions. Those homes–particularly those targeted to extremely low-income renters (earning less than 30% of the AMI) and very low-income renters (earning less than 50% of AMI)–are crucial.
The National Low Income Housing Coalition (NLIHC), in its report “The Gap: A Shortage of Affordable Homes,” estimates that there are 36 rental homes that are affordable and available for every 100 renters earning 30% of the AMI or less. A report from Harvard’s Joint Center for Housing Studies revealed that (adjusted for inflation) the number of apartments renting for less than $600 a month declined from 32% of the overall market to 22% of the overall market from 2011 to 2019.
For residents of those most deeply targeted homes, a transition of a property out of the LIHTC restricted rents–even if the apartment becomes affordable to tenants earning 80% to 100% of the AMI–can be catastrophic. That scenario highlights the need for efforts to promote resyndication and other financing tools to keep the property under LIHTC restricted rents. Nothing in the Freddie Mac Multifamily report suggests those efforts are counterproductive.
LIHTC properties are income- and rent-restricted based on local AMIs and generally must remain affordable for at least 30 years (some states require longer. For instance, California requires 55 years of affordability for LIHTC properties). There is a concern that once properties are no longer subject to rent restrictions, property owners may depart the LIHTC program, increase rents significantly and no longer serve tenants in need of affordable housing.
There is a growing number of properties facing that risk, largely propelled by the 1990 change that required recipients of the federal LIHTC to remain affordable for a minimum of 30 years. That three-decade period is now expiring for properties placed in service in the early 1990s and a 2021 joint study by the NLIHC and Public and Affordable Housing Research Corporation indicated that affordability and income restrictions are set to expire for more than 300,000 federally assisted rental homes by the end of 2025–with 44% of those supported by the LIHTC.
The Freddie Mac Multifamily report examines why properties abandon LIHTC income and rent restrictions and what happens to those apartments once they’re no longer required to follow LIHTC regulations. The paper’s authors say that understanding the issue better, “can help states consider how to best use their limited LIHTC and private activity bond allocations to help preserve affordable housing.”
The Freddie Mac Multifamily report relies on two databases–the LIHTC property-level database compiled by HUD and LIHTC data compiled by the National Housing Preservation Database. Freddie Mac Multifamily identified slightly more than 40,000 LIHTC properties over the history of the incentive, 5,321 of which have exited the program and are no longer monitored for compliance.
Of those that are no longer subject to LIHTC income and rent restrictions, the report identified some broad trends:
- LIHTC properties with nonprofit owners are less likely to abandon LIHTC income and rent restrictions,
- properties placed in service before 1990 are far more likely to remove LIHTC income and rent restrictions (in 1990, the federal minimum requirement for affordability switched from 15 to 30 years),
- among older properties, those with fewer homes are more likely to have abandon LIHTC income and rent restrictions,
- properties that have been resyndicated are more likely to retain LIHTC income and rent restrictions, and
- properties in states with extended affordability requirements are more likely to still be subject to LIHTC income and rent restrictions.
The report concludes that LIHTC properties no longer subject to LIHTC income and rent restrictions have rents higher than those at LIHTC-restricted properties, but their rents are lower than conventional market-rate homes.
There are caveats on the lower-than-market-rate data. The Freddie Mac Multifamily report authors point out that the non-programmatic LIHTC properties tend to be older than market-rate properties in the same market. In the seven metro areas in which the study most sharply focused, the average LIHTC property was completed in 1982, while the average competition date for all properties (LIHTC and market-rate) was 1992.
The authors say that while the removal of LIHTC income and rent restrictions is a blow to the lowest income tenants, it still benefits modestly affordable workforce housing. The report concludes that “the creation of workforce housing stemming from the loss of LIHTC homes is a silver lining of the LIHTC exit process, but the loss of affordable LIHTC homes can still be very problematic.”