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Squeezing the Housing Credit at Both Ends


Tuesday, March 11, 2014

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Developers of affordable housing properties rely on the Low Income Housing Tax Credit (LIHTC) to provide the equity needed to build quality housing that would otherwise be unaffordable to low-income households. High-capacity nonprofit owners have used the LIHTC to build tens of thousands of affordable apartments serving residents at all income levels. Recently, however, there has been a trend that undermines the efforts of mission-driven sponsors to preserve the quality and affordability of these properties beyond their 15-year initial compliance period.

Some investors, including large commercial banks, have recently been making demands on critical cash reserves from LIHTC properties when they exit these deals. But where investors see a potential windfall, long-term affordability and housing quality are put at risk. This trend undermines the impact of investors’ LIHTC investments and raises questions about how they should be evaluated with respect to the Community Reinvestment Act.

For example, the non-profit sponsor of a 65-unit family property in Oxnard, California wants to refinance and preserve this property as it emerges from its 15-year compliance period, but the investor is seeking up to 50 percent of the $5 million appraised value. Sale proceeds of this magnitude would exhaust refinance proceeds from the property, jeopardizing the future stability of the property. The investor is also disputing the sponsor’s attempt to exercise its right of first refusal provided under Section 42 of the tax code, which sets the provisions of the LIHTC program. The investor rejects the validity of the third-party offer for the property because investor approval is required for sale, suggesting that the non-profit has no ability to exercise its right of first refusal.

Housing Credit properties are developed with minimum 30-year affordability restrictions requiring that the property have rents affordable to families with less than 60 percent of area median income. The tax compliance period on the property only lasts 15 years, and at that point, limited partner investors typically exit such investments. After fifteen years most buildings need renovations, and owners generally rely on cash reserves accumulated during the compliance period to fund necessary repairs. These reserves are generally a product of prudent and disciplined management and are typically required by housing finance agencies, investors, and syndicators as protection against future contingencies such as roof replacement, heating and cooling system failure, and other major repairs.

The need for affordable homes is at an all-time high: according to the Urban Institute’s new Housing Assistance Matters Initiative, for every 100 extremely low-income renter households, there are only 29 affordable and available units. If exiting investors strip the reserves and other resources from these properties as a condition of withdrawing their partnership interest or providing approval for property refinancing, sponsors will need to secure other sources of funding. This will drive sponsors to seek other increasingly scarce HOME, CDBG and LIHTC resources to preserve these properties, reducing resources available to fund other needed affordable housing.

Toby Halliday is executive vice president of Stewards of Affordable Housing for the Future.

2014-03-11 00:00:00
Increasingly, investor demands on expiring tax credit partnerships threaten the long-term quality and affordability of housing credit properties