Study Examines What Happens to LIHTC Units When Affordability Restrictions Expire

A new report by Freddie Mac, “Low-Income Housing Tax Credit (LIHTC) at Risk,” examines the factors associated with LIHTC properties leaving the program and investigates the trajectory of units no longer subject to program requirements. The authors find that, after exiting the program, units in former LIHTC properties often remain affordable to households earning 60% of the area median income (AMI). However, the study also identifies significant caveats about the affordability of former LIHTC units for the lowest-income renters.

The LIHTC program is the primary source of federal subsidy for affordable housing construction. The program is designed to serve households earning up to 80% of AMI but typically serves households with much lower incomes. Under federal law, units in LIHTC properties must generally remain affordable for a minimum of 30 years, though some states require or incentivize longer periods of affordability. The federal LIHTC statute, however, contains a loophole, known as the qualified contract (QC) option, that allows owners to exit the program and all restrictions after just 15 years under certain circumstances. Some states disincentivize use of the QC option or require LIHTC developers and owners to waive their right to the option. Even so, LIHTC owners have been able to exercise the QC option since 1990, and the first LIHTC properties reached the ends of their 30-year affordability restrictions in 2020. There has been little research to date on what happens after LIHTC units reach the end of their required affordability period or exit the program prematurely through the QC loophole.

To examine what happens to LIHTC units after they leave the program and explore the risk factors for exiting, researchers at Freddie Mac utilized data from HUD’s LIHTC Database and the National Housing Preservation Database (NHPD) to identify LIHTC properties that have exited the program (i.e., non-programmatic properties) and survey their characteristics. Because neither the HUD LIHTC Database nor the NHPD include information on unit-level rents, the authors also matched a sample of 134 non-programmatic properties from seven metropolitan areas to private rental housing data from Yardi Matrix. The seven metropolitan areas were Dallas, Indianapolis, Los Angeles, Orlando, Phoenix, Seattle, and Washington, D.C.

The authors identified multiple risk-factors associated with LIHTC properties exiting the program. Properties with non-profit owners were less likely to become non-programmatic than those with for-profit owners. Properties more recently placed in service and those with subsequent allocations of tax credits were also much less likely to exit the program. States with more stringent LIHTC affordability requirements were less likely to lose LIHTC properties. Local housing market conditions could also impact exit risk, but the authors were unable to determine a clear statistical relationship between market conditions and the non-programmatic status of LIHTC properties.

In the sample of 134 non-programmatic LIHTC properties from seven metropolitan areas, the authors found that approximately 61% of non-programmatic LIHTC properties remained affordable, on average, to renters at 60% of AMI. The authors further observed an absence of non-programmatic properties in high-rent sub-markets within these metro areas, suggesting that substantial rent hikes may not be feasible for many owners of LIHTC properties exiting the program because comparable market rents often do not significantly exceed LIHTC rents.   

The authors, however, caution that severe rent hikes could still occur for deeply targeted LIHTC units exiting the program where rents might have been affordable to households at 30% of AMI, because of the significant difference between these highly restricted rents and market rents in nearly any sub-market. Over half of LIHTC households earn less than 30% of AMI, and even small rent increases after a LIHTC property exits the program could destabilize households with such limited incomes.

Read the report at: