An article in Housing Policy Debate, “Challenges for Low-Income Housing Tax Credit Projects at Year 15 and Beyond in a Weak Housing Market: The Case of Detroit, Michigan,” examines the financial conditions and outcomes for Low-Income Housing Tax Credit (LIHTC) properties around Year 15 in Detroit, Michigan. The authors conclude that preservation challenges for LIHTC properties in weak housing markets may be more significant than reflected in prior national research on Year 15.
The LIHTC program is the largest source of subsidy for affordable housing construction in the nation, having financed over 3 million units since its creation in 1986. The Joint Committee on Taxation estimates the LIHTC will cost $9.4 billion in tax expenditures (foregone federal tax revenues) in 2020, with a total of $49 billion between 2019 and 2023. Housing produced with LIHTC must be used for the construction or rehabilitation of rental housing affordable to households earning less than 60% or 50% of the area median income (AMI). Rents are set at a fixed amount of 30% of the income eligibility threshold for a given unit; in other words, rents are not based on actual household incomes.
There are two types of credits, commonly referred to as 4% and 9% credits. LIHTC projects built with either type of credit after 1989 must remain affordable for a minimum of 30 years, after which all program requirements end unless requirements are in place from other funding sources or state and local governments. The first 15 years of this period is referred to as the compliance period, the end of which is often referred to as Year 15. New ownership is typically organized around the end of the compliance period when investors in the tax credits leave the ownership structure. Foreclosure presents a risk both before and after Year 15.
To study outcomes for LIHTC properties reaching Year 15 in Detroit, the authors analyzed public records for LIHTC projects, reviewed news stories about projects and developers, and conducted interviews with 19 stakeholders involved in developing and managing LIHTC projects, syndicating tax credits, and overseeing the program. The authors used satellite images and site visits to assess the physical condition of the properties. The financial condition of LIHTC units reaching Year 15 was assessed through analysis of financial audits for a limited sample of LIHTC projects reaching Year 15 between 2016 and 2022.
Among the multifamily LIHTC projects that reached Year 15 between 2004 and 2017, about half continued to operate as affordable housing with the same rents and serving the same populations without subsequent reinvestment. Fewer than 30% of projects were recapitalized following Year 15. Approximately 15% of multifamily LIHTC projects, however, were subject to foreclosure, which is far higher than foreclosure estimates reported in national studies. At least 5% of low-income units in multifamily projects past Year 15 were uninhabitable, also far higher than estimates suggested by national studies.
Single-family LIHTC homes only accounted for about 5% of low-income units past Year 15 in Detroit, but their outcomes were worse than for multifamily projects. None of these projects were recapitalized following Year 15 and just 40% of the single-family units continued to operate with affordability restrictions. Twenty-three percent of single-family units went through foreclosure and 14% of all single-family LIHTC units past Year 15 were uninhabitable due to deterioration or demolition. Projects involving syndicators (financial intermediaries in LIHTC deals) fared better than those without. Syndicators, especially mission-driven ones, frequently intervened to preserve distressed projects and prevent their loss from the affordable stock.
Examination of the financial audits of the limited sample in Detroit revealed that LIHTC projects approaching Year 15 were far more financially distressed than projects included in national surveys. The median debt coverage ratio (the difference between net operating income and required replacement reserve contributions divided by mandatory debt service payments) for Detroit LIHTC projects reaching Year 15 was .95 compared to 1.34 for all projects in a national survey. After subtracting hard debt service and required contributions to operating reserves, the median per unit net operating income for Detroit LIHTC units reaching Year 15 was minus $72 compared to a positive $599 for all projects nationally. Economic occupancy (the ratio of actual rental income to potential gross income) was 97% in both Detroit LIHTC projects and all projects in a national survey.
These indicators of the financial health of Detroit LIHTC projects reaching Year 15 suggest a high demand for LIHTC units, but insufficient rents to support debt and operating expenses. The authors found that a median of 41% of replacement reserves had been funded per project, while 11 projects had no replacement reserves at all. Insufficient reserves significantly undermines the ability of owners to finance needed repairs and renovations, which puts projects at risk of physical deterioration. In terms of financial health, projects financed with 4% credits fared better than those financed with 9% credits, larger multifamily projects fared better than smaller multifamily and single-family projects, and projects with project-based rental assistance fared better than those without it.
The authors largely attributed the relatively poor outcomes and financial conditions for LIHTC projects to Detroit’s weak housing market where a sluggish recovery from the Great Recession and stagnant income growth significantly restricted rental income and negatively impacted the capacity of affordable housing developers. The weakness of Detroit’s housing market presents a fundamental challenge for making LIHTC development financially sustainable. This challenge in Detroit brings to light concerns about preservation issues facing the LIHTC stock in communities with weak housing markets across the country.
“Challenges for Low-Income Housing Tax Credit Projects at Year 15 and Beyond in a Weak Housing Market: The Case of Detroit, Michigan” is at https://bit.ly/38RPfrh.
More information about the LIHTC program is on page 5-14 of NLIHC’s 2019 Advocates’ Guide.