In a world of already increasing costs, rates, and rents, a recent Freddie Mac report shows that low income housing properties are increasingly at risk of rent increases as properties age out of the Low-Income Housing Tax Credit Program.
The Low-Income Housing Tax Credit (“LIHTC”) Program was launched in 1986. Since its inception, it has been the federal government’s primary vehicle for promoting widespread affordable housing. Through an allocation of approximately $8 billion yearly, the program provides funding for the acquisition, construction, or rehabilitation of low-income rental properties.
LIHTC units accounted for roughly one-third of all multifamily rental housing constructed between 1987 and 2006. The program restricts income and rent based on an area’s local income levels. Properties that entered the program after 1990 must maintain affordable rent for 30 years, with some states, such as California, requiring a longer duration. After 30 years, the property owners no longer have to abide by the affordable rental rates. While the program is not absolute—and some property owners leave the program sooner than the expiration—the risk remains the same higher rent in low-income areas.
Under the program, property owners using the tax credit must remain affordable at specific income levels, generally 60% of the Area Median Income (“AMI”). Still, they can also provide affordable housing in various tiers ranging from 60% down to 30% of the AMI as part of the program based on local market trends.
The Risk of Losing Affordability
In their report, Freddie Mac found that the overwhelming majority of properties were based at the 60% AMI tier. Freddie Mac also found that the maximum rent of 60% AMI is characteristically below the market rate based on the study. If these properties were to revert to the market rate, they would rapidly become unaffordable for low and moderate-income families.
As these properties come to the sunset of their 30 years, there is a real chance for a massive loss of affordable housing, exacerbating the already compounding issues surrounding rent affordability and housing stability. In a 2021 joint report by the Public and Affordable Housing and Research Corporation and the National Low Income Housing Coalition, the two agencies analyzed the risk of preserving affordable housing. Affordability and income restrictions are set to expire for 312,446 (or 6%) federally assisted rental homes by the end of 2025, and most of the properties fell under the LIHTC program.
While not all these properties will lose their affordability, falling outside the AMI, many will see some rent increases. According to the Freddie Mac report, about 61% of properties exiting the LIHTC Program will maintain their 60% AMI affordable rent, continuing to serve low or middle-income families. However, for those properties falling outside the majority, moving away from the 60% AMI causes a dramatic and unaffordable hike in rent, causing many families to be displaced. This is a result of the inability of conventional markets to support deeply discounted rents.
The LIHTC Property Path
Several factors contribute to a LIHTC property’s path when exiting the program. One major contributing factor is ownership type. Several housing agency studies have found that nonprofits have a much higher propensity to maintain LIHTC rent restrictions even after leaving the program. In contrast, other ownerships tend to transition to higher rents.
Another factor is the year the property entered into the program. Older program properties are more likely to exit the program and this leads to much uncertainty as properties that entered in the 90s are quickly aging out. Property size is another major factor in whether a property will remain affordable after exiting the program. Smaller properties run by small operators are more likely to exit the program. It is believed that this is a result of substantial regulatory burdens. However, upon leaving, many of these properties remain in an affordable range. Other contributing factors were the state, local markets, re-syndication, the decision to stay in the program renewing the rent, and income restrictions.
While the future is uncertain for many LIHTC properties reaching the end of their restrictions, one thing is for sure—if properties exit the program and return to market rent, there may be an even larger housing crisis. Ultimately, when it comes to predicting trends with these properties, the data is critical, and organizations such as the HUD’s Office of Policy Development and Research are instrumental in tracking and reporting on these trends. In the end, it lies with the federal government, states, and various housing authorities to drive the future of affordable housing.