Acq-Rehab Property Expenses Still Higher than New-Construction LIHTC Properties
The gap between operating expenses for low-income housing tax credit (LIHTC) properties that are acquired and rehabilitated and those that are newly constructed is the largest it’s ever been, according to the 2018 Novogradac Multifamily Rental Housing Operating Expense Report-Survey and Analysis of LIHTC Properties.
The 2018 report details 2016 property expenses for nearly 1,700 LIHTC properties located throughout the country, with more than 190,000 affordable rental homes. Property characteristics discussed include: property type, building size, geographic area, and regional population density, among other factors.
In the seven years Novogradac has surveyed LIHTC properties’ operating expenses, the gap between operating expenses in acq-rehab properties and new construction properties ranged from a low of 6.1 percent in 2012 to a high of 20.7 percent in 2016. While operating expenses for acq-rehab properties have always been higher than those for new construction, in 2013 that gap widened at a greater pace. In the three year’s prior, acq-rehab expenses were approximately $4,500. In 2013, the year-over-year growth in expenses for these properties was 10 percent, bringing the cost difference per LIHTC apartment to just more than $5,000. In subsequent years, year-over-year growth was 8.3 percent in 2014, 0.6 percent in 2015 and 5.1 percent in 2016. The compounded annual growth rate for new construction LIHTC properties’ operating expenses was 2.7 percent from 2010 to 2016, compared to a 4 percent growth rate for acq-rehab properties.
With the exception of one category – administration – average operating expenses were higher for acq-rehab LIHTC properties compared to newly constructed properties. Still, administration costs were just 1 percent lower in acq-rehab properties, hardly a significant difference. The category with the largest difference was operating expenses (which is comprised of extermination, trash and security, among other things). In this category, expenditures for acq-rehab expenses were 34.1 percent greater than those of new construction properties in 2016.
The differences in expenses of affordable acq-rehab properties and new construction are most likely due to the relative age and maintenance needs of the former. It is not surprising that for older properties, which acq-rehab projects tend to be, expenses are higher than in newly constructed properties. Knowing that these trends have been consistent and will likely hold into the future allows stakeholders to plan accordingly.