Critique of LIHTC Based on Flawed Premise

Published by Michael Novogradac on Wednesday, November 20, 2013 - 12:00am

To mark the 27th anniversary of the Low Income Housing Tax Credit (LIHTC), the Bipartisan Policy Center (BPC) recently held an online Housing Expert Forum. The BPC posed two questions about the LIHTC: What lessons have we learned?  What key components continue to make it a successful program?

One of the guest posts was from a critic of the LIHTC who cited “Do Tenants Capture the Benefits from the Low-Income Housing Tax Credit Program?” by Dr. Greg Burge in 2011 in Real Estate Economics as support for the proposition that the “vast majority of the [LIHTC] subsidy is captured by providers, with a small portion ultimately flowing to the tenants.”

This assertion is a misreading of the Burge paper.

First, the Burge paper looks at a handful of properties in Tallahassee and hypothesizes that market rents for a newly constructed apartment in that area would have been rising at a mere 1.8 percent each year for the eight year period from 1994 to 2002, while during the same period area median gross incomes in the area were rising at a rapid compounded annual rate of 4.44 percent.

Based on this, Burge essentially makes the statistical observation that if market rents for a newly constructed property are rising at an annual rate of 1.8 percent, but qualifying incomes are rising at 4.44 percent annually, then after approximately 15 years an LIHTC property isn’t providing much, if any, rent subsidy to low-income residents. As a result, Burge’s calculated present value rent savings is less than the present value cost to the federal government of the allocated LIHTCs.

But the reality is that the relationship between Burge’s estimate of annual increases in market rent and annual increases in median incomes is not the least bit reflective of the national historical experience. Burge himself notes that his analysis was limited to a single housing market, and that a natural question is how his results can be generalized to other markets.  Nationally, during the same eight year period, median asking rents for rental properties rose 6 percent, more than 2 percent higher than the annual increase in area median gross incomes, which was about 3.95 percent. For areas experiencing the national averages, the rent savings for low-income families increase every year, and the present value is quite substantial ̶ well in excess of the projected present value cost of associated LIHTCs.

If you expand the measuring period to cover the 30 year period from 1977 to 2007, asking rent rose at an annual rate of 5.07 percent, while area median gross income rose at a slower annual pace of 4.47 percent, 60 basis points less. Under these assumptions, you still find increasing and substantial annual rent savings to low-income renters, with a present value benefit well in excess of the present value cost of the anticipated associated LIHTCs.

Burge’s estimate of annual net rental increases of about 1.8 percent is based on projected market rents rising at over 3 percent, but simultaneously, as a newly constructed project ages, real rents declining in the early years about 1.2 to 1.3 percent a year.  Burge’s projected annual net rental rate increases of about 1.8 percent conflict with surveys of apartment investors who regularly project expected annual rental growth rates of 3 percent or more, net of the effects of aging.

Regarding the cost of the tax credits relative to the benefits, Burge notes two additional points that are relevant to the assertion that the “vast majority of the [LIHTC] subsidy is captured by providers.”

First, Burge writes, “The present analysis is not able to comment directly on the magnitude of benefits from the LIHTC program that accrue to developers or project investors.”

As a practical matter, investors’ competitively bid for tax credits and pay market yields, so they are not getting above market benefits.  Similarly, developers have market based, regulatory imposed fee limits that prevent them from getting above market benefits.

Finally, in his paper Burge also acknowledges that even if the present value cost of the LIHTCs for a specific property exceed the present value savings, “… there are other important potential benefits of the LIHTC program this study has not investigated directly.”