A Downward Slope (Not a Ledge): The Future Loss of Restricted Rental Units

Published by Michael Novogradac on Tuesday, May 6, 2014 - 12:00am

Last month, Mark Dellonte wrote about rental affordability on The Hill’s Congress Blog, warning about a looming low-income housing tax credit (LIHTC) “ledge,” a period when many LIHTC properties would leave their rent-restricted compliance periods. Dellonte observes that as many as one million LIHTC-financed apartment properties could leave the affordable housing stock between now and 2020. This rough unit estimate is generally accurate, though downward slope or aspect is a better geological metaphor than ledge.

Based on a 15-year compliance period, and looking at data from the Department of Housing and Urban Development’s (HUD) LIHTC database, an approximate 924,396 affordable rental units will reach the end of their 15-year compliance period between 2014 and the year 2020. Dellonte’s assessment on this point is correct – there is a crucial shortage of affordable housing and of the importance of preserving at-risk affordable housing. But it is important to provide a more granular analysis of the so-called “LIHTC ledge.”

First, the 15-year compliance period is generally no longer the relevant binding constraint on rent and income restrictions for LIHTC properties. LIHTC properties with allocations in 1990 or later are bound to at least a 30-year extended use period where income qualification and restricted rents still apply. While tax credits are no longer subject to recapture after the first 15 years, other penalties and enforcements mechanisms exist to ensure compliance during the extended use period. Properties with allocations in 1990 and later won’t start reaching the end of LIHTC based restrictions until 2020, or realistically speaking, 2022, because properties with allocations made in one year are unlikely to be placed in service in the very same year. Again using HUD’s LIHTC database, an estimated maximum of 45,203 units in 2020, 48,828 units in 2021, and 47,174 units in 2022 will reach this point.

Critics may respond that the LIHTC statute provides that the 30-year extended use restriction can be terminated through the qualified contract (QC) process, under which property owners can request regulatory relief from LIHTC requirements after Year 15. However, in practice this process is rarely used. Many states require LIHTC developers waive the QC option in order to be eligible to receive a credit allocation. The QC process itself is uncertain and complicated. As a result, a HUD study found that, “the QC process has rarely been used, even for properties that have not waived their right to use it.”

Second, there are many factors that lengthen extended use periods beyond 30 years. Many states, such as Michigan, California and Massachusetts, have extended use periods longer than 30 years. In addition, many LIHTC-financed properties are subsequently rehabilitated using LIHTCs, and therefore have extended affordability restrictions longer than their initial 15-year compliance and 30-year extended use periods. Many LIHTC properties have rental assistance contracts or mortgages from HUD or the U.S. Department of Agriculture (USDA) that require affordability use restrictions beyond the LIHTC extended use period of 30 years. Many LIHTC properties are operated by nonprofits, whose missions are to provide affordable housing, and thus are unlikely to convert their LIHTC properties to market rate.

Third, HUD’s previous analysis on this issue indicates that the ledge is likely overstated. When HUD analyzed the set of LIHTC properties that had reached or were reaching Year 15, it found that “by far the least common outcome for LIHTC properties [was] conversion to market-rate housing” (emphasis added). Furthermore, HUD found that “the most common pattern for the early year LIHTC stock, despite the expiration of extended LIHTC use restrictions at Year 30” is for properties to continue as affordable housing.

The current shortage of affordable rental housing is a real and significant issue, and many existing LIHTC properties have recapitalization needs after Year 15. But it is important for policy makers to know that significant restrictions remain in place for affordable housing and a LIHTC ledge doesn’t exist.