Larger LIHTC Building Size Reflects State, Local Policy Choices

Published by Michael Novogradac on Friday, June 20, 2014 - 12:00am

As regular readers of this blog know, the Low-Income Housing Tax Credit (LIHTC) program is part of the federal tax code, but is administered at the state and local level by credit allocating agencies. Unfortunately, periodically researchers publish analyses that fail to incorporate the role and effect credit allocating agencies and other state and local policies have in directing LIHTC development outcomes. For example, a recent paper entitled, “Cost Inefficiency in the Low-Income Housing Tax Credit: Evidence from Building Size,” argues that the LIHTC encourages developers to build larger buildings with larger housing units. The author, Dr. Bree J. Lang, contends that this is evidence that the LIHTC is inefficient, that the “LIHTC creates a market distortion in construction decisions” and that it “incentivizes developers to construct buildings with too much capital.” However, these assertions misrepresent the cause and effect relationship in play, because they don’t account for the role of credit allocating agencies and state and local housing policies.

In the paper, Dr. Lang reports that in Los Angeles County between 1993 and 2007 “the average LIHTC apartment building has 33 percent more square footage than unsubsidized buildings … [approximately] half of the increase in building size is due to larger housing units. The other half is the result of developers constructing additional units within the building.”

The question that should be asked is: what is driving the larger unit size and the additional units per building?

Cause of Larger Unit Size

Larger unit sizes considered in the paper appear to be principally the result of specific policy choices made by California’s credit allocating agency, not the underlying LIHTC incentives provided to developers.

California’s credit allocating agency is the largest in the nation and allocates more than 10 percent of LIHTCs available in the country. The agency set a goal of allocating about 65 percent of credits for “large family” developments. To qualify as a “large family” development, at least 30 percent of LIHTC units in the property must have three or more bedrooms; four bedroom and larger units must have at least two bathrooms; bedrooms must be large enough to accommodate two persons each; and living areas must be adequately sized to accommodate families based on two persons per bedroom. As Dr. Lang notes, California requires three bedroom LIHTC units to be at least 1,000 square feet. (And four bedroom units must be at least 1,200 square feet.) These policies suggest California LIHTC properties have a high percentage of three bedroom or more units that are 1,000 square feet or more, pushing up the average size of a LIHTC unit. Dr. Lang’s tables appear to confirm the effect of this large family housing goal, as the average square footage of senior and at-risk housing is not larger than that of non-LIHTC units. Additional calculations would be useful to better delineate what portion of the larger unit size in question is attributable to the credit allocating agency’s “large family” housing goals.

Additional Units per Building

The paper notes that the average increase in units per building is approximately 16 percent for LIHTC properties. The principal cause of this increase is likely related to California’s Bonus Density Law, which provides developers with as much as a 35 percent increase in development density (i.e., units per building) for developing affordable rental housing. This density bonus is unrelated to LIHTC incentives provided to developers, but often used by developers building LIHTC properties.

The paper’s data on senior and at-risk housing supports a relationship between the density bonus and larger unit size. A trend toward more units per building in senior and at-risk housing can be seen when comparing those categories to non-LIHTC housing.

Because the density bonus is as much as 35 percent but the observed increase is 16 percent, additional research would be needed regarding the ability of the LIHTC developers to fully use the density bonus, as well as the number of non-LIHTC subsidized developments that qualify and use the density bonus.

Additional Observations

Dr. Lang’s observations that the research indicates that LIHTC construction increases property value, reduces poverty concentration, provides access to better schools and decreases local crime rates are welcome.

And while her research results do indicate that for some tenants LIHTC offers larger housing units that may not be available through demand-side subsidies, it’s not for the reasons suggested in the paper. The larger LIHTC building size identified by the author appears to be principally the result of specific policy choices made by California’s credit allocating agency and density rules, not the underlying LIHTC incentives provided to developers.