LIHTC Expense Rate Increasing, but Rate of Increase is Slower in Same Properties

Published by H. Blair Kincer on Monday, November 16, 2020 - 12:00am

Comparing apples to oranges can lead to a possibly incorrect conclusion that fruit is getting more citrusy.

On one hand, it’s possible that apples are actually getting more tart. On the other hand, the comparison may be flawed: Apples and oranges are fruits that grow on trees, but they are not the same thing.

Apply that to the examination of expense totals for affordable housing properties. Evaluating expenses over time for the same properties allows a higher level of confidence in how expenses are changing than does comparing similar properties. Accuracy is not a guarantee–there is, of course, the possibility that the specific properties are outliers from a general trend–but the comparison is apples to apples, not apples to oranges.

Apples-to-apples comparisons are usually cleaner.

One of the findings in the 2020 Multifamily Rental Housing Operating Expense Report: Survey and Analysis of LIHTC Properties is that the longitudinal (apples-to-apples comparison of the same property) survey of properties show a 2.7 percent compound annual growth rate for total operating expenses since 2010, compared to a 3.0 percent compound annual growth rate for all properties in the survey.

LIHTC Compound Annual Growth Rate Total Expenses, 2010-2019
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On one hand, that’s not a tremendous difference: 2.7 percent instead of 3.0 percent.

On the other hand, that difference over a decade or more could result in a significant difference at the finish. An annual expense level of $5,394 (the average total expenses per unit in 2019) would over 10 years reach $7,041 at a 2.7 percent compound annual growth rate. At a 3.0 compound annual growth rate, the same property would reach $7,249. That’s just $248, but that’s $248 per unit–which is approximately the amount many properties set aside as an annual reserve. And year after year, that margin would increase.

There’s value in the longitudinal analysis.

Novogradac’s longitudinal survey includes the 96 properties that have been involved in the annual operating expenses report each year for the past decade. The most recent survey–which includes data from 2019–included nearly 1,500 total properties, so the longitudinal sample makes up only about 6 percent of all properties surveyed.

Observing properties over time provides the opportunity to make a useful comparison of changes in both specific and total expenses for comparable properties: an apple-to-apple comparison. While we believe in the value of comparing different properties over time (they are, after all, low-income housing tax credit properties, they all follow Internal Revenue Code 42 regulations and including a large number of properties provides an accurate big-picture view of how expenses are changing), the reality is that comparing different units over time introduces the possibility of bias.

The 2019 result that the longitudinal compound annual growth rate was less than that for all properties is the continuation of a relatively recent trend. That comparison has been available for nine years. For the first five years, the expense growth rate was higher for the same-set units, including two years (2011 and 2012) when the same properties rate of growth was more than double the growth rate for all properties. However, in three of the past four years, the longitudinal growth rate has been less than the rate for all properties, although never by more than 0.5 percent.

In the end, the difference between the longitudinal properties and all properties is significant, but not hugely so. The fact that same-store properties have seen expenses increase at a slightly slower rate than all properties is worth keeping an eye on.

Apples are best compared to apples.

For More Information

2020 Multifamily Rental Housing Operating Expense Report: Survey and Analysis of LIHTC Properties