LIHTC Rental Income, Operating Expenses Grow in 2019

Published by H. Blair Kincer on Thursday, October 1, 2020 - 12:00am

In an 1811 letter to his granddaughter Cornelia Jefferson Randolph, Thomas Jefferson wrote, “Never spend your money before you have earned it.” Low-income housing tax credit (LIHTC) operators apparently put that lesson into practice in recent years.

They spent more, but only after they earned more.

Rental income for LIHTC properties increased 8.5 percent in 2019, according to 2020 Multifamily Rental Housing Operating Expense Report: Survey and Analysis of LIHTC Properties, Novogradac’s annual report with expense data on more than 1,500 properties comprised of nearly 160,000 apartments. The rental income increase followed a 4.1 percent jump in rental income the previous year.

The two-year surge in rental income likely played a significant role in a 6.8 percent increase in overall expenses in 2019, the highest year-over-year increase since Novogradac began tracking operating expenses in 2010.

Blog Table: LIHTC Net Operating Income, 2010-2019
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The main drivers of the 2019 increase in operating expenses were management fees (which increased 14.9 percent) and repairs and maintenance (which increased 12.7 percent)–two categories whose increase likely reflected LIHTC property owners catching up for lesser expenditures throughout years of lean budgets during and immediately after the Great Recession.

From 2010 through 2017, when rental income increased by a compounded rate of 0.6 percent, management fees increased by a compounded rate of 2.4 percent and repairs and maintenance increased by a compounded rate of 3.9 percent. When income increased more dramatically, spending on those categories increased.

Delayed maintenance likely played a role in the 2019 increase over 2018. Higher management fees in the past two years may reflect a continued trend of properties in the Novogradac survey getting smaller–smaller properties have higher per-unit management fees due to the economies of scale. In 2010, the first year Novogradac surveyed properties for expenses, the median number of units in a LIHTC property was 101. In 2019, it was 80.

To further illustrate, properties in 2019 with 200-499 units spent a median of $510 per unit on management fees, while properties of less than 50 units spent $768.

Whether the increases in those two categories are short-term outliers or are harbingers of a period of more spending is unclear. While expenses jumped 6.8 percent in 2019, the overall trending line for operating expenses is a much lower 3.0 percent compounded growth since 2010.

Longer-range increases for those two categories are higher than the overall compounded expenses growth rate of 3.0 percent, but those figures are nowhere near the 2018 or 2019 boosts. Repairs and maintenance have a compounded growth rate of 5.2 percent since 2010 and management fees have a compounded 5.8 percent growth rate.

In dollars, 2019 LIHTC rental income grew by $719 per unit, while overall operating expense increased by $341 per unit–both the highest numbers in the decade of Novogradac record keeping. The previous greatest jump in income was $215 per unit in 2018, while the previous highest increase in expenses was $178 per unit in 2016.

Nearly $200 of the $341 increase in 2019 expenses came from the sum the repairs and maintenance category and management fees. Repairs and maintenance increased $111 per unit and management fees jumped $87 per unit.

The overall increase in rental income and overall expenses are the top-level numbers from the annual report, which includes much more data and analysis. The report evaluates multifamily rental housing operating expense over time and by type, location and property size.

The 2020 edition of the report includes expense data with comparisons between different types of LIHTC properties, including family vs. senior tenancy, acquisition-rehabilitation vs. new construction and small properties vs. large properties. The report also compares properties in non-metropolitan, micropolitan, small metropolitan and metropolitan areas, as well as by general geography and by state. Age data for LIHTC properties is also included.

With the COVID-19 pandemic dramatically affecting expenses in 2020, the next report may be more of a reflection of an unprecedented year in America than an indicator of trends. But over coming years, it will bear watching to better understand whether rental income and operating expenses continue to grow rapidly or whether 2018 and 2019 were two years of adjusting and future increases will be more in line with history.