Nearly 750,000 Affordable Homes, Including LIHTC-financed Homes, At-Risk of Loss by 2031, but Build Back Better Act Would Preserve Many

Published by Peter Lawrence on Thursday, December 2, 2021 - 12:00am

Every year, thousands of affordable homes are at risk of being lost. However, provisions in the Build Back Better Act (BBBA) could alleviate some of that loss.

In October, the National Low-Income Housing Coalition (NLIHC) and the Public Affordable Housing Research Corporation (PAHRC) released the 2021 Picture of Preservation report, which discussed why many affordable rental homes are vulnerable to loss and the necessity to preserve them. Using data from the National Housing Preservation Database (NHPD), the report examines the different federal subsidies that assist affordable homes and why, despite receiving these subsidies, thousands of affordable homes are subject to loss.

However, many of these homes can be preserved with new federal funds, such as those in the BBBA, which passed the House Nov. 19. Preservation comes in two main forms: using federal funds to rehabilitate deteriorating housing and providing new federal subsidies when current ones expire.

Blog Graphic: Federally Funded Project-Based Subsidy Programs
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Picture of the Federally Assisted Rental Market

By 2031, the affordability and income restrictions for an estimated 745,017 federally assisted rental homes are set to expire. Most of these homes are in low-income housing tax credit (LIHTC) properties with Section 8 properties being the second highest amount. Many of these homes will be lost unless they are preserved with new or renewed federal assistance. LIHTC is the largest federal housing program, comprising half of the federally assisted housing stock (about 40% of federally assisted homes use more than one subsidy program).

Between 2019 and 2020, 44,629 federally assisted affordable homes were lost, but 99,845 affordable homes were gained, resulting in a net gain of 55,216 new affordable homes.

Blog Graphic: Of the 44,629 Federally Assisted Homes Lost in 2020, 38% Were Lost Before Their Affordability Restrictions Expired
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Preservation Risks

The report explains the three main preservation risks that federally assisted affordable homes can face: exit, depreciation and appropriations. About 60% of federally assisted homes that have affordability restrictions expiring soon also have other preservation risks.

Exit Risks

Exit risks occur when affordability restrictions expire or when there are policies in place that enable property owners to exit affordability restrictions early. The chart below details the different federal programs containing provisions that can result in homes being lost due to exit.

Blog Graphic: Provisions That Enable Property Owners to Opt Out of Affordability Provisions Early
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Nearly half (47%) of federally assisted homes are supported by non-renewable subsidies, an increase of 2% from 2019. Since 1990, about 143,456 LIHTC homes lost their affordability restrictions early and the data suggests that these losses may be due to the building owners exiting through the qualified contract (QC) process (QCs are detailed in this previous Notes from Novogradac post). The amount of LIHTC properties that have affordability restrictions set to expire rose by 33% since 2020 and most of these homes are in the West and Midwest.

LIHTC, U.S. Department of Agriculture (USDA) Section 515 Rural Rental Housing Direct Loans, HUD Section 202 Elderly Housing Direct Loans, HOME and USDA Section 538 Rural Rental Housing Guarantee Loans are all non-renewable programs, leaving them more vulnerable to loss of affordability. Property owners can apply for new subsidies, but they may not receive them due to limited availability. If they cannot receive new federal subsidies, these homes are most likely lost from the affordable housing stock. For the homes with subsidies expiring soon, 79% have not received a new federal subsidy within the last 20 years. For LIHTC-financed homes with affordability restrictions expiring in 2020 as reflected in the underlying data sources, just 18% remained affordable. Less than 1% of LIHTC-financed homes were lost due to foreclosure, showing that affordability restrictions ending are the main reason LIHTC-financed homes are lost. However, this data on the LIHTC affordability restriction period is not comprehensive, as the NHPD lacks data on whether states have negotiated longer affordability periods as an incentive to receive a LIHTC allocation.

Depreciation Risks

Depreciation risks occur when there are threats to the quality of the physical structure of federally assisted rental homes. Between 1996 and 2020, about 233,000 public housing homes were lost permanently due to poor condition of the physical buildings, according to the report. The report also states that 23% of public housing homes and 4% of project-based Section 8 housing scored less than 60 on their most recent Real Estate Assessment Center (REAC) inspection. This low score results in a failure to pass inspection, but most property owners will make necessary repairs after receiving a failing score. Property owners may also appeal their REAC scores if they believe that they should have received a different score. However, we do not know the full scale of homes that are facing depreciation risks because not all federally assisted affordable homes are required to collect housing quality data.

Appropriations Risks

Appropriations risks occur when Congress does not appropriate sufficient funds or renew existing rental assistance contracts and properties must operate at a deficit. Congress does not appropriate enough funds to fully cover the costs of maintaining public housing. According to the report, the current capital needs backlog for public housing is between $35 billion and $70 billion due to insufficient appropriated funds since 2002. The BBBA would appropriate $65 billion to address this backlog.

Recommendations to Preserve Affordable Homes

The NLIHC and PAHRC provide a series of recommendation on how to preserve federally assisted affordable homes for low-income households:

  • State and local governments should increase funding for preservation efforts in their own states and localities, including offering tax incentives to private developers to construct and preserve affordable housing.
  • The federal government should increase their funding for preservation efforts of federally assisted affordable homes.
  • Rental assistance for Project-based Section 8 properties should continue as it gives property owners of Section 8 homes the necessary income needed to continue operating these properties at rents affordable to the lowest income households.
  • The BBBA, including its housing provisions, should be enacted into law.

Next Steps

On November 19, the House passed the BBBA and it is now being considered in the Senate.

The BBBA contains a series of LIHTC provisions:

  • Increases 9% LIHTC allocations by 10% plus inflation annually during 2022-2024 based on extending the 12.5% allocation increase originally enacted in 2018 and scheduled to expire in 2021 through 2024.
  • Temporarily reduces the tax-exempt private activity bonds threshold test from 50% to 25% for calendar years 2022-2026.
  • Provides a maximum basis boost of 50% for units serving extremely low-income (ELI) renters.
    • States are required to allocate no less than 8% of 9% allocations to buildings with no less than 20% of units underwritten for ELI households.
    • The 50% basis boost would be available to no more than 13% of 9% allocations and 8% of a state’s annual private activity bond cap.
  • Creates a permanent maximum basis boost of 30% for properties in Native American areas.
  • Repeals the QC option for properties financed by future allocations and retroactively changes statutory price formula for existing properties.
  • Permanently changes statutory right of first refusal into a purchase option for properties financed by future allocations, modifies the existing statutory right of first refusal and clarifies rights relating to building purchase for existing properties.

Novogradac estimated in a previous Notes from Novogradac post that 811,900 affordable rental homes can be built from the BBBA’s LIHTC provisions between 2022-2031.

BBBA also provides more than $150 billion for a variety of affordable housing and community development spending, including $25 billion to expand rental assistance, $65 billion to preserve deteriorating public housing, $15 billion for the Housing Trust Fund and $750 million for the Housing Investment Fund administered by Treasury’s Community Development Financial Institutions Fund, structured very similarly to the Capital Magnet Fund.

As stated above, the BBBA is now pending in the Senate and being examined for compliance with the Byrd rule, which governs which provisions are eligible to be considered in the Senate under the budget reconciliation rules. If it passes the Senate but undergoes any changes from the House-passed version as expected, the BBBA will need to go back to the House for approval before it can be enacted.

Enactment of the BBBA would provide the funds to preserve many federally assisted affordable homes. In 2020 alone, 44,629 federally assisted homes were lost. Preserving existing affordable homes and constructing new ones will provide safe, stable and affordable housing for low-income households long term.