University of Pennsylvania: 1 Million Federally Subsidized Affordable Homes, Or More, Are At Risk

Published by Peter Lawrence on Wednesday, January 16, 2019 - 12:00am

New data about existing affordable rental housing paints a worsening picture of the affordable housing crisis. Recent research by the University of Pennsylvania shines a light on the potential loss of more than 1 million homes of federally subsidized housing from the affordable housing stock. The major threats to affordable housing are highlighted, including how changes in funding can lead to housing loss. Current events put this particular risk factor in stark relief – the ongoing partial government shutdown is exacerbating and accelerating the problem of preservation, with 1,150 U.S. Department of Housing and Urban Development (HUD) Section 8 Project Based Rental Assistance (PBRA) contracts expired and not renewed in December and January, potentially affecting 70,000-80,000 very low-income households, and hundreds more contracts scheduled to expire each upcoming month, impacting tens of thousands more very low-income households. The working paper, "Preservation of Subsidized Housing: What We Know and Need to Know,” also calls for more research on the status of subsidized housing provided by federal supply-side housing programs, an increasingly important subset of all affordable housing.

Of the numerous federal housing programs in use today, the report chose to focus on housing created through seven major federal supply-side programs: public housing; PBRA; the Section 202 supportive housing program for elderly; the U.S. Department of Agriculture’s (USDA) Section 515 program for rural housing; the low-income housing tax credit (LIHTC); the HOME federal block grant; and the National Housing Trust Fund. These programs fund housing intended to assist a wide variety of households in need of affordable housing options such as seniors, those living in rural areas, and low-income households, especially those earning  50 percent or less of the area median income. These programs provide funding for a range of affordable rental housing activities including financing new homes, rehabilitating existing homes, and below market loans to affordable rental housing developers.

Though rental homes may leave the affordable housing supply for any number of reasons, the report lists the three biggest threats to subsidized housing as:

  • expiration or exit – homes are no longer required to remain affordable, either through expired requirements or owners’ ability to exit a particular program;
  • depreciation – where rehabilitation costs, oftentimes worsened by deferred maintenance, for aging subsidized housing becomes so cost prohibitive that homes either leave the subsidized universe or become totally uninhabitable; and,
  • appropriations – if federal funding were to be cut to supply-side programs the number of homes created or maintained would be in jeopardy.

The report states more than 6 million affordable homes have been developed through direct investment by the federal government. It should be noted that this estimate may not account for homes receiving assistance from two or more sources, so the actual number of homes created through government assistance may be less. To be clear, subsidized rental housing does not represent the entirety of affordable rental housing, but it is an important subset as evidenced by the number of homes created or supported by the program, and in a time when the affordable housing crisis is reaching catastrophic levels, maintaining every affordable home is crucial.

 

Blog Chart Rental Homes Programs Rundown
Click to Enlarge

 

Of the programs examined, the LIHTC has created by far the most affordable housing. LIHTC housing with expiring affordability requirements has been the subject of numerous studies, including the subject of a recent Notes from Novogradac post about homes nearing Year 30, and what this potential loss of affordable rental housing will mean for those in need. The table above highlights the number of LIHTC homes at risk of being lost due to owners exiting the program. But the report also touches on another milestone – Year 15 – that poses a potential, indirect loss risk. At Year 15, while investors generally do exit the partnership, LIHTC property owners generally do not exit the program, and they can restructure, applying for another round of tax credits if their properties are in need of recapitalization. Research shows there will be more than 1 million LIHTC homes in properties reaching Year 15 in the next 10 years. The authors contend there may be more competition for LIHTC between owners of existing LIHTC properties and those looking to develop new housing. In fact, state allocating agencies are already having to make hard choices between the two, and will start to face increasing pressure as the recapitalization needs of the growing Year 15 housing stock is compounded by loss of rental homes in properties reaching Year 30 (particularly in states where affordability requirements are not extended beyond the 30 year mark).

Risks to the LIHTC has implications for other programs that rely on tax credits for funding. As detailed here, the Housing Assistance Council (HAC) stresses the importance of the LIHTC in terms of supporting rural housing. HAC reports that nearly half the homes in the Section 515 housing portfolio are LIHTC-financed. For Section 515 homes created after 1988, the percentage of homes with LIHTCs increases to 73 percent. With USDA funding of new Section 515 properties dropping to zero in recent years, the program is losing homes; there has been a 7 percent decline in the number of Section 515 properties since 2006. Factor in the properties with mortgages nearing maturity that can choose to opt out of the program once the mortgage is paid off, and the repeated attempts by the administration to cut USDA and HUD funding to programs and agencies that provide or support affordable housing efforts, and the LIHTC is more important than ever.

The lack of affordable housing in rural areas has been overlooked in the past but the increasing severity of the problem has forced stakeholders to direct more of their efforts to this issue. The housing government sponsored entities, Fannie Mae and Freddie Mac, are required to serve rural markets as per the congressional Duty to Serve mandate, and have recently increased their focus. Fannie Mae increase the number of affordable rural housing homes it has committed to invest in from 2018 to 2020 in its revised Duty to Serve plan.

The LIHTC program can also be tapped by public housing authorities (PHAs) as a financing source through participation in the Rental Assistance Demonstration (RAD). The RAD program, HUD’s main response to preserve public housing, allows PHAs to convert some of their properties to Section 8 project-based vouchers or PBRA. This conversion makes it easier to use LIHTC to recapitalize public housing properties, thus helping to mitigate the more than $26 billion rehabilitation backlog highlighted above, making the LIHTC not only vital to the creation of affordable housing but also its preservation. HUD reports that more than 100,000 homes have been preserved under RAD in the past five years. At the time of this post, approximately $5.75 billion has been secured for construction investment. There are currently plans to preserve or redevelop another 250,000 homes currently in PHAs’ portfolios – amounting to a total of about 30 percent of the nation’s public housing remaining affordable into the future.

In addition to preserving homes in the public housing portfolio, RAD can also be used to preserve other multifamily homes. Under the RAD program, properties funded by HUD’s Section 202 supportive housing for the elderly projected based rental assistance contract and “legacy” programs—Rent Supplement, Rental Assistance Payment and Section 8 Moderate Rehabilitation—can be converted to PRBA or project-based vouchers. HUD reports that this project-based assistance offers a “more reliable source of operating subsidy that allow PHAs and owners to safely leverage private capital,” allowing for the financing of rehabilitation or replacement of affordable housing.

The numbers highlighted in the University of Pennsylvania report paint a worst-case scenario: While there are more than 1 million rental homes with affordability restrictions set to expire, it’s not known how many of these homes may actually be lost if funding levels and policies are not changed. The authors were careful to highlight that just because a home is at risk does not mean it is a certainty that it will leave the affordable housing stock. Owners could choose to remain in their respective programs, renewing their contracts; they could apply for a new subsidy, thereby resetting the restriction clock; or, even without a subsidy, rental housing homes could remain affordable (perhaps because the market in which they are located in would not support an increase in rents).

More research is needed to accurately quantify the problem and, assist advocates in focusing their efforts. With limited funding available to fund housing development and preservation, states would also benefit from a clearer picture of housing at risk. Which affordable housing homes in terms of type and location are most likely to be lost? Are funds better spent preserving affordable housing, preferably in areas of opportunity or building new affordable housing? Should states alter their qualified allocation plans to better focus preservation efforts? What happens to low-income households, those with the fewest options and most at risk if existing affordable housing is lost? These are all questions that require additional research to answer.

In the meantime, the preservation provisions of the Affordable Housing Credit Improvement Act (AHCIA) are a good start to address the conditions that are already known. Introduced in the previous Congress by Sens. Maria Cantwell, D-Wash., Orrin Hatch, R-Utah, and Reps. Carlos Curbelo, R-Fla., and Richard Neal, D-Mass, the AHCIA contained several provisions aimed at facilitating the recapitalization of the nation’s public housing and other subsidized affordable housing using the LIHTC: expanding the LIHTC allocation authority by 50 percent; establishing a minimum 4 percent credit rate and enabling states to provide a basis boost for tax-exempt bond-financed preservation; and providing a basis boost for developments serving extremely low-income (ELI) households, among other provisions. Reintroduction and passage of the AHCIA would strengthen and expand the LIHTC, which benefits preservation efforts and ultimately households in need across the country.