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Washington Wire: Report Assesses Track Record of Low-Income Housing Tax Credit Financed Rental Properties

Published by Michael J. Novogradac on Wednesday, June 1, 2011

Journal cover June 2011   Download PDF

As discussions about the national deficit, federal spending and tax reform deepen and grow in number, budget hawks are dissecting all categories of government expense, including tax expenditures such as the low-income housing tax credit (LIHTC). Lawmakers may not be content to cut discretionary spending on the appropriations side alone and have begun proposing reductions to tax expenditures, which they describe as “spending in the tax code,” as a way to increase federal revenue.

Meanwhile, the need for affordable rental housing continues to grow. In fact, a record number of renters are paying more than half their income for housing, according to a report released on April 26 by the Harvard Joint Center for Housing Studies (JCHS). “America’s Rental Housing: Meeting Challenges, Building on Opportunities” found that one in four renters, or 10.1 million households, spend more than half their income on rent and utilities. (Read more about the JCHS report on page 8.)

Moreover, JCHS reports that the nation’s affordable housing stock has lost more than 700,000 federally subsidized units since the mid-1990s and the LIHTC stands nearly alone in replenishing these units. According to the report, if the LIHTC program continues to add units at its current pace, the tax credit will become the single largest source of assisted housing within the next few years. Clearly, against this backdrop, communicating the LIHTC program’s value and strengths to legislators is increasingly important.

Contributing to an Informed Discussion
In this context, Novogradac & Company LLP undertook a study to assist the Housing Advisory Group (HAG), a coalition of housing interests dedicated to protecting and improving affordable housing programs, assess the track record of LIHTC financed rental properties. The report found that LIHTC financed properties have a remarkable track record, particularly when compared to the performance of other federal government subsidies of affordable rental housing. The report also identifies key structural reasons for the LIHTC’s remarkable track record.

The special report is organized into six main sections:  an assessment of the track record of the LIHTC; an analysis of the major reasons for the LIHTC’s exemplary track record; an examination of the track records of other supply-side government programs; a review of the role of the Section 1602 cash grant exchange program; an assessment of the LIHTC program’s efficiency compared to the estimated efficiency of the exchange program; and a comparison of the efficiency of the LIHTC program at reduced tax credit equity prices compared to the exchange program.

Taken together, these points serve to highlight the low-income housing tax credit’s unique strengths that make it invaluable in serving low-income renter households. The study’s findings are fundamental to reinforcing not only the maintenance of the LIHTC program, but also its continuation as the foremost supply-side affordable rental housing program. Those findings are summarized here only in brief; affordable housing advocates are urged to download the complete report so they can be fully prepared to support and defend the low-income housing tax credit in the coming months. See page 3 for where you can download the report.

Remarkable Track Record
The report details the LIHTC program’s low foreclosure rates and low rate of noncompliance with program rules, as well as its ability to maintain affordable rental housing stock over the long-term. In fact, the report finds that the LIHTC has a more successful track record than a number of other supply-side affordable rental housing programs that have experienced high default and foreclosure rates. Moreover, although there are not many LIHTC recapture statistics publicly available, it appears that the LIHTC program has experienced extremely low levels of tax credit recapture during its history, and the Internal Revenue Service (IRS) has generally found that LIHTC properties compliance with the program requirements has been very good.

The reasons behind the LIHTC’s remarkable track record are many. Chief among the program’s strengths are the involvement of a third-party for-profit partner, the placement of construction, lease-up and occupancy risk on the sponsors and investors instead of the federal government, the delivery of low-income housing tax credit benefits over time, and state and federal oversight.

Best Suited to a Recovered Market
During the Great Recession of the late 2000s, the federal government provided cash grants in lieu of LIHTCs with the enactment of Section 1602 of the American Recovery and Reinvestment Act of 2009. Some affordable housing advocates have argued for an extension of the exchange program, but the report finds that an extension would not necessarily have a long-term positive effect on the LIHTC industry.

Specifically, the report suggests that an extended exchange program could face significant issues in the long term. For example, a long-term exchange program would dilute the effectiveness of the underwriting and screening procedures that have been successfully honed and refined over the life of the LIHTC program. Similarly, under a grant program the responsibility for asset management and monitoring, traditionally borne by the private sector, shifts to the public sector—specifically to the credit allocating agencies. The temporary Section 1602 exchange program has served its purpose and now that the LIHTC investment market has recovered the exchange program is no longer needed.

The public-private partnership established by the LIHTC program is built on a solid foundation of checks and balances that ensure its stability and success. In addition, its ability to work seamlessly in tandem with other government housing programs further strengthens the LIHTC program’s benefits. It’s no wonder that as the low-income housing tax credit celebrates its 25th anniversary this year, it has stood the test of time and remains the cornerstone of the nation’s affordable rental housing industry.

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