In Pennsylvania, affordable housing units funded through tax credits will likely stay affordable even as the tax credit restrictions expire.
One of the primary methods for bringing affordable housing online in the U.S. is the Low Income Housing Tax Credit (LIHTC). Nearly a third of all multi-housing units built from 1987 to 2006 used the tax credit. According to the U.S. Department of Housing and Urban Development (HUD) the program makes available approximately $8 billion in tax credits nationwide each year “for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.”
In the commonwealth, the Pennsylvania Housing Finance Agency (PHFA) manages the LIHTCs, about $28 million per year.
From its creation in 1986 to 2013, 1,473 projects — a total of 42,070 affordable units — have been opened in Pa. using LIHTCs, according to HUD’s LIHTC database.
Nationwide, LIHTC has helped fund approximately 2.2 million units.
But federal rules don’t require that LIHTC-funded properties keep that affordable status in perpetuity. The units have to stay affordable for 30 years.
That means that affordable housing units that received tax credits between 1990 and 1995 will see their LIHTC affordability requirement expire between 2020 and 2025. In the commonwealth, that includes 9,523 units, nearly a quarter of affordable units the tax credits helped to materialize to date.
Since LIHTC affordability requirements have only recently started expiring in the U.S., it’s not clear yet whether the housing will remain accessible to low-income tenants. But there is reason to believe that many units will in Pennsylvania.
How does the LIHTC program work?
LIHTC is a government program that leverages private capital.
Here’s how a tax credit generates affordable housing units:
The local agency that distributes LIHTCs — the PHFA — grants tax credits to a developer, and the credits typically last ten years.
The developer sells those credits to an investor, often a bank. The sale price can vary. According to a report on the LIHTC program by CohnReznick LLP, “for most of the past 15 years, the demand for housing credit investments has exceeded the supply. The demand for credits has driven the price at which they trade from $0.42 per $1.00 of housing tax credits in the early years of the program to close to $1.00 per $1.00 of housing tax credits” as of November 2014.
If the credit is for $1 million and the investor pays the developer $0.90 on the dollar, then the developer receives $9 million. Here’s the math:
$1 million/year x 10 years = $10 million
$10 million x $0.90 = $9 million
Both the investor and the developer benefit from the deal.
The developer secures funds necessary to complete the project upfront and decreases how much he has to borrow or mortgage.
The investor receives a dollar-for-dollar discount on his federal tax bills spread out over a decade. The investor also gets Community Reinvestment Act (CRA) credits. CRA credits are required by federal law and are used as a way to hold banks accountable in the communities where they operate.
There are many reporting requirements to assure that units are occupied by low-income tenants and the tax credit to the investor depends on compliance. As a result, the units are often managed well and the housing tends to be of good quality.
Will Pennsylvania start to lose units as LIHTC affordability clauses expire?
Pennsylvania has a shortage of housing accessible to low-income earners, so keeping what affordable units exist is important.
Of course Pennsylvania is not the only state in this position, so HUD has started studying what happens to LIHTC-funded units as their affordability clauses expire. A 2012 national study looked specifically at what happens at Year 15, when “the owners of these properties may apply for a new round of tax credits, may continue to operate the property as affordable housing without new subsidies, or may opt out of the program and reposition the former LIHTC property as market-rate housing.” (Year 15 transitions are allowed by some states, but not Pennsylvania. So here, a transition to market rate housing could only happen at year 30.)
According to this study, the majority of LIHTC properties continue to operate as affordable developments. A small number of projects do transition to market rate housing, something that occurs primarily in strong housing markets.
Bill Wasielewski, with Mullin & Lonergan Associates, Inc., a firm that works with LIHTC deals, said he expects the same to hold in Pennsylvania. For one, many of the LIHTC developments use other government monies which may have their own affordability clauses that make it difficult to transition to market-rate housing upon expiration of LIHTC rent controls.
Two, the finances involved in paying off debt and doing the renovations necessary to charge higher rents may not add up. “You have to be in a very, very good real estate market to make the numbers work,” Wasielewski said.
Many LIHTC developments, especially earlier ones, went up in so-called qualified census tracts, which are low-income areas, often ones that have seen disinvestment.
“Since so many of these projects were built in qualified census tracts which tend to be the weakest markets in the area it’s conceivable that oftentimes the market rate rents will be affordable anyway, or not that much more than they were if the market were to go off those affordability restrictions,” said Nick Fedorek, also with Mullin & Lonergan.
Wasielewski said low rents dominate in much of the state, even outside those tracts. And because of that “a developer is not going to get a significant bump…in terms of rental income. The numbers wouldn’t make sense from that perspective to convert those developments across the state.” In other words, Pennsylvania’s lackluster housing market is good for affordable housing. He added that there are some exceptions — like Philadelphia’s Center City and Pittsburgh’s East End — which are booming.
The bigger problem, said Wasielewski and Fedorek, is growing need for affordable housing and a shrinking pot of federal money available to build it. That’s a problem in and of itself, but it also affects the LIHTC program because that’s what developers often use to leverage LIHTC dollars.