Developments that exit the low-income housing tax credit (LIHTC) program generally continue to charge rents below the broader market and serve as valuable workforce housing, according to new research by Freddie Mac Multifamily.
Rents at these properties have often been boosted above program levels, but the average rents remained materially lower than market comparables in a sample of 133 former LIHTC properties across seven markets. Rents were lower by an average of 12%, but differences varied widely across the cities that were studied, says the white paper.
Former LIHTC properties in Dallas offered rents nearly 27% below market, but rents in Phoenix were just 3% below market.
“A fear has been that LIHTC properties would simply jack up rents to the top of the market at the expiration of their rent and income restrictions, generally about 30 years, but that’s not usually the case,” said Steve Guggenmos, vice president of Research & Modeling for Freddie Mac Multifamily. “Any loss of units affordable to the lowest-income renters is concerning, but there is some consolation in that LIHTC properties typically continue to serve low- and middle-income renters.”
The research finds that nearly 87% of LIHTC properties are “programmatic,” meaning they remain in the program and are subject to rent restriction. However, a growing number of properties will be able to potentially exit in the coming years.
The white paper adds that some non-programmatic LIHTC properties increase rents substantially above 60% of the area median income (AMI) affordable rents, but the majority are still affordable at this level. “The most common path for a non-programmatic LIHTC unit is to remain affordable at 60% AMI, which happens roughly 61% of the time,” says the report.
For those homes that have been priced well below the 60% AMI maximum, conversion to market rate can cause a dramatic hike in rents. “The conventional market is generally unable to support deeply affordable units, which is why programs like LIHTC are critical,” adds the report.
Freddie Mac looked broadly at property-level LIHTC data compiled by the Department of Housing and Urban Development and the National Housing Preservation Database. Researchers identified 40,296 multifamily properties in the entire history of the LIHTC program. Of these, 34,975 were identified as programmatic, which means that they currently restrict rents based on local income in accordance with LIHTC requirements. The remaining 5,321 properties are identified as non-programmatic, or properties that have exited the LIHTC program and are no longer monitored for compliance and are therefore no longer believed to have LIHTC-restricted rents.
Freddie Mac also found that properties are more likely to remain in the LIHTC program when they are owned by a nonprofit or were placed in service after 1990 when Congress extended the LIHTC use period from 15 to 30 years.
The research, which fulfills commitments under Freddie Mac’s Duty to Serve and Equitable Housing Finance Plans, is intended to paint a picture of the risk that currently exists in the market and the potential severity of affordability loss.