Stemming the loss of affordable housing: the role of nonprofits.
Now housing advocates are concerned about preserving the existing affordable housing supply, as well, which is at risk of being lost through physical deterioration, expiring affordability restrictions and the need for recapitalization.
Affordable housing preservation not only calls for protecting the number of low rent units in the housing stock, but also for maintaining the quality of units available to low- and moderate-income renters. Each affordable rental property presents different challenges and requires a unique combination of tactics to surmount the barriers to preservation.
When affordability restrictions expire
In 2000, rental affordability restrictions technically began to expire for a fraction of Low Income Housing Tax Credit (LIHTC) units, those with credits allocated between 1987 and 1989. Expiration of the restriction for some units only exacerbated a similar preservation problem in protecting the U.S. Department of Housing and Urban Development's (HUD) portfolio of assisted units developed through the Mark-to-Market Program in the 1990s (see Partners v. 11, n. 2).
According to a Neighborhood Reinvestment Corporation study by Kate Collignon in October 1999, three main challenges threaten the affordability of tax credit developments: (1) conversion to market rents; (2) cessation or reduction of targeting to very low-income households; and (3) a need for capital infusion to ensure continued financial feasibility and prevent physical deterioration. Collignon's research recommends that LIHTC sponsors should be aware of these potential problems as they consider regulatory and partnership agreements, market factors, the physical condition of the property, the financial climate, and owner preferences and their priorities.
The LIHTC program works best when leveraged through combination or layering with other federal programs and private monies to finance affordable rental development. It was not intended to finance the entire development. This approach can enhance the effectiveness and efficiency of the program, which largely depends on its inherent ability to react to market forces, as well as to provide flexibility in targeting, financial and motivating affordable housing production to meet the needs of local communities.
Although administered by the Internal Revenue Service, the practical administration of the LIHTC such as underwriting and allocation falls to state housing finance agencies (HFAs). This system allows states to set specific allocation criteria for awarding credits that target identified affordable rental housing needs, as outlined in the state's Qualified Allocation Plan. Furthermore, HFAs also control how tax credits can be combined with other financing programs they administer: Combined programs can improve the leveraging of the funds either to finance specialized housing development or to boost incentives to developers targeting a specific housing need identified by the state.
For example, the Florida Housing Finance Corporation (the state HFA) has set priorities for funding affordable housing for farm workers, the elderly and the homeless. Projects that develop transitional housing for the homeless, for instance, receive an automatic 9 percent tax credit, which is set aside when they receive funding through the Slate Apartment Incentive Loan (SAIL). SAIL is also administered by the agency.
Role of nonprofit developers in housing preservation
The success of preserving tax-credit developments will largely hinge on the involvement of organizations with a social mission that includes protecting existing low- and moderate-income tenants from displacement. Thus preservation is increasingly dependent on nonprofit organizational capacity both to develop and maintain properties.
Although at least 10 percent of tax credits are set aside for nonprofit developers, many nonprofits find the program inaccessible. Less sophisticated nonprofits or those with limited resources are discouraged by a complicated and demanding application process, and some find it difficult to compete against more experienced applicants.
For some time, nonprofits have benefited financially by partnering with for-profit developers eager to improve their applications' competitiveness by incorporating the nonprofit developer factor. This "rent-a-nonprofit" process, as it is referred to by some in the industry, does little to build capacity within the apprentice organization if, as is often the case, they are not allowed to participate in the development process.
Advocates for building nonprofit capacity argue that these development partnerships should not only involve the nonprofit in the application process, but also encourage the nonprofit's active participation in the construction and property management as well.
Florida Housing Finance Corporation assists nonprofits
Stephen Auger, Deputy Director of Multifamily Development at Florida Housing Finance Corporation (FHFC), explains that HFAs are interested in building the capacity of nonprofit developers to Finance and undertake projects as well as improving their access to tax credits. Nonprofits, he notes, are socially committed to preserving affordable housing and have the ability to develop and manage supportive housing that serves the lowest-income residents.
The FHFC is hosting a series of dialogues with small nonprofit developers about how to simplify the LIHTC application process and make it more accessible. According to Auger, expiring tax credit affordability periods did not have a substantial impact in Florida since a relatively small number of properties were affected. Nonetheless, since Florida has one of the largest LIHTC portfolios, preservation strategies are a priority as the state faces recapitalization and rehabilitation of properties at risk of conversion to market rents. Even though HVAs often impose a right-of-first-refusal agreement with nonprofits if a developer opts to sell the property at the end of the 15-year affordability period, many nonprofits may not have the resources necessary to finance the acquisition or recapitalization necessary for these aging properties. FHFC seeks to remedy this situation.
Florida nonprofit develops preservation strategies
Several larger nonprofits with adequate capacity and experience competing for tax credits are developing preservation strategies. Greater Miami Neighborhoods (GMN) is one of the largest nonprofit developers in Florida and a frequent sponsor of LIHTC developments. Elena Dominguez-Duran, vice president of development with GMN, says that in its first 10 years of operation, they focused on new construction. Now, using its own portfolio, GMN is developing successful models to recapitalize aging tax credit properties. Specifically, GMN is exploring how existing programs and resources can be used to recapitalize 10- to 15-year old properties that will become available as for-profit developers opt to sell.
"The properties have to be looked at on a deal-by-deal basis," says Dominguez-Duran. "We look at the operating expense and operating income, determine the purchase price and then look at available financing." She says that the nature of layered financing requires that they start looking at properties two or three years in advance to develop a strategy and structure the financing in time to acquire the property in the fifteenth year when it becomes available.
Dominguez-Duran explains that GMN also benefits from having the resources necessary to obtain interim financing to secure acquisition of at-risk properties while working out the permanent financing arrangement. This is not an option available to many smaller or less established nonprofits.
Some HFAs are setting aside a portion of their LIHTC allocations for the preservation of existing tax-credit properties that are at risk. Concern exists that this strategy could spread available resources too thin and dilute the tax credit's impact in meeting growing needs for affordable housing. If the tax credit's soft equity is required to make acquisition and recapitalization possible, it is critical to begin the process early in order to coordinate the application rounds and varied funding cycles.
HUD database aids preservation efforts
This strategic approach to preservation has been aided by HUD's creation of a national LIHTC database that provides information on each tax-credit property and thus allows preservation sponsors to identify where best to focus their planning.
The database is also drawing attention to the quantity of affordable rental units threatened by deterioration and expiration of affordability agreements. Like most affordable housing properties, tax-credit deals involve several layers of funding. Often the additional funding sources have longer afford ability periods that provide stronger protection. But the pressure to stay financially feasible remains a constant challenge in low-rent development and property management.
The Florida Housing Coalition (FHC), a nonprofit that provides technical assistance and advocates for affordable housing, maintains a list of Florida properties funded by tax credits and other financing that face expiring affordability restrictions. Wight Greger, FHC's Senior Technical Advisor, says that the intermediary organization is trying to find nonprofits interested in adding these properties to their housing portfolios. The first step, however, is to determine whether the nonprofit already has the capacity to acquire and rehabilitate the buildings, or if they will have to develop the capacity.
"Capacity," says Greger, "is the biggest barrier to rehab. In-house expertise or access to the necessary expertise is essential to handle the trials of rehab." Particularly in buildings with operating reserves that are inadequate to maintain the property, explains Greger, acquisition and rehabilitation become more demanding on a nonprofit's resources. Intermediaries, like FHC, are focusing on building financial, technical and administrative capacity to manage the more challenging projects.
Greg Melanson, Bank of America's senior vice president of Community Development, says that one of the more effective ways banks can support emerging and growing nonprofits is through intermediaries. "Investments in the intermediaries and loans to their loan hinds," he says, "provide predevelopment and gap financing that are not traditionally available from banks." Supporting intermediaries allows banks to fuel nonprofit development effectively by linking funding to technical assistance that ensures greater levels of success for challenging projects.
FHC is also advocating for policy changes to expand the availability of resources applicable to preservation activities. Tax credits, says Greger, seem to be harder to access for rehabilitation. "In markets where funding sources are more abundant," she continues, "many non-profits have become very good at complicated layering structures to finance preservation." But other communities find that accessible funding sources are less diverse, and they will have to depend more on the flexibility of available resources to meet their needs.
As the discussion surrounding affordable housing preservation grows, nonprofit organizations will emerge as a cornerstone for long-term strategies to protect housing stock for the lowest-income renters. Building capacity and improving the responsiveness of funding program priorities, like the LIHTC, will allow nonprofits to build and maintain quality affordable housing and strengthen the economic vitality of our communities.
This article was written by Arm Cruz-Taura, Regional Community Development Director in the Atlanta Fed's Miami Branch.
Overview of the LIHTC Program
Created by the Tax Reform Act of 1986, the Low Income Housing Tax Credit (LIHTC) is the most important resource today supporting the production of affordable rental housing. The tax credit structure was proposed to offset the 15-year depreciation associated with the production of low-income housing. Acting as equity and typically combined with other funding sources, the tax credit helps to finance the acquisition, rehabilitation or construction of affordable rental housing units.
One condition for a development to be awarded tax credits is that a portion of the units must be set aside for low-income households for a period of 15 years. Shortly after the program was created, legislators were alerted to the threat of expiring HUD affordable housing finance contracts and realized the importance of amending the LIHTC policy to ensure affordable-housing preservation. As a result, the original 15-year rental affordability agreement that supported the tax credit allocation to developers was extended an additional 15 years in 1989. In some states the affordability agreement has been extended well beyond--to 50 years in California and 99 years in Utah.
In return for a commitment to maintain affordable rents, the developer receives a 10-year federal tax credit stream that can be converted into equity by selling or syndicating the tax credits to investors. This creates a cash infusion to finance the project. In the early years of the program, investors in LIHTC ventures were more immediately associated with the projects and purchased the tax credits directly from the developer. At that time the tax credit price averaged 45 cents on the dollar.
As the LIHTC matured and as further legislative actions ensured the continued viability of the credit, syndication through intermediaries gave access to larger corporate investors and to greater economies of scale. Amendments to the Community Reinvestment Act and the growth in socially responsible investment also added value to the tax credit. Today credits are sold at an average of 80 cents on the dollar.
The LIHTC program is managed by the Department of Treasury's Internal Revenue Service, which delegates administration to state housing finance agencies (HFAs). Each state is allocated tax credits based on $1.75 per capita. This figure was set to adjust with inflation beginning in 2003. State HFAS award tax credits each year to multifamily developments as well as monitor compliance with affordable rental agreements. Because demand is well above supply in most states, allocations are awarded to affordable housing projects on a competitive basis.