Study Explores Strength of Post-Year 15 Tax Credit Sites

Although the low-income housing tax credit program started less than 30 years ago, many sites are now operating after their initial 15-year compliance period—that is, in the “extended use period,” which preserves rental affordability for at least an additional 15 years as required by federal regulations.

Currently, over 80,000 housing credit units finish their initial 15-year compliance period each year. And this number will grow to over 100,000 next year. In the typical disposition at Year 16, the housing credit investor exits the investment and the general partner becomes the sole owner of the affordable housing property.

In light of this trend, Enterprise Community Partners, Inc. conducted a survey to address questions about tax credit sites’ performance, level of capital improvements needed, and how sites might do in the years beyond the compliance period. The results were recently published in “Preserving Housing Credit Investment: The State of Housing Credit Properties and Lessons Learned for the Extended Use Period.”

Survey Results

The first comprehensive look at the post-Year 15 portfolio was a HUD-commissioned study that focused on over 11,500 properties representing over 411,000 units that reached Year 15 by 2009—properties placed in service between 1987 and 1994. The results of the study, conducted by Abt Associates, were published in 2012 in a paper called “What Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond?”

Abt’s research found that nearly all the properties remained affordable and were owned by the same general partner or sponsor. The majority of these properties was in good physical condition and had only limited immediate capital needs. The Abt study indicated that there were some physical and operational needs that couldn’t be met with current cash flow and reserves.

The new Enterprise study surveyed 340 organizations in late 2012 to learn more about how the sites are performing post-Year 15. The survey found results similar to the HUD-commissioned study and found trends in the data that may signal concerns on the horizon.

Affordability. Almost all the sites remain affordable—97 percent of the sites continue as affordable housing, and 92 percent are owned by the same organization or an affiliated entity.

Physical condition. The survey found that the majority of sites are in Excellent to Good condition. Only 2 percent answered that the site is currently in Poor condition. Nearly 80 percent are rated as being in either Good or Excellent condition after more than 15 years of operation.

Financial condition. A majority of sites are viable for another 15 years, with some questions. Owners were asked, “What is the property’s financial condition?” The three answer choices were: (1) it generates cash flows with sufficient reserves; (2) it just breaks even with little or no reserves; or (3) it has insufficient cash flow to fund expenses, reserves, and required debt service.

Just over 50 percent of the properties are generating positive cash flow and have sufficient reserves. And while only 16 percent responded that the projects have insufficient cash flow, another 31 percent cannot service any additional hard debt with their current financial status. As for the 16 percent with insufficient cash flow, 79 percent of the sponsors said they subsidize the property’s operations, and 64 percent have already funded capital improvements.

Renovation and Financing Challenges

While HUD’s Abt study and Enterprise’s survey show similar results in terms of projects being overwhelmingly in good physical condition and performing financially in a satisfactory way at Year 15, almost half of the owners surveyed responded that the properties do not generate positive cash flow. The HUD-commissioned Abt study stated, “The experts we interviewed agreed that these reserves are usually insufficient after 15 years … to cover current needs for renovation and upgrading.”

When asked, “Have you completed physical renovations,” 40 percent of property owners said Yes, 44 percent said No, and only 16 percent answered None Needed. It’s important to note that after 16 to 24 years, some level of capital improvements is necessary for most properties.

For those that have already completed renovations:

• A significant majority (73 percent) performed the work within the last year or it is currently ongoing.
• 57 percent said the renovations were for immediate capital needs and to create fit and efficient housing for the rest of the extended use period and beyond.
• The scope of work in more than three quarters of cases was for less than $10,000 per unit with 53 percent below $5,000 per unit.
• When asked if the completed work met all the immediate capital needs, 55 percent said Yes.
• For those who answered No, half said that the properties needed at least an additional $5,000 per unit in work.
• For the sites that needed more work, only a quarter of them generate positive cash flow and have sufficient reserves, while the other 75 percent either break even or have insufficient cash flow without reserves.

For those properties that haven’t yet completed physical renovations:

• 41 percent said that the property doesn't have enough reserves and cash flow to make the improvements.
• 75 percent said they need more than $5,000 per unit in work.

The report found that there were very limited financing choices throughout the extended use period for properties with modest recapitalization or capital improvement needs. According to the report, the best choice seems to be a re-syndication with a new housing credit allocation. However, the use of housing credits to preserve and extend the affordability of existing affordable housing competes with other housing credit properties, including public housing revitalization and new projects (both as adaptive reuse of existing buildings and new construction).