Coming Together To Preserve Affordable Housing

According to data from the 2010 American Community Survey, more than half of all rental units in the St. Louis region are occupied by people who pay more than 30 percent of their income toward rent. Many are working families whose wages don’t stretch far enough beyond rent payments to allow for savings, or to purchase health insurance or transportation. A significant number of these households are considered to be extremely low-income, paying more than 50 percent of their earnings toward housing costs. Recent trends also indicate heightened demand in the rental market and, in some areas, increases in rent prices. There is a clear need for affordable rental housing in the region today.

The Low Income Housing Tax Credit (LIHTC) is a program designed to meet this need, providing a dollar-for-dollar credit against tax liability to encourage the private development of affordable housing. The program has helped finance more than 52,000 affordable units in Missouri since it began, and has brought considerable economic activity and job opportunities to the state and the region. Today, however, many of these affordable units face uncertain futures.

The LIHTC program requires an original compliance period of 15 years, after which investors in properties are free to exit partnerships. Those property owners who wish to continue offering rents at affordable rates face tough challenges as properties approach Year 15, including:

• restructuring ownership when limited partners exit,
• finding capital for repairs and rehabilitation,
• refinancing and restructuring debt,
• ongoing issues with physical and asset management of properties,
• high expenses and low levels of revenue and cash flow, especially for smaller properties, and
• a general lack of preparedness for Year 15.

Another significant challenge for LIHTC partnerships is competition from newer affordable housing developments that open in close proximity to existing properties. Tenants with mobile Section 8 vouchers may leave older units and move to these newer accommodations, which can impact the financial viability of older LIHTC developments.

If these issues cannot be resolved, property owners may be left with little option but to look for a way out. Though LIHTC requires properties to continue operating at affordable rates for a further 15 years, owners can request that the state housing finance agency search for a new buyer through their qualified contract process at any time after the 14th year of the original compliance period. If one cannot be found, owners are released from all restrictions and are free to sell properties to any willing buyers, who are only bound to keep rents affordable for a further three years. Most properties do remain affordable after Year 15, especially in weaker housing markets, such as many parts of the Midwest. Nevertheless, the Year 15 process is lengthy and challenging, and requires a great deal of preparation.

Between 2012 and 2022, more than 13,000 properties in the St. Louis region will arrive at Year 15. (See Figure 1.) Recognizing the challenges at hand, the Community Development department of the Federal Reserve Bank of St. Louis convened a meeting of representatives of state and city agencies, and local organizations with extensive experience in the LIHTC field. The goals were to clarify the issues related to Year 15 in the region; allow those involved to share successful strategies to negotiate this process; generate ideas for new, creative strategies; and plan next steps, both short- and long-term. Some of the most pressing issues were found to be:

• the reluctance of banks to refinance debt on properties;
• the capacity and stability of some nonprofit property owners;
• county-by-county variability regarding property assessment and the resulting property taxes imposed if properties are valued at market rate;
• declining external neighborhood conditions;
• a need for a city-wide plan for the spatial development of LIHTC properties; and
• a need for improved communication at state, city and individual property levels.

Several attendees remarked that this was the first time all parties had gathered to address these issues, and the willingness to engage in constructive discussion about the challenges and possible moves toward action was evident. Perhaps most encouraging was the desire of many of the participants to form a LIHTC working group to begin to address these challenges collaboratively; the group held its first meeting in September.

Similar working groups have had considerable success in other cities. In Portland, Ore., a group was formed comprised of staff from state and city housing departments, local and national nonprofits, and other LIHTC property stakeholders. The group was tasked with assessing the risk of loss of affordable units approaching Year 15 and developing recommendations to avoid this loss. The results of the group’s meetings impacted the city of Portland’s Preservation Agenda and the state’s Qualified Allocation Plan.

Another successful LIHTC working group is led by Novogradac & Company, a San Francisco-based accounting and consulting firm with a wealth of LIHTC experience. They hold monthly conference calls and meet annually to discuss best practices for the LIHTC industry and address policy and technical issues related to the program. The group regularly provides comments to state and federal government agencies on issues that impact the LIHTC field, including recent comments regarding the implementation of the Volcker rule of the Dodd-Frank Act.

Communication and shared knowledge are crucial in addressing the many issues that arise in the complicated, messy LIHTC field. The clearer the issues become, the better the strategies that can be created to resolve them. Partnering and sharing resources to overcome common obstacles will only make the field stronger and ensure that the region’s needs for affordable housing preservation are addressed. By developing its own working group, the St. Louis region has taken a step closer to overcoming the challenges it faces. For more information about the working group, please contact Stephen Acree (Regional Housing and Community Development Alliance) at stephen@rhcda.com.