Enacted by Congress in 1986, the Low-Income Housing Tax Credit (LIHTC) Program is the largest and most successful federal subsidy to promote affordable rental housing in the United States. Leveraging nearly $100 billion in private investments and developing more than 2.6 million affordable rental units since its creation, the LIHTC Program encourages private equity infusions to construct, preserve and rehabilitate affordable homes for low-income renters. In return for private investments that help finance construction costs and lower debt burdens, which allow developers to operate properties at affordable rents, investors receive a dollar-for-dollar credit against their federal tax liability over a period of 10 years.
In an effort to measure current conditions of the LIHTC market, a survey study was conducted for the Federal Reserve Bank’s Eighth District. From July 8 through July 24, 2013, survey responses were collected from four state housing finance agencies (Arkansas, Indiana, Kentucky and Tennessee). A total of 54 completed surveys were also collected from housing developers who are actively participating in the LIHTC Program within the Eighth District, but also in states that included Alabama, Georgia, Louisiana, Florida, Michigan and Ohio.
Data collected for reporting year 2012 from the participating housing finance agencies indicate that 55 percent of projects that were allocated credits in 2012 were located in metropolitan areas. The balance between rural and metropolitan developments depends largely on the state, as nearly 69 percent of projects in Indiana were identified as metropolitan while 71 percent of the projects in Arkansas were identified as rural-based for the year. Families were also reported as the tenants most targeted for LIHTC developments, followed by the elderly. Approximately 68 percent of combined projects in Arkansas, Indiana and Tennessee primarily served as housing for families, while only Indiana identified two projects intended to serve the homeless. Among these three states, 47 percent of projects were awarded credits to fund new construction, while 37 percent were awarded credits for acquisition and rehabilitation purposes. Again, states differ largely in this category—67 percent of projects in Tennessee were new construction but 71 percent of projects in Arkansas were acquisition and rehabilitation properties.
Approximately 52 percent of developers report that current investor demand for tax credits is somewhat strong or very strong. When compared to the past five years, 68 percent report current demand as somewhat stronger or much stronger. (See Figure 1 below.) However, when geography is examined, more than half of developers report investor demand as much stronger in urban areas. (See Figure 2 below.) Compared with the past five years, the data show increased investor demand for tax credits in urban areas but decreased demand in rural locations. Developers estimate the average amount received per dollar tax credit in 2013 at 85 cents.
The Community Reinvestment Act (CRA), the 1977 regulation encouraging depository institutions to invest in and meet the credit needs of their low- and moderate-income neighborhoods, is reported by housing developers as both a benefit and a liability to the LIHTC market. While 83 percent of developers strongly agree or agree that a more diversified investor pool is needed, which would likely include CRA-indifferent investors, developers also agree that requiring banks to meet CRA obligations increases the demand for and pricing of tax credits. However, when asked about the geographic assessment areas in which banks are obligated to meet CRA criteria, 71 percent of developers responded that uneven geographic coverage makes it difficult for rural areas to attract LIHTC investors; 76 percent believe demand would be greater in rural areas if LIHTC investments outside assessment areas were scored more favorably. Again, while CRA gives leverage to developers who want to sell tax credits, large geographic disparities persist.
Developers agree that the demand for affordable rental housing for families and the elderly is high. (See Figure 3 below.) On the other hand, 56 percent of developers did not know enough to comment on the level of demand for the immigrant population. With regard to the supply of affordable housing, the general consensus among developers is that supply fails to meet demand regardless of tenant type. (See Figure 4 below.) Immigrants, however, were again the exception, with 68 percent of developers not knowing enough about the needs of this population to comment.
At Year 15 of the LIHTC Program, investors are allowed to exit partnerships and owners must decide how to continue operating their properties. Of the challenges that can occur at the onset of Year 15, applying for new tax credits ranked the highest, followed closely by funding repairs. (See Figure 5 below.) Furthermore, of those developers who had 1-3 properties reach Year 15 in 2012, 84 percent report that they continued to operate those properties as affordable housing; only 15 percent repositioned their developments to market rate.
The architects of the LIHTC Program have left an enduring mark on the affordable housing debate. A massive undertaking, this initiative has matured into an efficient and valuable resource; a true testament to its resilience is now unfolding. Longstanding as the program may be, the market for tax credits was not immune to the financial crisis. As Fannie Mae and Freddie Mac exited the marketplace in 2008, leaving behind a small investor pool of CRA-regulated banks, the demand for tax credits plummeted. How the program responds and the market recovers in this postrecession era will be critical to the affordable housing landscape. Data collected from this survey are encouraging. Market conditions in the region have greatly improved and demand for tax credits is strong. Properties are remaining affordable and prices paid for credits have increased. However, while market conditions appear to be on par with the economic recovery, disparities still exist in the geography of investments, a challenge that must be addressed moving forward.
While this survey highlights some important quantitative and qualitative data for the region, further research is required to build and improve on its methods, design and results. As the nation emerges from the Great Recession and the LIHTC Program continues to display its proficiency for community development, greater research is needed to harness the full potential of this important initiative.