As Tax Credits Expire, Number Of Affordable Housing Units Drops 8%

The nation’s affordable housing shortage is only going to get worse as the low-income housing tax credits developers used to help finance their construction expire.

But that could be an opportunity for investors who’d like to add affordable housing to their portfolios.

During the pandemic, the number of affordable units declined by 8% for a loss of 500,000 residences, with many of the properties converted into market-rate housing, according to a recent Moody’s Analytics analysis.

Millions of affordable housing units have been built or preserved under the Low-Income Housing Tax Credit (LIHTC) program, which was implemented in 1986 and made permanent in the early 1990s. But despite receiving subsidies, thousands of affordable units are at risk every year. 

“One of the issues with LIHTC projects is they operate on very, very thin margins,” said Matt Reidy, director of commercial real estate economics on the Moody’s Analytics Thought Leadership team. “After you collect rent, pay expenses and pay the mortgage, there’s not much left over to maintain the property. There are standards they must meet, but they don’t have the same amount available to reinvest to upgrade to more current standards.”

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The LIHTC program provides tax credits to build or rehabilitate affordable housing. Developers usually sell the tax credits to investors to raise equity, which allows them to borrow less money for a project so they can charge lower rents. 

Properties in the LIHTC program must remain affordable for 30 years. Properties also are subject to a 15-year compliance period where the tax credits for renovations during which the IRS can claw back the tax credits for renovations if they fail to meet the terms.

And that is where the opportunity for investors comes in. Within the next five years, 188,000 low-income housing tax credits are expected to expire and owners will have to decide whether to restart the compliance period, sell or convert to market-rate housing.

“For investors that want to get into affordable housing, this is a really good time with all these periods coming up,” said David Caputo, a data scientist with Moody’s Analytics. “They can jump into a project that is affordable and improve it to their vision. While it’s still a struggle, taking over one that already exists is a way for investors to get into the industry.” 

With affordable housing already in short supply, it’s important to keep existing units affordable, Reidy said.  

 “We can’t afford to lose units in this way,” he said. “We can’t have units that are reaching the end of their compliance period converting back to market rate. If you can’t keep the affordable units you already have, it’s difficult to grow the pool of affordable units.”

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