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Cascade: No. 82, Winter/Spring 2013

Preservation Is Critical*

The preservation of privately owned affordable rental housing units has long been both a goal and a challenge for affordable housing advocates. When affordability restrictions expire, private owners and investors rationally weigh the costs and benefits of selling, renovating, repositioning, or preserving the property. They consider market conditions, tax consequences, and the availability of federal incentives and subsidies, including rental assistance.

In the wake of the recent recession, job loss and home mortgage foreclosures have forced additional households into the rental market. The addition of these former homeowners, along with households who have postponed homeownership due to the uncertainties of the recession, has resulted in higher rents and fewer available units, particularly at the lower end of the market. According to the Census Bureau, national homeownership rates have fallen to 65.4 percent as of the last quarter of 2012, from a high of 69.5 percent in 2004. Homeownership rates are now at their lowest level since 1997.1

Additional evidence of pressure on the rental housing market consists of the growing percentage of households that are burdened by the cost of rental housing. “Affordability and Availability of Rental Housing in the Third Federal Reserve District: 2012,” published by the Federal Reserve Bank of Philadelphia, found that the percentage of all households that are cost burdened (paying more than 30 percent of their income for rent and utilities) grew from 44 percent to 50 percent from 2005 to 2010.2 During the same period, the percentage of households that were spending more than 50 percent of their income on rent and utilities (severely cost burdened) increased from 24 percent to 29 percent. As would be expected, cost burden levels were highest for extremely low-income renters but increased more sharply for very low- and low-income renters between 2005 and 2010.3

Low Income Housing Tax Credits as a Tool for Preservation

Widely regarded as the largest and most successful program to create affordable rental housing, the low income housing tax credit (LIHTC) was created by the Tax Reform Act of 1986. Since then, the LIHTC program has leveraged more than $75 billion in private investment capital, providing critical financing for the development of more than 2.5 million affordable rental homes.4 The program annually supports 95,000 jobs and finances approximately 90 percent of all affordable rental housing. In 2010, 50 percent of all multifamily housing starts were financed through the LIHTC program. The program requires that properties that have been awarded tax credits remain affordable for a 15-year compliance period. State qualified allocation plans, or QAPs as these plans are known, are a road map on how a state will award its allocation of LIHTCs.

Preservation of Rental Units in Delaware, Pennsylvania, and New Jersey

By the early 2000s, most state housing finance agencies had begun to develop ways to stimulate or encourage the preservation of LIHTC units. Either by awarding points in the competitive process of allocating credits or by creating set-asides within the plans, states encourage preservation of rental units created by the LIHTC. “For a period in the middle of the decade,” says Susan Eliason, director of housing development at the Delaware State Housing Authority (DSHA), “the state of Delaware concentrated our tax credits on preservation projects.” Along with existing LIHTC projects, the DSHA allocated its tax credits to properties with older forms of expiring affordability controls, such as project-based Section 8 and FHA-insured developments.5

Although the three states in the Philadelphia Fed’s District each provide incentives for the preservation of affordable rental housing through points or a set-aside in their QAP, each state has a somewhat different approach.

In its most recent annual QAPs, including the plan for 2013, the state of Delaware has required that nearly 50 percent of its LIHTC allocation be set aside for preservation of existing low-income housing units.6

The 2013 QAP of the Pennsylvania Housing Finance Agency (PHFA) prescribes a per unit cost of rehabilitation, with a floor of $20,000 and cap of $75,000, in order for a project to be eligible as a preservation development. This is the first year that the PHFA has specified these requirements. “If a property needs more than $75,000 per unit in renovation, it looks more like substantial rehabilitation, not preservation,” says Holly Glauser, PHFA’s director of development. “By keeping the per unit costs within these ranges, we hope to see many of the properties implementing energy-efficiency measures to reduce long-term operating costs.”

The New Jersey Housing and Mortgage Finance Agency (NJHMFA) defines an eligible preservation project as “ … an existing housing project that is at least 50 percent occupied and is at risk of losing its affordability controls or at risk of losing its level of affordability.” In order to qualify for the preservation set-aside, “the proposal must be for the rehabilitation of at least 75 percent of the affordable units and no new construction of units is permitted.”

Anne Hamlin, NJHMFA’s manager of LIHTCs, explains, “We strive to preserve buildings that are worthwhile candidates for rehabilitation, so we only accept proposals for properties that are currently habitable. At the same time, we recognize that some of the older LIHTC and Section 8 projects originally had very small units, and we will fund a project that reconfigures the building to create larger units with more bedrooms.”

In New Jersey, most preservation projects use the 4 percent credit rather than the competitive 9 percent credit. While the 4 percent credit is awarded to eligible projects as of right, subject only to eligibility review, the 4 percent credit yields less equity for the project. With interest on tax-exempt bonds so low at the present time, preservation projects can often support this debt. In Pennsylvania, there is a roughly equal number of projects using 4 percent and 9 percent LIHTCs. In each state, the use of the 4 percent LIHTC depends on the availability of other sources of funds to fill the gap between the 4 percent equity and the tax-exempt debt. With many of those funds drying up, the importance of preserving affordable rental housing is all the more crucial.

For more information, contact Susan Eliason at 302-739-4263 or susane@destatehousing.com E-Mail, www.destatehousing.com External Link; Holly Glauser at 717-780-3800 or hglauser@phfa.org E-Mail, www.phfa.org External Link; or Anne Hamlin at 609-278-7400 or ahamlin@njhmfa.state.nj.us E-Mail, www.nj.gov/dca/hmfa External Link.

  • * The views expressed here are those of the author and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.
  • 1 These data are from the U.S. Bureau of the Census.
  • 2 This report is available at http://www.philadelphiafed.org/community-development/publications/cascade-focus/.
  • 3 The study defines three strata of lower-income households: extremely low-income renters (with income up to 30 percent of the median family income (MFI)), very low-income renters (31-50 percent of the MFI), and low-income renters (51-80 percent of the MFI).
  • 4 See the National Council of State Housing Finance Agencies at www.ncsha.org External Link.
  • 5 According to a study conducted by the National Housing Trust, in 2008-2009 Delaware was one of a handful of states that had set aside more than 50 percent of its LIHTC allocation for preservation projects. See more on the preservation of affordable rental housing at www.nhtinc.org External Link.
  • 6 Preservation in Delaware’s QAP is defined as any LIHTC development that has completed its compliance period and that is in need of substantial rehabilitation or is at risk of losing its affordability.