A Bright Picture: New Study Finds Solid Performance by LIHTC Properties

By
5 min read

Low-income housing tax credit (LIHTC) properties exhibited strong operating performance during 2008-2010 at the state-by-state level as well as overall nationally, according to a new study by CohnReznick LLP.

The report expands upon and is far greater in length, scope, and level of analysis than a similar study published by the firm (predecessor Reznick Group) in August 2011. The new study reflects a larger sample of projects and provides data and analysis on the composition and operating performance not only for the overall portfolio nationally but also for regions, states, and more than 200 metropolitan statistical areas. It also contains maps and more charts and appendices.

The new study collected data from 38 syndicators and institutional housing credit investors on 17,118 LIHTC properties (9% and 4%, 1,264,353 units). It examines and analyzes operating performance data for 2008-2010 for 15,399 of these projects (1,114,928 units) that achieved stabilized operations by December 31, 2010. In addition to the projects covered by the August 2011 study, the new report includes data for 4.5% additional properties. The earlier study had data from 32 respondents on 16,356 properties (1,191,198 units) and analyzed 14,700 stabilized projects (1,049,723 units).

CohnReznick Principal Fred Copeman, Director of Tax Credit Investment Services, estimated that the larger sample in the new study accounts for at least two-thirds of all active LIHTC properties as of year-end 2010.

Strong Operating Performance

Like the August 2011 report, the new study found that LIHTC properties overall performed well from an operating standpoint during the tough economic period of 2008-2010 and thereby represent a sound investment for institutional tax credit investors.

The new study, like the earlier one, measured operating performance for LIHTC properties using the following metrics: median physical occupancy rate; median debt service coverage ratio, and median annual per-unit cash flow.

The study provides operating performance data for each metric for the total stabilized LIHTC property portfolio for 2008, 2009, and 2010, as well as identifying the composition of the portfolio and the performance by segments, including: credit type (9%, 4%); tenant profile (e.g., senior, family, special needs); type of investment (e.g., multi- or single-investor fund, direct investment); type of development (e.g., new construction, rehab); and (new) age of properties.

For the overall portfolio, the new study’s statistics for median physical occupancy, median hard debt coverage, and median annual per-unit cash flow are very similar to those in the August 2011 study. For 2010, the new study’s statistics are identical for median physical occupancy (96.6%) and median debt coverage ratio (1.24) and very close for median annual per-unit cash flow ($419 per $412).

The median debt coverage ratio trended upward during 2008-2010, to 1.24 in 2010, median per-unit cash flow jumped sharply, while median physical occupancy held steady in the 96-plus percent range.

The incidence in 2010 of underperforming properties – defined as a physical occupancy rate below 90%, a debt coverage ratio below 1.0, or zero or negative per-unit cash flow – was 12.5% of all stabilized properties in the first category, 27.5% in the second, and 27.5% in the third, respectively. The percentages for underperformance in these three categories decreased from 2008 to 2010. A small fraction of properties underperformed throughout 2008-2010.

Only 98 of the total 17,118 properties were in foreclosure at some point prior to year-end 2010, for a foreclosure rate of 0.57%.

Closer Geographic Analysis

The new report also breaks out data on the number of stabilized LIHTC properties and operating performance data for them during 2008, 2009, and 2010 for: all 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands; 12 geographic regions incorporating the former; and more than 200 metropolitan statistical areas (MSAs).

Copeman noted that one “impressive finding” by the new study was that the median debt coverage ratio was above the break-even level of 1.0 in all states. “That was not the case in prior years,” he said. “We no longer have a situation of having what I would call weak parts of the market from an investment perspective.”

The study found wide differences among states in operating performance in two of the three metrics.

Among the 50 states in 2010, the median physical occupancy rate for stabilized LIHTC properties ranged from 94.0% in Idaho to 99.0% in Hawaii, with the vast bulk of states at 95% to 97%. However, median debt coverage ratio ranged from 1.04% in Idaho to 1.69% in Hawaii and median annual per-unit cash flow ranged from $111 in Idaho to $2,422 in Hawaii.

The top five states as measured by tax credit net equity for the properties, accounting for 42% of the total for the entire portfolio, were, in order, California, New York, Texas, Florida, and Illinois. Some 26.3% of the total net equity was concentrated in 10 MSAs, led by the NY-NJ-PA MSA, followed by Los Angeles, Chicago, and San Francisco.

By a large margin, the region incorporating the New England and Mid-Atlantic states accounted for the largest number of stabilized properties and units, housing credits received, and tax credit net equity among the 12 regions. Lowest was the region comprised of Alaska and Hawaii. Among the 12 regions in 2010, median physical occupancy ranged from 95.0% to 99.4%; median debt coverage from 1.13 to 1.34; and median annual per-unit cash flow from $250 to $959.

More Accurate Underwriting

Copeman said a major takeaway from the study’s findings is that LIHTC program participants – developers, syndicators, lenders, and credit allocating agencies – have gotten much more accurate in estimating future operating expenses when underwriting new projects.

He also noted that the very high level of physical occupancy for stabilized LIHTC properties throughout 2008-2010 – a tad above 96% – clearly demonstrates that there isn’t an oversupply of affordable rental housing in the U.S.

Copeman noted that his recent informal canvas of five or six of the largest syndicators that participated in the new study found continuing strong performance by their LIHTC properties in 2011. “The good news is that cash flow and occupancy have held in 2011,” he said. “Debt coverage was down a bit, but not enough to write home about.”

CohnReznick expects to issue a third report in the near future analyzing the impact of the Community Reinvestment Act on housing tax credit pricing.

(The Low-Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance, http://tinyurl.com/dxw2azo.)