CohnReznick
By Thom Amdur
4 min read
Property Performance Continues to Improve
At 30 years old, the Low-Income Housing Tax Credit has never looked better according to CohnReznick. The Low-Income Housing Tax Credit Program at Year 30: Recent Investment Performance (2013-2014), the national accounting firm’s look back at the performance of LIHTC properties over the program’s lifetime, as well as at recent trends across the portfolio, delivers good news to both for-profit and non-profit multifamily developers, as well as those who invest in their projects. The report provides a data-driven argument to strengthen and expand the program to create more affordable housing across the country.
The report, which describes LIHTC as the “longest tenured federal affordable housing program in history,” details the broad impacts and successful results that have made the program a mainstay of affordable housing development, as well as a strongly supported program amongst legislators. LIHTC has financed the construction or rehabilitation of about 2.8 million units over its lifetime. About 20,000 properties make up the current LIHTC portfolio. The report takes a deep dive into both property performance and fund investment performance.
Signs of Strength
Since CohnReznick completed its last survey of the LIHTC program in 2012, the “basic metrics” of success – physical occupancy, debt cover ratio, and per unit per annum cash flow – have continued to improve. Physical occupancy increased half of a percentage point to 97.5%. Debt coverage ratio went up from 1.30 to 1.33. The average amount of annual cash flow generated by a unit improved by about 20%, improving from $498 to $597.
In this report, for the first time, CohnReznick also considers economic occupancy, which takes into account how much income a unit generates, as opposed to physical occupancy, which only looks at whether the unit is occupied at all. The report’s authors sought to determine if the recent recession, which strengthened the performance of many LIHTC properties based on the traditional measures of success, also improved economic occupancy. Their findings suggest it did. In 2014, median economic occupancy was 96.6%, which is within a percentage point of physical occupancy. According to the report, this “demonstrates very powerfully how the demand for affordable housing units has lowered the turnover rate in housing credit properties, reduced the costs associated with units turning over, and lowered the loss in rental income associated with rent skips.” While this is a positive finding for the calendar year, it does not allow room for additional growth in rental income.
In addition to looking at the number of LIHTC properties that are performing well, the report considers those that are not. In 2005, CohnReznick found that about 35% of LIHTC properties were operating below breakeven. By 2014, that fell to 16.9% and the properties included in that group “failed to [achieve breakeven operations] by relatively modest amounts.” When looking at underperforming properties across the 12 regions designated in the report, properties with physical occupancy under 90% ranges from 1.4% (GU, PR, VI) of the stabilized portfolio to 12% (IA, KS, NE, MO). All 12 regions saw an improvement in physical occupancy from 2013 to 2014. The percentage of properties with economic occupancy below 90% is more variable across the regions. Only 4% of California, Oregon, and Washington portfolios is below 90% economic occupancy. On the other hand, more than a fifth (20.9%) of Iowa, Kansas, Nebraska, and Missouri portfolios is below 90%.
Impact of Who and How
The report’s authors wrote that they are often asked to compare for-profit and non-profit developers in terms of their success in operating LIHTC properties. They found that occupancy is slightly higher in properties developed by non-profit developers and cash flow is slightly higher in properties operated by for-profit developers. However, the differences are minimal and the report concluded that “there is no meaningful difference in performance between the two groups.”
There does appear to be a possibility of meaningful difference in terms of how other industry professionals are doing their jobs. For the report, CohnReznick asked Ohio Capital Corporation for Housing to look at how their operating expense underwriting varied from the actual results five years later. When they looked at data for 2004 on properties that were underwritten in 1999, they found an average variance of 32%. For properties underwritten in 2009, they found that the variance had diminished to nearly a quarter of that. While there is not enough data to support a conclusion, this initial information suggests that a more solid methodology for underwriting operating expenses may be a factor in the LIHTC portfolio’s increasingly strong performance. CohnReznick plans to look further into this possibility in future reports.
The report demonstrates that those who invest in these properties are sharing in the success. The report takes a look at 1,700 Low-Income Housing Tax Credit funds, both proprietary and multi-investor, from the calendar year 2000 and on. As of 2014, the average LIHTC investor has realized 98.4% of the credits it was promised.
