Economy Watch: Tax Credit-Financed Multifamily Performing Well

Multifamily communities financed by the federal government's LIHTC program are operating better than in any period during the program's history, according to a recent CohnReznick report.
Source: CohnReznick LLP (chart courtesy of CohnReznick, click on image for full report)

Properties financed by the federal government’s housing tax credit program are operating better than in any period during the program’s history, according to a new report from CohnReznick. In 2016, the surveyed affordable multifamily portfolio, which consisted of about 23,000 properties, reported a 97.9 percent occupancy rate, 1.40 debt coverage ratio, and $688 per-unit per-annum net cash flow.

The performance of tax-credit multifamily continues to be strong for many reasons, according to the report. One is the growing need for affordable housing, which supports high rates of occupancy for the properties and strong operating performance.

Housing Tax Credits in Demand

There are 11.2 million severely cost-burdened U.S. renter households (those who spend more than 50 percent of their income on housing), which is projected to increase to more than 13 million by 2025. Not surprisingly, CohnReznick said, virtually all housing tax credit properties are fully occupied, many with lengthy waiting lists.

Also, the public-private partnership structure of the housing tax credit program supports a very low rate of foreclosures compared to any other type of real estate. Authorized under the Internal Revenue Code Section 42, the administration of the housing tax credit program resides primarily with the state credit-allocating agencies.

The real strength of the housing tax credit program, at least compared to most other federal affordable housing programs, lies in its reliance on sophisticated capital. Ultimately, the report noted, the success of housing tax credit investments is collectively “guaranteed” by stakeholders who share common goals.

In March, Congress passed an omnibus spending bill that included two key improvements to the housing credit program. The bill provided a 12.5 percent increase in housing credit allocation for each of the four years 2018 to 2022, which is a significant step toward addressing the rising national demand for affordable housing.

The bill also included an income averaging provision that would allow the 60 percent area median income ceiling to apply to the average of all apartments in a project rather than each individual apartment. These provisions were crucial additions to offset the impact of the reduced corporate tax rate enacted through the Tax Cuts and Jobs Act passed in December, which was projected to reduce tax credit equity.