Reznick Group’s Tax Credit Investment Services (TCIS) team has released the first in a series of periodic reports addressing the performance of properties financed with low-income housing tax credits. Given the scrutiny of all federal income tax expenditures and the recent market fluctuations, this is an appropriate time to examine whether these properties are meeting their financial obligations and the needs of the markets they serve. Reznick collected financial statement data of more than 16,300 apartment properties from about 40 investment sponsors and institutional investors. The preliminary results of this study indicate:
- Occupancy Rates. Housing tax credit properties typically require economic occupancy of at least 87″“89 percent yet recently, occupancy in housing credit properties has consistently averaged approximately 96 percent. More specifically, notwithstanding the national recession and sharp increase in unemployment, occupancy in housing credit properties averaged 96.4 percent, 96.3 percent and 96.6 percent in 2008, 2009 and 2010, respectively. As previously noted, occupancy rates are another indicator of the tremendous imbalance between the increasing demand and short supply of affordable housing properties.
- Debt Coverage Ratio. The debt coverage ratio for housing tax credit properties has hovered between 1.13 and 1.15 for most of the last decade but towards the end rose to 1.19 and 1.24 in 2009 and 2010, respectively. The increase in these ratios is likely attributable to several factors including the increasing number of housing tax credit properties that have been financed with little to no hard debt, the impact of higher housing credit prices on the equity/debt mix in housing tax credit properties and the fact that a significant number of properties reported higher rental income.
- Operating Cash Flow per Unit. Annual net cash flow averaged $200″“$250/apartment unit in recent years but reached $246 in 2008, increased to $335 in 2009 and reached $412 in 2010. While these percentage increases may appear dramatic, they represent growth in net income per apartment of less than $10 per month.
- Underperforming Properties. Operating underperformance refers to instances where a property suffers from low occupancy, operating deficits or physical plant issues such as deferred maintenance. The data suggest that the percentage of properties reporting underperformance from 2008 to 2010 was 13.6 percent for negative coverage and just 3.8 percent for occupancy rates below 90 percent which means that the number of chronic underperforming properties has decreased in recent years.
- Incidence of Foreclosure. The rate of foreclosures in housing tax credit properties has increased in small increments in recent years and may be underreported as a result of incomplete data. However, the data indicates that about 50 percent of the foreclosures occurred between 2008 and 2010 suggesting that challenging economic conditions may have disproportionately affected chronically underperforming properties during recent years.
Overall, given the recent stigma surrounding Federal tax credit programs, the Reznick Group’s timely report offers unique insight into the physical and financial performance that can be expected of properties that utilize housing tax credits. In general, while some properties are considered underperforming and may be affected by foreclosure, the number of these properties is relatively small compared to the overall demand for affordable housing around the country.
The Reznick Group plans to publish a second, expanded report in the fourth quarter of 2011 that covers: whether and to what extent the provisions of the Community Reinvestment Act affect the price at which housing tax credits “trade” based on property location; why housing tax credit property performance has improved and how performance differs based on location (state and region), property type and other factors; why certain properties underperform and how that has changed in recent years; and in addition to the foreclosure rate, an assessment of the financial impact of foreclosure on investors and the manner in which the results vary based on timing.
To read the full report, click here.