NH&RA member firm, CohnReznick LLP recently released a study which examined the operating performance of low-income housing tax credit properties. The report, entitled “The Low-Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance”, finds a striking imbalance between the supply and demand of affordable rental housing and confirms the critical shortage that currently exists for affordable housing. The report, which expands on a previous report released by the firm in August 2011, examines certain performance measures including occupancy rate, debt coverage ratio, cash flow per-unit, and the incidence of underperforming properties by state, region, and Metropolitan Statistical Area (MSA).
The survey measures the operating data for 17,118 housing credit properties, 90% of which achieved stabilized operations as of December 31, 2010 and on average had operated for approximately seven years. This pool represents approximately $73 billion in LIHTCs and approximately $62 billion in equity contribution from investors to finance property development.
The main outcomes and takeaways from the report include:
- Occupancy: While LIHTC properties typically require an 87-89 percent occupancy rate to break even, the LIHTC properties that were studied represented a median occupancy rate of approximately 96 percent. CohnReznick notes that high occupancy rates are another indicator of the imbalance between increasing demand and short supply of affordable housing. In addition, many of the survey respondents indicated that unfavorable economic conditions have led to enlarged tenant bases across properties within their affordable housing portfolios.
- Debt Coverage Ratio: Typical debt coverage ratios (DCR) for LIHTC properties are around 1.13 and 1.15, but recently these numbers have increased to 1.21 in 2009 and 1.24 in 2010. Similarly, net cash flow per apartment unit has increased from $250 per unit in 2008 to $419 per unit in 2010. CohnReznick hypothesizes that increases in DCR and cash flow per unit could be caused by better expense underwriting practices and more favorable mix of debt to equity.
- Underperforming Properties by State: CohnReznick found that properties in virtually all markets showed improved financial performance between 2008 and 2010. The report notes that 2010 is the first year in which every one of the 50 states reported a median debt coverage ratio of greater than 1.00 for the entire state. However, certain markets remain fragile and report a disproportionately larger share of both underperforming properties and persistent operating deficits. Thus while there was collective improvement across the country, LIHTC properties in certain areas continue to have more favorable operating histories than others.
- LIHTC Property Foreclosure: Of the 17,118 properties surveyed, only 98 experienced foreclosure through the end of 2010, an aggregate foreclosure rate of .57 percent measured by property count. However, approximately 50% of the stated foreclosures were reported to have occurred between 2008 and 2010. Thus, although operating performance generally improved between those years, the rate of foreclosure from 2008 to 2010 still increased, suggesting that challenging economic conditions may have disproportionately affected chronically underperforming properties.
The report authors note that while this data is promising for the industry as a whole, the sustainability of improved DCR and cash flow metrics will depend on a number of factors, including whether the industry continues to benefit from the historically low interest rate environment that it has enjoyed in recent years.