Nearly 750,000 affordable homes, including LIHTC-funded homes, at risk of loss by 2031, but better reconstruction law would preserve many Peter Lawrence
Every year, thousands of affordable housing units are at risk of being lost. However, the provisions of the Build Back Better Act (BBBA) could mitigate part of this loss.
In October, the National Low-Income Housing Coalition (NLIHC) and the Public Affordable Housing Research Corporation (PAHRC) released the 2021 Picture of Preservation report, which explains why many affordable rental housing units are vulnerable to loss and the need for them. to preserve. Using data from the National Housing Preservation Database (NHPD), the report examines the various federal grants that help affordable housing and why, despite these grants, thousands of affordable housing units are subject to loss. .
However, many of these homes can be preserved with new federal funds, like that from the BBBA, which passed the House on November 19. Preservation comes in two main forms: using federal funds to rehabilitate deteriorating homes and providing new federal grants when those expire.
Image of the federally subsidized rental market
By 2031, affordability and income restrictions for approximately 745,017 federally assisted rental units are expected to expire. Most of these homes are Low Income Housing Tax Credit (LIHTC) properties, with Section 8 properties being the second highest amount. Many of these homes will be lost unless they are preserved with new or renewed federal assistance. LIHTC is the largest federal housing program, comprising half of the federally subsidized housing stock (about 40% of federally subsidized homes use more than one subsidy program).
Between 2019 and 2020, 44,629 federally funded affordable housing units were lost, but 99,845 affordable housing units were gained, resulting in a net gain of 55,216 new affordable housing units.
The report explains the top three preservation risks that federally funded affordable housing may face: exit, depreciation and credits. About 60% of federally-subsidized homes with affordability restrictions expiring soon also present other preservation risks.
Exit risks arise when affordability restrictions expire or when there are policies in place that allow owners to exit affordability restrictions earlier. The table below details the various federal programs that contain provisions that may result in the loss of homes due to an exit.
Almost half (47%) of federally subsidized homes are funded by non-renewable grants, an increase of 2% from 2019. Since 1990, approximately 143,456 LIHTC homes have lost their affordability restrictions prematurely. and the data suggests that these losses may be due to the building owners exiting through the Qualified Contract (QC) process (QCs are detailed in this previous Novogradac Notes post). The number of LIHTC properties with affordability restrictions expiring has increased by 33% since 2020 and most of those homes are in the West and Midwest.
LIHTC, US Department of Agriculture (USDA) Section 515 Rural Rental Housing Direct Loans, HUD Section 202 Elderly Housing Direct Loans, HOME and USDA Section 538 Rural Rental Housing Guarantee Loans are all non-renewable programs, making them more vulnerable to loss of affordability. Homeowners can apply for new grants, but they may not receive them due to limited availability. If they cannot receive new federal grants, those homes are most likely lost in the affordable housing stock. For homes with grants expiring soon, 79% have not received a new federal grant in the past 20 years. For LIHTC-funded housing with affordability restrictions expiring in 2020, as reflected in the underlying data sources, only 18% remained affordable. Less than 1% of LIHTC-funded homes have been lost due to foreclosure, showing that the end of affordability restrictions is the main reason LIHTC-funded homes are lost. However, this data on the LIHTC affordability restriction period is not exhaustive, as the NHPD lacks data indicating whether states have negotiated longer affordability periods to incentivize receiving an allocation from the LIHTC.
Risk of depreciation
Depreciation risks arise when there are threats to the quality of the physical structure of federally subsidized rental housing. Between 1996 and 2020, around 233,000 social housing units were permanently lost due to the poor condition of physical buildings, according to the report. The report also states that 23% of social housing and 4% of section 8 project-based housing scored below 60 in their most recent Real Estate Assessment Center (REAC) inspection. This low score results in a failed inspection, but most homeowners will make necessary repairs after receiving a fail score. Owners can also appeal their REAC scores if they think they should have been given a different score. However, we do not know the full scale of homes that face depreciation risk, as not all federally subsidized affordable homes are required to collect housing quality data.
Appropriation risks arise when Congress does not allocate sufficient funds or renew existing rental assistance contracts and properties must operate in deficit. Congress is not allocating enough funds to fully cover the costs of maintaining public housing. According to the report, the current backlog in capital needs for public housing is between $ 35 billion and $ 70 billion due to insufficient funds allocated since 2002. The BBBA is reportedly earmarking $ 65 billion to fill this backlog.
Recommendations for preserving affordable housing
The NLIHC and the PAHRC provide a series of recommendations on how to preserve affordable federally funded housing for low-income households:
- State and local governments should increase funding for preservation efforts in their own states and localities, including providing tax incentives for private developers to build and preserve affordable housing.
- The federal government should increase its funding for federally subsidized affordable housing preservation efforts.
- Rent support for project-based Section 8 properties is expected to continue as it gives Section 8 homeowners the income needed to continue operating these properties at rents affordable to lower-income households.
- The BBBA, including its housing provisions, should be enacted into law.
On November 19, the House passed the BBBA and it is now under consideration by the Senate.
The BBBA contains a series of LIHTC provisions:
- Increases LIHTC allowances by 9% by 10% plus inflation each year between 2022 and 2024 based on the extension of the 12.5% ââallowance increase originally adopted in 2018 and due to expire in 2021 until 2024 .
- Temporarily reduces the threshold criterion for tax-exempt private activity obligations from 50% to 25% for calendar years 2022-2026.
- Provides a maximum base increase of 50% for units serving Very Low Income (ELI) renters.
- States are required to allocate at least 8% of the 9% allocation to buildings with at least 20% units subscribed for ELI households.
- The 50% base increase would only be available up to 13% of the 9% allocations and 8% of the annual cap on a state’s private activity obligations.
- Creates a permanent maximum base increase of 30% for properties located in Native American regions.
- Repeals the QC option for properties funded by future allocations and retroactively modifies the statutory pricing formula for existing properties.
- Definitely transforms the statutory right of first refusal into a purchase option for buildings financed by future allocations, modifies the existing statutory right of first refusal and clarifies the rights relating to the purchase of buildings for existing properties.
Novogradac estimated in a previous Novogradac Notes article that 811,900 affordable rental units can be built from the LIHTC provisions of the BBBA between 2022 and 2031.
BBBA also provides over $ 150 billion for various affordable housing and community development spending, including $ 25 billion to increase rent assistance, $ 65 billion to preserve deteriorating public housing, $ 15 billion to the Housing Trust Fund and $ 750 million for the Managed Housing Investment Fund. by the Treasury’s Community Development Financial Institutions Fund, structured very similarly to the Capital Magnet Fund.
As noted above, the BBBA is now Senate litigation and under review for compliance with the Byrd Rule, which governs provisions eligible for Senate review under the Budget Reconciliation Rules. If it passes the Senate but undergoes changes from the version passed by the House as intended, the BBBA will need to return to the House for approval before it can be enacted.
The enactment of the BBBA would provide the funds necessary to preserve many affordable housing funded by the federal government. In 2020 alone, 44,629 federally subsidized homes were lost. Preserving existing affordable housing and building new housing will provide safe, stable and affordable housing for low-income households over the long term.