Many of us appreciate the role that affordable apartment properties play in providing housing to Virginians who wouldn’t otherwise be able to afford it, but few genuinely understand what goes into preserving those meaningful living quarters in the state’s affordable housing supply. It’s an information gap that needs to be closed soon: During the next five years, more than 25,000 affordable apartment units reserved for tenants with incomes at or below 60 percent of an area’s median income and financed by the Virginia Housing Development Authority (VHDA) will conclude their mandatory 15-year lockout period, the compliance period during which a property that received federal low-income housing tax credits (LIHTCs) must maintain a certain amount of affordable units. At that point, many owners may need to invest heavily to modernize their properties or sell them to offload the financial burden.
The challenge at hand goes to the way such properties originally were financed. The federal low-income housing tax credit (LIHTC), created under the Tax Reform Act of 1986, accounts for nine out of every 10 affordable rental units developed in the United States. The program allows property owners to take a federal tax credit equal to a percentage of the cost incurred for developing low-income units. The credit is then sold, or “syndicated,” to an investor or group of investors in exchange for a capital contribution.
For a property to qualify for LIHTCs, the owner must agree to lock up a certain percentage of low-income units for a 15-year period. The VHDA went a step further by requiring developers who received LIHTC subsidies to agree to an extended compliance period of an additional 15 years.
In signing on, many property owners simply did not envision what would be required to preserve the quality of the affordable housing stock. Today, many of the 265 some multifamily properties about to come out of the original 15-year lockout period are in need of extensive renovation, and yet the fact that they will have restricted rent flexibility for another 15 years limits their ability to pay for them and remain profitable at the same time. Faced against the prospect of higher debt costs to pay for these improvements, many are mulling a sale to new owners who will inherit the challenge.
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Source: Virginia Business | August 27, 2014