What Happens to LIHTC Properties After 15 Years?

For over two decades, the Low-Income Housing Tax Credit (LIHTC) program has served as a pillar of progress in terms of new multi-family housing development. It has produced over 2.2 million apartment units for rent, which constitute approximately one-third of all new multi-family rental housing constructed from 1987 to 2006. 

 

However, when the fifteen-year compliance period is nearing expiration, a major issue arises—will they still be affordable?

 

This blog will examine what might happen to these properties and what aspects contribute to such changes. 

What Happens at Year 15? 

When LIHTC properties turn 15, they can either be profitable or not. Stakeholders and policymakers need to recognize all probable results of this scenario:

  

1. Continued Affordability Without Recapitalization: Most LIHTC properties continue providing affordable housing at the same quality and rent levels, with minimal rehabilitation. This means that even after 15 years, these properties serve the same population without needing major capital investments. 
2. Affordability With New Subsidy: Some properties get a new round of tax credits or other public subsidies, allowing for substantial capital improvements. This ensures that the properties remain affordable while also being upgraded. 
3. Repositioning as Market-Rate Housing: A minority of properties convert to market-rate housing, primarily in strong housing markets. This is the least common outcome but can significantly impact the availability of affordable housing in those areas. 

Key Factors Affecting Year 15 Outcomes 

The following key elements significantly determine the future of LIHTC properties:

 

Change in Use Restrictions: After 15 years, properties no longer need to report compliance to the IRS, and investors are not at risk for tax credit recapture. However, federal law requires an additional 15-year extended-use period. Owners can seek to remove this restriction through the Qualified Contract (QC) process. In this process, the state agency has one year to find a buyer who will maintain affordability. The complexity of the QC process varies by state, impacting how frequently it is used.

 

1. Change in Ownership: Ownership changes are common in Year 15. Limited partners often sell their credits to general partners or their affiliates. Nonprofit developers usually retain ownership, while some for-profit developers choose to sell. 
2. Financial Distress and Capital Needs: Some properties face financial distress due to poor management, financial structure, physical condition, or a weak rental market. Although foreclosures are rare (1-2%), they do occur. Properties typically have replacement reserves for repairs, but these may be insufficient after 15 years. The need for upgrades depends on whether the property was newly constructed or rehabilitated and local market conditions. 

Possible Paths After Year 15 

After the initial 15-year compliance period, LIHTC properties embark on different trajectories. The future of these properties falls into three primary categories:

 

Remain Affordable Without Recapitalization: Most properties continue to operate as affordable housing, either with or without LIHTC compliance. Properties with committed owners or in areas where market rents are comparable to LIHTC rents will likely stay affordable. This pattern is common across strong, weak, and moderate markets.

 

1. Remain Affordable With New Subsidy: Some properties receive new tax credits and refinancing to cover renovation costs and maintain affordability. The decision to seek new credits depends on capital needs, market competition, and state policies. These properties often need significant upgrades to stay competitive with newer affordable housing.
2. Repositioned as Market-Rate Housing: The least common outcome is conversion to market-rate housing, usually in low-poverty areas. Even in high-risk areas, nearly half of the properties have rents below the LIHTC maximum. This suggests that many properties remain affordable even without formal restrictions. 

Looking Towards Year 30 

While the properties studied have not yet reached Year 30, it is anticipated that the patterns observed at Year 15 will continue. Properties with mission-driven owners or additional use restrictions are likely to stay affordable, while others may convert to market-rate housing depending on local market conditions. After Year 30, the balance may shift more toward repositioning and losing affordability, especially for properties without ongoing use restrictions. 

Policy Recommendations 

Policymakers should prioritize maintaining the physical asset quality of older LIHTC properties. Most properties will become mid-market rentals over time, which is a positive outcome. State Housing Finance Agencies (HFAs) should focus resources on developments at risk of repositioning to higher market-rate rents. Additionally, they should revise Qualified Allocation Plan (QAP) standards to prioritize properties needing additional use restrictions. 

Conclusion 

The future of LIHTC properties at Year 15 and beyond shows a generally positive trend toward maintaining affordability, though challenges remain. With strategic policy interventions and a focus on preserving the physical quality of these properties, the LIHTC program can continue to provide much-needed affordable housing for years to come.