Since its inception in 1986, the LIHTC program has helped create more than 3.1 million units of affordable housing, including nearly 2.6 million units affordable to low-income households. But what happens to these properties when their compliance periods end at year 15?

It turns out that most property owners—especially non-profits—continue to operate their properties as affordable housing beyond the term of IRS regulatory requirements. This is mostly due to the extended-use agreements that run with the land, but also fits with ownership's approach to affordable housing preservation. There is also now a wide variety of sophisticated financial tools to secure the capital needed to preserve affordability.

The various players in a LIHTC partnership all have differing agendas about when is an appropriate time to buy-out a partner or sell to a third-party buyer. For these reasons, it is critical to evaluate your property and plan for a transition starting in year 13 or earlier.

Looking at LIHTC allocations from 2004 to 2008, there are 7,551 properties comprised of more than 600,000 units approaching the end of compliance periods from now through 2023. Because LIHTC allocations correspond to state populations, there aren't many surprises when we look at where these units are located (California and New York top the list).

Though the condition of each property will depend on a myriad of factors, these properties are all at least 15 years old and in need of some form of repairs or renovations. For properties with LIHTCs allocated in the 2004 to 2008 range, 46% of units were new construction, while 40% were acquisition and rehabs.

While 15 years is a relatively short time in the economic life of a building, the use, location, quality of construction, and scope of renovations will all influence the amount of capital needed for repairs and upgrades.

A new construction property serving families with children in the northeast, for example, was found to need more than $100,000 per unit as it hit year 15. These costs—obviously at the high end of the spectrum—were due to a combination of failing wood siding, trim, and related roof problems, as well as wear and tear from large families with many children. Or, a property located in a high crime area may have had operating expenses skewed towards lighting, surveillance, and security costs, increasing the likelihood for deferred maintenance in other areas.

Once you have an idea of the costs associated with keeping your property in good condition for your residents, figure out the new ownership and capital structure. When limited partners seek an exit, general partners are left with the need to refinance, resyndicate, or sell. There are several effective financing options available.

Both Fannie Mae's Multifamily Affordable Housing and Freddie Mac's Targeted Affordable Housing product lines offer a host of customizable, low-cost solutions for properties with expiring tax credits. These non-recourse programs start at $1 million and feature tiered pricing with more favorable terms and higher proceeds for more affordable properties. You can qualify for preferred pricing if your capital improvements plan incorporates a strategy to reduce combined water and energy use by 30% or more—with at least 15% of those savings in energy.

If you are set on a long-term hold, we recommend examining FHA options. Section 223(f) refinancing is a great tool if you are looking to 'set it and forget it' with loan terms up to 35 years. Leverage ranges from 85% to 90% LTV depending on affordability. MIP rates drop to 0.35% for green/energy efficient properties and 0.25% for broadly affordable properties. Have an existing FHA loan in place? Section 223(a)(7) was built to refinance affordable properties with an existing FHA loan. Benefits include a DSCR as low as 1.05x for non-profit borrowers.

Fannie Mae and Freddie Mac both offer low-cost resyndication solutions as well. Fannie Mae's Flexible Choice Bridge starts at $1 million and comes in two flavors–an ARM 7-6 and Structured ARM (SARM) Loan–both of which feature a fixed-rate conversion feature and 80% max LTV. The Freddie Mac Bridge to Resyndication is a shorter term solution with a 24-month term with one 6-month extension option and a maximum LTV of 85%.

A LIHTC property approaching year 15 is often a blessing in disguise. Sure, you'll be presented with a host of nuances to navigate, but this recapitalization milestone also provides an opportunity to update your asset to align with where the market has moved over the past decade and a half. u

Suzie Cope and Kevin Deegan are both directors in the affordable housing group at Hunt Real Estate Capital. The views expressed here are the authors' own and not those of ALM's Real Estate Media Group.

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Building Balance: LIHTC Properties After Year 15

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