CohnReznick Investment Report

5 min read

High Performance and Increased Need 

CohnReznick LLP recently released its sixth study addressing the performance of properties financed with Federal Low Income Housing Tax Credits. The report, Housing Tax Credit Investments: High Performance and Increased Need, analyzes the aggregate data compiled from over 22,000 housing tax credit properties across 50 U.S. states, Guam, Puerto Rico and the U.S. Virgin Islands, representing 92 percent of all U.S. metropolitan statistical areas and over 70 percent of all actively managed housing credit properties. Every active housing tax credit syndicator and two of the nation’s largest direct investors participated in the study. CohnReznick is grateful to the housing credit industry for its continuing support of the campaign to promote a deeper understanding of the housing tax credit program, its strengths and the critical role it plays in the development of affordable housing.

Industry median performance over the past eight years (2008-2016) for physical occupancy, debt coverage ratio and per-unit per annum net cash flow (cash flow available after paying for expenses, mandatory debt services and required replacement reserve contributions) have all achieved year-over-year new highs.

In 2016, the surveyed portfolio reported 97.8 percent physical occupancy, 1.35 debt coverage ratio and approximately $627 per-unit per annum net cash flow. Every performance metric exhibited year-over-year increases since 2012, apart from physical occupancy which remained flat at a 97.8 percent high water mark between 2015 and 2016. This means that barring normal turnover, effectively all housing tax credit properties are fully occupied with many maintaining extensive waiting lists. The favorable variance between a project’s actual vacancy and its underwritten vacancy assumption, which typically lies between five percent and seven percent, serves to bolster rental revenue. Since housing tax credit projects are fundamentally underwritten with a narrow margin for error, the surplus revenue serves as a cushion against factors that may otherwise stress a property’s operating performance, such as unexpected operating expense spikes or less than projected rent increases that are heavily influenced by HUD published area median incomes.

While overall portfolio performance has remained strong on a national basis, a property’s operations can be easily driven below breakeven by factors, such as market fluctuations, deteriorating property conditions or ineffective development and management teams. Underperformance is defined as properties operating with less than 90 percent occupancy, less than 1.00 debt coverage ratio or negative per unit cash flow.

On a net equity basis, the overall incidence of housing tax credit property underperformance continued to decline in 2015 and 2016. In 2016, 3.8 percent of the national portfolio reported below 90 percent occupancy; 7.9 percent reported below 90 percent economic occupancy; 13.8 percent reported below 1.00 DCR; and 14.2 percent reported negative cash flow. The spread between physical and economic underperformance has narrowed over the period presented, which suggests that rent collection is likely improved and rental losses have reduced.

The unique public-private partnership structure of the housing credit program supports a very low rate of foreclosure compared to other types of real estate. The industry’s foreclosure rate is particularly meaningful when compared to delinquencies reported among conventional multifamily properties.

The industry’s annual foreclosure rate was just 0.0046 percent in 2016, compared to 0.73 percent for conventional multifamily properties. The extremely low incidence of foreclosure is due in part to the design of the housing credit program, which fosters multiple players (including syndicators, investors, and lenders) to share underwriting and asset management responsibilities. The cumulative foreclosure rate of the national housing credit portfolio (the total number of foreclosed properties divided by the total number of housing credit properties developed since program inception) was also very low at 0.71 percent.

Beyond operating performance, housing credit properties first and foremost provide safe and affordable housing options for the nation’s most at-risk populations. According to the HUD’s Office of Policy Development and Research, 46 percent of all affordable units were occupied by extremely low-income renter-households (i.e. households earning no more than 30 percent of the area median income) in 2012. Contributing to the industry’s ability to sustain high rates of occupancy and strong performance is the growing demand for affordable housing, particularly among the extremely low-income demographic. The amount of renter-households across the nation has increased by five percent, or two million households, since before the housing crash. Moreover, the number of extremely low-income households rose from 10.3 million in 2013 to 11.4 million in 2016, reflecting approximately 25 percent of all renter-households in 2016. According to the National Low Income Housing Coalition, there are just 3.2 million rental units available in the U.S. that extremely low-income households can afford, which equates to only 28 units for every 100 extremely low-income households.

The widening gap between the supply of, and demand for, affordable units makes the housing credit program that much more vital. The Housing Tax Credit is the most important program in the U.S. for creating and rehabilitating much needed affordable housing. Every year, the housing tax credit program finances the construction or rehabilitation of more than 75,000 units of affordable housing that support roughly 96,000 jobs and generates $3.5 billion in tax revenue. No other local, state or federal program comes close.

Because the production power of the housing tax credit program is limited by statutory authorization, the result is that housing tax credit production is unable to keep up with the rising demand for affordable housing. The Affordable Housing Credit Improvement Act of 2017, introduced by Senator Maria Cantwell (D-WA) and Senate Finance Committee Chairman Orrin Hatch (R-UT), aims to expand and strengthen the housing credit. The bill would increase housing credit authority by 50 percent over a five-year period, which would be a significant step toward addressing the rising national demand for affordable housing. CohnReznick supports this bill and actively works to educate elected officials on the value of this program.

To read the latest CohnReznick report, please visit our website:

For more information about the report please contact Tax Credit Investment Services;

Cindy Fang is a senior manager with the Tax Credit Investment Services practice of CohnReznick. Ms. Fang’s primary responsibilities include providing due diligence services to many of the nation’s largest equity investors in housing credit developments and leading various industry research and study projects. Cindy started her affordable housing career with the Real Estate Transaction practice of the legacy Reznick Group where she provided real estate transaction advisory services to developers with a specific focus on low-income housing tax credit, tax-exempt bond and historic rehabilitation credit financed projects. Prior to re-joining Reznick in December 2010, Cindy was a member of the Tax Credit Investment Advisory Services group of Ernst & Young LLP. Cindy specializes in structuring tax credit transactions and advising on the monetization of tax credits in all realms of the tax equity market, including low income housing, wind, solar, new markets and historic rehabilitation tax credits. Cindy’s experience in connection with the low income housing tax credits primarily included conducting due diligence and providing other advisory services to institutional investors in both primary and secondary transactions. Cindy co-authored “The Low Income Housing Tax Credit Program at Year 25: An Expanded Look at Its Performance,” a CohnReznick study assessing the operating performance of housing tax credit projects during years 2008-2010, and “The Community Reinvestment Act and its Effect on Housing Tax Credit Pricing,” a CohnReznick study analyzing the impact the CRA has had on the availability and pricing of housing tax credits. In addition, Cindy has provided services to numerous energy clients including offering advisory services in establishing tax credit monetization strategies, building financial models which allow client to evaluate the financing strategies in detail and providing advice as to the available transaction structures for the contemplated transactions. Cindy received her Master of Public Management (with a concentration in finance) from University of Maryland, College Park and her Master of Taxation from Northeastern University. Cindy is a certified public accountant in Massachusetts.