Affordable Housing Institute : US

Those of us with long experience in affordable housing work from the presumption that not only does every property have a regulator, every regulator has some form of potential enforcement powers.

“Enforcement Powers?  Oh, bee-have, baby!”

 

Yet, as explored in depth in a Fort Worth Star-Telegram investigative article, there’s a class of affordable owners for whom established tools are futile:

 

By YAMIL BERARD
Star-Telegram staff writer

 

Corporations and wealthy individuals have scooped up millions of dollars in federal tax breaks in return for a promise to provide safe, affordable housing for the poor. But you wouldn’t want to call some of these places home.

 

Some Tarrant County residents live in moldy, bug-infested apartments with no air conditioning; others live next door to fire-ravaged buildings threatening to collapse.

 

Morgan Channing, 59, lives in the Spanish Park apartments in Arlington [Texas], where three buildings have been deemed dangerous because of fire or water damage. She and other residents are concerned about crime and say they have seen drug dealers and prostitutes in the complex.

 

Several of the complexes have been hot spots for prostitution, drug sales and other crimes. One has seen a murder, rapes and assaults. Vagrants flock to vacant units and destroy property.

 

More often than should occur, lack of strong enforcement leads to lack of compliance and lack of quality housing.  The observant herd takes notice, the quality of resident declines, as does resident behavior, and in come criminals, either as residents or as temporary visitors.

 

The IRS has a powerful weapon it can wield against owners who don’t measure up: the ability to yank tax breaks during the first 15 years of a property’s involvement in the Low Income Housing Tax Credit Program [LIHTC].

 

It’s called ‘tax credit recapture,’ and it’s elegantly simple.

 

“You know how to recapture, don’t you?”

 

If a property or apartment is non-compliant, as determined by tax credit allocator inspection, then the allocator issues an IRS Form 8823 (Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition), which is sent both to the sponsor and to the IRS.  Since everybody does business with the IRS, the next time tax day rolls around, the amount is due, and the IRS has its full array of collection powers.

 

“Allocators,’ Miss Litella, not alligators

The result is that investors – chiefly corporations – who are subject to tax credit recapture are fully collectible.  That neat, swift collectibility is one of the key reasons I’ve cited as to why tax credits work.  As I put it in that post:

Recapture is collectible because enforcement is against an investor, not against the property, and hence there is no economic hostage problem.   

Appropriated programs (where the government pays cash up front) can simulate these three features — risk transfer, post-audit compliance, and recapture collectibility — but cannot duplicate them.  For governments whose financial ecosystem is sufficiently complex, soft equity is a better kind of money to spend than either soft debt or hard debt. 

Sounds wonderful, doesn’t it?   

So why have some complexes — whose owners have included a government official, high-profile real estate developers and an affordable-housing advocate — fallen into disrepair?
The agency has lost its clout with many complexes, because all the tax credits have been cashed in and the period of IRS oversight has ended. That means an increasing number of owners have little incentive to make repairs.

“My informal name for them is zombies — you can’t hurt them,” said David A. Smith, chief executive officer of Recap Advisors, a Boston firm that specializes in tax-credit properties.

I eat your compliance records

The reason is statutory, and elementary, and some of us have long known it was likely to become a problem.

For many years, we’ve feared this day would come

Simply put, tax credit recapture phases out to zero long before the affordability restrictions expire.  

It works like this:

For ten years, recapture’s a powerful stick, but its power wanes:




“Do your worst.“

As the Star-Telegram observes:

Nationwide, more than 400,000 housing [apartments] are either off the IRS’ radar or will be soon. Of the nine Tarrant properties on the state’s noncompliance list, four are off the radar and three are on the brink, while two have several years to go.

Under the original statute – as enacted in 1986 – recapture matched the compliance period.  Both were 15 years.  So when recapture faded away, so too did the LIHTC operating restrictions.  A few years later (between 1990 and 1993) Congress decided that it should get a longer affordability period, so the minimum was extended to thirty years.  [Technically, there’s a notional way investors can exit after fifteen years, but it’s designed to be rare, and its implementation has been investor-hostile, making it even rarer.]

Sighting of an actual Qualified Contract exercise 

“I don’t blame Texas or any other state for the failures,” said Stephen Malpezzi, a professor of real estate and urban land economics at the University of Wisconsin-Madison. “A lot of the problem stems from an unfortunate failure to think this through when the program was designed.” 

Professor Malpezzi’s not into blame 

As a result, a property between Year 15 and Year 30 is ‘undead’ – it’s subject to a use restriction which there is no penalty for flouting.

And I’m uninterested too

Oscar Wilde once called fox-hunting ‘the pursuit of the inedible by the unspeakable.’  In a similar vein, Wilde would have called regulatory oversight of a post-recapture tax credit property the claim of the unenforceable against the uncollectible.
 

I’ll pursue the unenforceable against the uncollectible 

“These are people who do not play by the rules, and those people are casting an unpleasant shadow across the entire industry,” said Jim Brown, executive director of the Texas Affiliation of Affordable Housing Providers in Austin, which represents developers of tax-credit properties. 

The Texas Association of Community Development Corporations, which represents nonprofit developers, agrees. It supports the state’s enforcement measures “as long as the tools are used appropriately and with proper discretion,” Executive Director Steven Carriker said. 

Collectibility works in the LIHTC’s early years because investors who consume large amounts of tax credits are by definition financially robust (or they wouldn’t have gone looking to buy credits against their annual income taxes).  Once the recapture period is over, these investors have no further interest in the property – and their typical partnership agreement will have allocated most of the cash flow and sale/ refinancing proceeds to the sponsors – so they want out.  Incoming investors, lacking tax motivations, needn’t be so financially large, and are seeking basically to get a cash-on-cash return. 

In short, after Year 15, a property is very likely to be sold from a better capitalized investor group to a worse-capitalized – and probably, less professional – one. 

Eric Miller, a Colorado investor who owned Emerald Run Apartments in North Richland Hills, sold the property last year. It fell off the IRS radar two years ago. 

He said he hired an affordable-housing consultant to address problems so that the complex, near City Hall, would not cross the point of no return. 

Although I would be the last person to criticize people who hire affordable housing consultants J, here there’s an inference that Mr. Miller was himself unfamiliar with LIHTC requirements. 

I thought I understood tax credit requirements 

One problem Miller said the state dinged him for was permitting tenants to move in without proof that they met low-income restrictions.  Miller said he provided proof. 

Hmmm.  Either the evidence exists or it doesn’t.

 

“I would say 98 percent of property owners never buy a property with the intention of running it into the ground,” he said. “You want to provide people with a good, decent living environment. Nobody wants to have a slum.”

Sale and transfer of control are important, potentially revitalizing events, so it’s important that the incoming buyer be capable, qualified, and financially sufficient.  

Are you experienced, man?

[Continued tomorrow in Part 2.]

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