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Affordable Rental Housing in Rural Texas

Needs and Solutions

Preservation Strategies

As noted above, Texas is at risk of losing a significant affordable housing asset if action is not taken. Preservation of Section 515 units is often possible using strategies and tools outlined below.

One tool is the Low Income Housing Tax Credit (LIHTC). However, while LIHTC is available to support those looking to preserve rural affordable rental housing, it is also a tool that is looked to by many other stakeholders trying to construct new or acquire and rehabilitate existing rental housing in rural and urban areas. Therefore, it is worth assessing how this tool has been used in the past and how it aligns with the requirements and scale of need when it comes to preserving Section 515 properties.[16]

The Tax Reform Act of 1986 created the LIHTC to provide an incentive for the development and rehabilitation of affordable rental housing. It does so by providing state and local LIHTC-allocating agencies—generally state or local Housing Finance Agencies (HFAs)—with annual budget authority to issue federal tax credits for the acquisition, rehabilitation or construction of rental housing targeted to lower-income households. The tax credits give investors a dollar-for-dollar reduction in their federal tax liability and are claimed pro rata over 10 years. Since its creation, the LIHTC has represented the single-largest source of support for the production or preservation of affordable housing in the United States. Since the LIHTC’s implementation, approximately 19 percent of LIHTC projects have been placed in service in rural areas.

Using a competitive application process, state HFAs award LIHTCs to developers who submit qualifying projects. State HFAs use Qualified Allocation Plans (QAPs) to award points based on their requirements and priorities; the points then help decide which projects will receive credits. Developers either use the credits themselves or sell them to investors to raise capital, which reduces the debt or equity contribution they would otherwise be required to make. With lower financing costs, tax credit properties can potentially expand the supply of affordable rental housing.

Analysis indicates that LIHTC is an important, but probably insufficient, tool in the preservation of affordable rural rental housing in Texas. Between 1987 and 2014, just under 254,000 low-income units were developed or preserved using the credit. This compares with over 533,000 units produced or preserved through the Section 515 program between 1963 and 2011 (the last year in which the Section 515 program financed the production of any new units). The LIHTC program is not large enough to take on the additional load of the at-risk 515 properties without supplementary resources such as HOME funds, Community Development Block Grants, Federal Home Loan Bank funds and other federal or state funds.

The average size of an LIHTC project in nonmetro Texas between 1987 and 2014 was 38 units, compared with a national average of 34 units. This average LIHTC project size is consistent with the average Texas Section 515 property of 36 units.

Given that the average size of nonmetro LIHTC and Section 515 properties has been similar, LIHTC may be an appropriate tool from a project-scale standpoint for preserving Section 515 properties. But has Texas historically deployed the LIHTC tool in nonmetro areas at a scale that reflects the relative needs in those communities?

On average, Texas does allocate a share of its LIHTC ceiling to rural projects consistent with the need in rural communities relative to urban communities. Specifically, between 2010 and 2014, 8.5 percent of LIHTC low-income units on average were placed in service in nonmetro counties in the state. For comparison, 7.4 percent of cost-burdened renters lived in rural areas of Texas in 2014.[17]

Additionally, a detailed review of Texas’ 2016 Qualified Allocation Plan by researchers at the Federal Reserve Board identified numerous provisions that incentivize the preservation of rural affordable rental housing, including:

  • Set-asides for USDA-financed developments (5 percent) and at-risk developments (15 percent).
  • Automatic qualification for points that are awarded based on a unit’s square footage if the project is USDA financed.
  • Up to a 30 percent boost in the basis eligible for credits for projects located in a rural area.

Developers have successfully used the LIHTC to preserve Section 515 properties in other parts of the country. In April 2018, Greystone Affordable Development announced the preservation of 1,310 Section 515 units in 17 counties across Georgia through recapitalization and rehabilitation.

Greystone Senior Vice President Will Eckstein described LIHTC as “absolutely essential” to the feasibility of the deal. In this transaction, Greystone and its partners generated about $34 million from the sale of LIHTCs and an additional $20 million from state tax credits.

The Georgia transaction brought together public organizations—namely USDA RD, Georgia’s Department of Community Affairs and local housing authorities—with private companies such as Hallmark Cos., the owner/operator, and Boston Financial Investment Management, the purchaser of the tax credits. Along with LIHTCs, Greystone used sources like tax-exempt bonds, reamortization of original Section 515 debt, investment income and deferred developer fees.[18]

Notes
  1. See note 11. Much of the analysis in this section is from “Rural Affordable Rental Housing,” by Dumont.
  2. See note 11. This is the most recent year of data available for the analysis.
  3. “Greystone Affordable Development Spearheads Preservation of 1,310 Low-Income Rental Units with $168.6 Million Transaction in Georgia,” Globe Newswire, April 11, 2018, www.globenewswire.com/news-release/2018/04/11/1468667/0/en/Greystone-Affordable-Development-Spearheads-Preservation-of-1-310-Low-Income-Rental-Units-with-168-6-Million-Transaction-in-Georgia.html.
Authors
  • Andrew Dumont
    Senior Community Development Analyst, Federal Reserve Board of Governors
  • Emily Ryder Perlmeter
    Community Development Advisor, Federal Reserve Bank of Dallas
  • Julie Gunter
    Senior Community Development Advisor, Federal Reserve Bank of Dallas

The full report can be found at https://www.dallasfed.org/cd/pubs/rural.aspx.

The views expressed in this framework are the author’s and do not necessarily reflect official positions of the Federal Reserve Bank of Dallas or Federal Reserve System.

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