Affordable Housing Advantages and Risks
Affordable housing has the same benefits as any commercial real estate program: it can deduct depreciation expenses and any operating losses from its tax bill. The tax credit program has the additional advantage of reducing tax liabilities on a dollar-for-dollar basis for the first 10 years of the program. One dollar of tax credit will reduce an investor’s tax liability by one dollar. Finally, the long-term nature of the government programs allows for easier long-term borrowing.
Affordable housing also shares many of the risks of other real estate programs. Depressed economic conditions can increase vacancy levels and the likelihood of defaults. Changes in government policy are particularly relevant to government-assisted housing. Congress could decide not to appropriate money to fund the programs. It could decide to make tenant eligibility more stringent. Or it could reduce the amount of the government subsidy. Also, the rate of appreciation of affordable housing generally lags behind other types of housing.
Owners of government-assisted housing face restrictions on how they may make cash distributions. They may only distribute surplus cash, defined as cash remaining after expenses have been paid, required reserve accounts have been filled, and tenant security deposits have been segregated. Distributions may only be made annually, and never from borrowed funds.
For Section 8 programs, the subsidized rent may be higher or lower than the market rent. This is because the average rent in a particular neighborhood may not track with the fair market value determined by HUD and the local housing authority for the entire metropolitan area.
Credit Recapture. The threat of credit recapture is a risk particular to the LIHTC housing program. Recall that investors may claim the low-income housing tax credit for 10 years, while the program must comply with investment regulations to remain eligible for 15 years. Credits are