Navigate the Terrain These areas of ambiguity in program guidelines make many developments from 1990 on less secure from market conversion than they seem. Investors are likely to sell after 15 years rather than waiting the full 30, because there is no advantage to hanging onto the property once tax credits are exhausted since few properties turn a profit.
“Generally you have to assume that the investors will be looking to sell their interest once they no longer receive the benefit of the tax recapture,” says Netzer. “It would be rare to have reason to hang on.”
The investors’ decision to exit forces the sale of properties to new owners, explains Jeffery Faile, a principal in the Atlanta office of San Francisco-based Novogradac & Co. LLP, a consulting and accounting firm that focuses on affordable housing. It is here that problems can arise.
For pre-1990 projects, nonprofit organizations that participate in sponsoring or developing the project have the right of first refusal to buy the property at fair market value. If no nonprofit was involved, the property can be placed on the open market, presuming the development contract has no other restrictions limiting sale.
For later projects, owners that do not wish to continue owning and operating them as affordable housing enter into a one-year contract with the state housing tax credit agency granting either the agency or a community-based nonprofit the right to purchase the property, again at fair market value.
If after a year neither the developer nor another entity steps in to make the purchase, the owners can prepare for open sale by giving tenants a three-year notice of intent to convert to market rate. When the three years have passed, they can sell to any buyer.
According to Garth Rieman, director of policy and government affairs for the National Council of State Housing Agencies in Washington, D.C., the properties least likely to attract buyers willing to keep them affordable would be projects that are not meeting debt payments; in need of a substantial infusion of new capital for repair and upgrades; and worth more in the market than nonprofits or state agencies are willing or able to pay. The last group consists primarily of projects in neighborhoods that have gone through gentrification.
At the moment, says Christine Hobbs, director of the Community Development Investment Group for Freddie Mac in McLean, Va., few LIHTC properties have reached their expiration dates despite passage of 17 years since program inception. As she points out, projects usually do not begin to use their credits till they are ready for occupancy. Most projects that received credits in 1987 did not begin using them until 1989 or later, so many tax credit housing projects should have at least a few years of affordability left.
Hobbs says only a handful properties from Freddie Mac’s portfolio of about 3,000 affordable projects have reached the end of their compliance period. While most of these were acquired by nonprofits, at least one converted to market status.