The time bomb coming to Colorado Housing

I’m amazed that there hasn’t been any major press on the impending time bomb heading for Colorado’s real estate especially in Denver and the resort communities.  Nearly 500,000 federally assisted apartments or rental homes can revert to market rents over next five years.  This is especially profound in high-cost markets where the median home price greatly exceeds the affordability for many.

It is critical to understand how the low income tax credit works, why it was established and why 2020-2025 will be very problematic for many low income properties.

What is Low Income Housing tax credit?

The Low-Income Housing Tax Credit (LIHTC) subsidizes the acquisition, construction, and rehabilitation of affordable rental housing for low- and moderate-income tenants. The LIHTC was enacted as part of the 1986 Tax Reform Act and has been modified numerous times. Since the mid-1990s, the LIHTC program has supported the construction or rehabilitation of about 110,000 affordable rental units each year (though there was a steep drop-off after the Great Recession of 2008–09)—over 2 million units in all since its inception.

The federal government issues tax credits to state and territorial governments. State housing agencies then award the credits to private developers of affordable rental housing projects through a competitive process. Developers generally sell the credits to private investors to obtain funding. Once the housing project is placed in service (essentially, made available to tenants), investors can claim the LIHTC over a 10-year period.

What Changes starting around 2020?

From 1986 to 1989, federal law required developers to maintain these affordability provisions for at least 15 years. Beginning in 1990, however, new LIHTC properties were required to preserve affordability for 30 years.

By 2020, when the first of the 30-year LIHTC properties still participating in the program become eligible for market-rate conversions, this will enable more properties to be repositioned as market-rate housing meaning they  will no longer be low income rentals  and the owners can switch to market rates, condo the property, etc…

Why is the problem so profound in Colorado?

The Denver front range and even more so the resort communities are very high-cost housing markets.  For example, the median home price in many resort communities vastly exceeds a million dollars.  With housing prices so high, there is huge demand for affordable housing/rentals.   Starting in 2020  a number of properties will no longer be required to provide affordable housing and they will be able to raise the rents to market rents.  I can guarantee almost every privately owned complex will increase rents to market rents to vastly increase the returns on the properties. 

Resort communities will be especially hit by the reversion to market rents.  For example, there are five affordable housing complexes in Summit county (Breckenridge, Frisco, Keystone, Copper, etc…) If one of these reverts to market pricing, this could eliminate almost 20 percent of the affordable housing in the County.

Furthermore, with many areas fully built out, building additional affordable housing is very difficult due to the lack of land, high land costs, and high building costs.

Summary:

High-cost counties like Denver and Summit counties need to start planning for a huge loss in affordable housing which will create a crisis in many of these communities.  How does Summit county, the ski resorts, and a tourism economy function without workers?  Businesses that rely on these workers will be severely impacted. Unfortunately, I haven’t heard a whisper on what they are going to do with the impending time bomb over the next 5 years nor even a quantification of how many units will be lost.  This doesn’t make me optimistic that they have a plan on how to solve the problem.

Additional Reading/Resources

1. https://www.taxpolicycenter.org/briefing-book/what-low-income-housing-tax-credit-and-how-does-it-work
2. https://www.huduser.gov/portal/pdredge/pdr_edge_research_081712.html
3. https://www.housingfinance.com/news/affordability-set-to-expire-on-500-000-units_o
4. https://preservationdatabase.org/reports/preservation-profiles/

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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