Last April, seniors who lived in rent-restricted units at the Sierra Ridge apartment complex in Clovis, California, were told that their rents would double by January 2022. Rent for a one-bedroom apartment would increase from $591 to $1,295 a month, management said, and a two-bedroom unit would go from $699 a month to around $1,400.

Although 20 percent of the units at Sierra Ridge had been subject to long-term affordability requirements that prohibited such increases, those conditions officially came to an end in early 2021.

Sierra Ridge was built in 1990 and it’s one of numerous properties in the U.S. that have been constructed using the Low-Income Housing Tax Credit (LIHTC) program, which provides tax incentives for the building, rehabbing, or purchasing of affordable housing. The development is comprised of a mix of market-rate and affordable units, the latter of which, like all other LIHTC-funded units, must remain affordable for 30 years, after which property owners are allowed to rent those units at prices the market will bear. The LIHTC program was created in 1986 and made permanent in 1993, meaning that many of those first LIHTC units are beginning to see those 30-year affordability restrictions expire.

It’s estimated that by the end of the decade, nearly half a LIHTC-funded million housing units will reach the end of their affordability period. “When these affordability restrictions go away, a lot of people lose the dignity of being able to afford living on their own,” says Marcos Segura, a staff attorney at the National Housing Law Project.

These properties are also at risk of falling into disrepair as property owners often need money for major renovations by the end of their affordability period, money that isn’t available without a new source of funding.

Are there any mechanisms in place to protect residents who live in these properties? What can housing advocates and public officials do now to preserve the affordability of those LIHTC units, and the ones to be built in the future?

No Game Like the Long Game

For profit-motivated owners, the closer their property gets to losing its rent restrictions, the more focused owners become on the returns that could be made from converting affordable units to market-rate. This is especially true in stronger housing markets, or markets that are getting hotter, like the one where the Sierra Ridge complex is located. (Between January 2021 and January 2022, the typical home value in Clovis, California, jumped by more than 21 percent, according to Zillow.)

Housing advocates have urged local and state policymakers to take action to prevent a massive loss of affordable housing, but there are few short-term options available to address immediate concerns about preservation of LIHTC properties.

“The main thing is for preservation sponsors and housing agencies to intervene well in advance of the end of the extended use period to extend those protections, ideally between year 15 and year 20 after the original LIHTC transaction,” says Andrew Spofford, chief of staff and senior vice president of Preservation of Affordable Housing Inc., a major affordable housing developer that manages LIHTC properties in 11 states and the District of Columbia. “At that point most properties are needing a comprehensive renovation anyway—so the existing owner, or a new preservation owner, can come in and use the 4 percent [LIHTC] housing credit to make renovations—and extend affordability protections for at least 30 and usually 40 or more years.”

Other Ways to Maintain Affordability

“The other thing you can do is just require longer affordability,” says Andrew Aurand, vice president for research at NLIHC. While the LIHTC affordability period is 30 years nationally, states can extend it. And they have.

In Vermont, a project must commit to perpetual affordability or it won’t even be considered for the 9 percent LIHTC housing credit, or the state tax credit. “So effectively in Vermont, once you develop a tax credit property there, it stays out of the private market in the long term, not just for a shorter 30-year period,” says Aurand.

Some states don’t require but do incentivize longer affordability periods, says Dan Emmanuel, an NLIHC senior research analyst. States determine which LIHTC development applications get credits based on qualifications and priorities set out in what’s called a Qualified Allocation Plan (QAP), and they can amend their QAPs to allocate more points to developments with longer affordability periods. Many states already do this to some extent, but the periods could always be longer. For example, Texas awards points to projects that extend the affordability period up to 45 years, while others like Virginia give preference to projects with affordability periods up to 50 years.

Similarly, states could incentivize nonprofit or public ownership of LIHTC properties by awarding additional points to nonprofit developers or requiring that a larger share of a state’s tax credits be allocated to nonprofit properties. Mission-driven nonprofits are less likely to convert LIHTC units into market rate since they do not have the same profit-driven motivations as for-profit developers.

The good news is that longer affordability requirements don’t seem to negatively impact affordable housing production, as the future revenues from a rent increase are too distant to factor into the investment decisions of developers. And longer-term or perpetual affordability requirements save localities a lot of money that must be used for preservation.

“That being said, if you’re going to require affordability for that long, the state probably also has to be prepared to reinvest and have plans on how it’s going to reinvest in that housing over time,” Emmanuel says. This may include raising money to not only renovate a property, but to purchase it as well.

And there’s another issue. It’s unlikely that new affordability requirements would be retroactive, says Aurand and Emmanuel. Take California, where the state’s housing finance agency imposes a 55-year affordability period for all projects that are awarded tax credits. That regulation wasn’t much help for Sierra Ridge residents because the complex was built in 1990, six years before the agency implemented the longer affordability rule.

While important, newer solutions would likely only lengthen the affordability period for new or newly recapitalized LIHTC properties. Any attempt to alter the affordability periods of current LIHTC properties could be deemed unconstitutional, says Segura of the National Housing Law Project.

Getting Accurate Data

To better prepare for finding a preservation buyer, reinvesting in housing, or helping residents who live in properties with expiring affordability restrictions, officials must have an efficient and accurate tracking system for their LIHTC inventory. But lack of data is a major problem for the LIHTC program, says Segura. And not all LIHTC developments are subject to the same compliance period. For instance, some states may have longer affordability requirements, some developments may have rehabilitated their properties using tax credits, extending the affordability requirements; and some LIHTC property owners have gone through or are going through the qualified contract process, which effectively allows property owners to bypass the typical 30-year affordability period and convert LIHTC properties to market rate after just 15 years.

Getting an accurate view is challenging. “We know that there’s going to be properties expiring all over the country, but to assess the impact we need to know those details,” Segura says.

That’s why it’s so important that local advocates monitor older LIHTC properties and connect with local government officials, nonprofit housing providers, and other stakeholders to identify a potential preservation buyer who could purchase the property and maintain its affordability, and provide tenants with information about the expiration of their home’s affordability status so they know their rights and can make necessary preparations.

Advance Notices

At Sierra Ridge, a mistake by the property owners was to the benefit of residents. California requires that tenants of a LIHTC property receive a one-year advance notice when affordability restrictions are about to expire, and another one no less than six months before restrictions end. Furthermore, for projects with affordability restrictions that expire after Jan. 1, 2021, owners must give tenants a three-year notice of the expiring restrictions by posting the notice at an accessible location at the property, as well as give notice to prospective tenants who apply to rent during that three-year period.

But the owners of Sierra Ridge only notified residents of the planned rent hike seven months before it was expected to happen, according to the National Housing Law Project, which reached out to tenants after learning about the situation via a newspaper article.

“We hooked up with the local legal aid office, the state’s Department of Housing and Community Development—which enforces and oversees that preservation law—and we looped in the owner, who fortunately didn’t fight it and conceded that they didn’t comply with the law,” says Segura. “[The owners of Sierra Ridge] had to restart everything, starting with a one-year notice of the expiring affordability restrictions, which gave the tenants another year to prepare to find another place to move.”

Unfortunately, that was the only reprieve residents received. They received no vouchers, no relocation assistance, and no guarantees that they would be housed by the same time next year, Segura says.

California, Oregon, and—to a lesser extent—Illinois are the few states that have an advance notice law regarding the expiration of affordability requirements. Tenants who live in LIHTC-financed properties in other states may simply wake up one day to find their rent has doubled.

“At minimum, there has to be some protection,” says Segura. Advance notices are a good start, along with protection periods that follow the notice when landlords cannot increase rent, but Segura would also like to see Section 8 vouchers provided to residents who could be priced out of the development. “This is something that exists for other subsidy programs … where there’s an expiration of affordability restrictions or the restrictions go away for some other reason,” he says. “There are vouchers available to help tenants of these properties relocate.”

Falling Into Disrepair

While LIHTC units in expensive areas are particularly vulnerable, that doesn’t mean that those in slower housing markets are safe. According to a new report by NLIHC, 68 percent of LIHTC units that will lose affordability restrictions between 2020 and 2029 are in weaker markets.

“The concern with those projects that are in weaker markets would probably be more about the quality of the housing or the risk of depreciation over time,” says Emmanuel. Depreciation here refers to the decline in physical quality of the building and its systems. As properties age, owners need to find a way to reinvest in those systems. While LIHTC units in pricier housing markets can be lost due to market-rate conversions, LIHTC units in weaker housing markets can be lost over time to disrepair. Federally subsidized homes have tight budgets to meet program eligibility and affordability standards, and they can fall into disrepair if funding turns out to be inadequate or if costs are higher than anticipated. The findings of the NLIHC’s 2018 report suggest that there may be a higher demand for funding to address the physical deterioration of housing in lower-opportunity neighborhoods than to preserve affordability in higher-opportunity neighborhoods.

“Around year 15 is when you start having to need to replace major systems like HVAC, roof, that kind of thing,” says Emmanuel.

The LIHTC program itself is a major source of funding for recapitalization, and LIHTC development owners can apply for new tax credits to fund renovations, but funding is limited and not guaranteed.

“We obviously have limited resources for preservation because we don’t adequately fund our affordable housing programs,” says Aurand. “States and localities do have to think about their priorities in terms of preservation. If there’s limited funding, where should that preservation funding go?”

Public-Private Partnerships

It is clear that to prevent LIHTC properties from losing their affordability or sliding into disrepair, there must be a serious infusion of funding as well as a commitment from local and state governments to meet preservation needs.

In Austin, Texas, Affordable Central Texas (ACT) works to preserve multifamily properties for long-term affordability by sponsoring the Austin Housing Conservancy, an open-ended social impact private equity fund that invests equity into middle-income housing. The fund has acquired 1,200 units of housing for more than 1,800 residents since it was started in 2018.

“We’re an open-end fund … and what that means [is] our fund roughly acts like a mutual fund. We can be in existence forever, which means we can then own properties for a very, very long time and maintain that affordability for a very long period of time,” says David Steinwedell, the executive director of ACT. “Most of the funds that are out there right now use a closed-end structure; they have to sell their assets after seven years and while they may provide some affordability in the short run, in the long run, most of those properties go back into the market rate when they when they close the fund.”

Steinwedell says that there is an underlying assumption that the property will appreciate over time, meaning that they likely won’t need to access additional equity or financing to fund renovations and can keep the units affordable perpetually.

According to research from Texas A&M University, in December 2011, the median price of a home in the Austin metro area was $188,000. That price had more than doubled to $476,700 by December 2021. For renters, the cost of a one-bedroom apartment jumped 32 percent in just one of the years in that 10-year period.

In 2016, Austin Mayor Steve Adler convened various housing advocates and real estate firms to come up with a solution, which is how the Austin Housing Conservancy was created. The fund aims to preserve units for households between 60 percent and 120 percent of AMI, but has not acquired any LIHTC properties yet due to high property costs. So far, it has only acquired existing market-rate multifamily properties and preserved them as affordable for moderate-income households. However, Steinwedell believes that this public-private model could be useful in markets that are not as costly in order to preserve affordable housing for those earning below 60 percent of AMI.

“There’s an opportunity to buy out at the end of the compliance period and at a price point that will allow you to continue preserve the affordability going forward. That can be done with private capital, it can be done with a blend of private or public capital,” says Steinwedell. “The one mistake we made when we were beginning to launch is that we didn’t buy everything we could in any way we could early on, because the market has moved so dramatically fast. And so we’ve missed some opportunity to preserve housing.”

Steinwedell says investors have significant interest in investing in affordable housing. “One of the things that institutional capital likes is stability. Well residents and LIHTC deals don’t move. So, you have incredibly stable cash flows in these properties.” The Austin Housing Conservancy expects total long-term returns to investors to be between 8 and 10 percent. Many properties owned by ACT are mixed-income, which makes it easier to balance the maintenance of affordable units and supporting returns to investors.

This story was originally published by Shelterforce and appears here as part of the SoJo Exchange from the Solutions Journalism Network, a nonprofit organization dedicated to rigorous reporting about responses to social problems.