Challenges for Low-Income Housing Tax Credit Projects at Year 15 and Beyond in a Weak Housing Market: The Case of Detroit, Michigan

ABSTRACT

Projects financed through the Low-Income Housing Tax Credit (LIHTC) program, the largest producer of affordable housing in the United States, face ownership transition after 15 years in service when tax-credit investors leave. In Detroit, Michigan, projects whose transitions were complete but that were subject to additional affordability restrictions fared much worse than national surveys showed. Many projects continued to provide affordable housing, but a share experienced mortgage or tax foreclosure, and many units became permanently uninhabitable, increasing disinvestment in neighborhoods. Projects reaching year 15 from 2016 through 2022 were under considerable financial stress as of 2015 and would likely need financial restructuring. Few high-capacity nonprofit developers existed to assume property ownership. The intervention of mission-driven syndicators helped stabilize numerous projects. Detroit’s experience illustrates the challenges LIHTC projects are likely to face in weak-market cities. Additional studies should investigate the year-15 challenges in diverse housing markets and the efforts to address those challenges.

KEYWORDS:

• low-income housing
• affordable housing
• Low-Income Housing Tax Credits
• weak markets
• housing preservation
• year 15

Acknowledgments

The first two authors contributed equally to this research. We thank Sarida Scott (Community Development Advocates of Detroit), Victor Abla and Tahirih Ziegler (Detroit Local Initiatives Support Corporation), Stephanie Socall and Kirby Burkholder (IFF), Julie Schneider and Rebecca Labov (Detroit Housing and Revitalization Department), Yulonda Byrd and Dennis Quinn (Cinnaire), Timothy Thorland (Southwest Housing Solutions), Warren Dean (Dean Law), Rochelle Lento (Dykema Gossett), and Eric Dueweke (CDAD and U-SNAP-BAC) for their partnership in this research through the CDAD Affordable Housing Work Group. They answered many questions and taught us much. We thank Michael Witt and Andrew Martin (Michigan State Housing Development Authority) for providing additional data and answering numerous questions. All errors of interpretation and fact are the responsibility of the authors. We thank the three reviewers for this journal who made remarkably thorough, helpful comments on our initial submission.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. No prescribed consequences exist for owners who do not comply. Penalties could include a lawsuit by tenants, HFA legal action, HFA refusal to award future resources to the same developers, and reluctance by potential purchasers to buy a property that is out of compliance (Collignon, 1999; Khadduri et al., 2012).

2. Owners of LIHTC projects may request a qualified contract after the fourteenth year of the compliance period. The state HFA has a year to find a buyer who will maintain the project’s affordability and makes an offer at the price determined by a federally mandated formula. The formula includes the fair market value of the non-low-income portion of the project plus, for the low-income portion, the sum of the outstanding debt, the adjusted investor equity, and other capital contributions minus cash distributions from the project. The calculated price is almost always greater than any reasonable market valuation, so state HFAs have difficulty finding buyers. If the HFA does not do so, the qualified contract process leads to the release of the affordability restrictions, which phase out over 3 years (26 U.S.C. 42; Kincer & Shelburne, 2017; MSHDA, 2018b).

3. The public records included city assessor data, annual lists of tax-foreclosed properties, county register of deeds files, City of Detroit demolition lists, city building permits showing demolitions and renovations, State of Michigan National Emission Standards for Hazardous Air Pollutants (NESHAP) notifications related to demolitions, State of Michigan corporate registration records, MSHDA records on types of financing provided, Zillow’s reports on rents, and Detroit Land Bank Authority ownership and sales (City of Detroit Assessor’s Office, 2018; City of Detroit Buildings, Safety Engineering & Environmental Department, 2010–2018; Data Driven Detroit, 2002–2013; Detroit Land Bank Authority, 2018a, 2018b, 2018c, 2018d; Detroit Land Bank Authority & Detroit Building Authority, 2014–2018; Loveland Technologies, 2014–2018; Michigan Department of Environment, Great Lakes, and Energy, 2009–2015; Michigan Department of Licensing and Regulatory Affairs, 2018; Michigan State Housing Development Authority, 2018a; Wayne County Register of Deeds, 2018; Zillow, 2018). The air quality division of the Michigan Department of Environment, Great Lakes, and Energy implements the NESHAP program for asbestos; the division requires a notification of intent to demolish and conducts inspections of demolitions. The NESHAP database therefore functions as a list of demolitions (Michigan Department of Environment, Great Lakes, and Energy, 2009–2015).

4. Authors’ calculation based on the U.S. Bureau of the Census (2015).

5. The area median income for Wayne County, which determines AMI for Detroit, was $67,700 in 2015.

6. Housing development and rehabilitation had contributed substantially to the revenues of Detroit community development corporations before the recession. When the recession made development financially infeasible, the loss of revenues meant that the organizations had little in the way of operating funds. Detroit also has a weak organizational network for community development corporations, so no reliable and predictable support existed to help those community development corporations experiencing financial problems (Dewar, 2013; Thomson & Etienne, 2017).

7. Mission-driven syndicators are nonprofits that focus on earnings and community investment impact, a “double bottom line” (Local Initiatives Support Corporation, 2019).

8. Previous studies did not provide estimates of the percentage of projects that had different types of experiences after year 15 (Abt Associates & VIVA Consulting, 2012; Khadduri et al., 2012; Schwartz & Meléndez, 2008).

9. This assessment was based on rents that Zillow displayed and on advertisements for tenants. Zillow does not explain the meaning of rents on their site, but these rents and the prices listed in advertisements are likely asking prices, higher than tenants’ actual rents (Zillow, 2018).

10. Michigan law stated that property owners who owed property taxes could not purchase properties at the tax auction. Therefore, investors commonly bought back the properties they had lost under another name, thus avoiding paying property taxes for 3 years at a time, the period of tax delinquency that led to tax foreclosure.

Additional information

Funding

This work was supported by a Community-Academic Research Partnership Grant from Poverty Solutions, University of Michigan; and the Ginsberg Center for Community Service and Learning Community Engagement Impact Grant, University of Michigan.

Notes on contributors

Margaret Dewar

Margaret Dewar’s research focuses on cities that have lost large amounts of population and employment and have experienced extensive property disinvestment. She has a particular interest in what deters or advances housing disinvestment. Her recent projects assessed the extent and impact of property tax foreclosure, the factors contributing to nonprofit organizations’ capacity to redevelop abandoned property, effects of residents’ efforts in preventing destruction of neighborhoods from mortgage foreclosures, and the challenges in reuse of derelict property. She is a leader of the Detroit School of Urban Studies, scholars considering how conditions of extreme decline can advance urban studies theory.

Lan Deng

Lan Deng studies housing policies and housing economics. She is interested in examining the different types of interventions directed toward housing and urban development. These interventions include formal government policies as well as grassroots community-based initiatives. Her research spans China and the United States. In the United States she has studied the Low-Income Housing Tax Credit Program extensively. Her China research has examined the changes in Chinese housing policies and housing market dynamics.

Melissa Bloem

Melissa Bloem works as an associate on the affordable housing team for HFF in Atlanta, Georgia. She graduated in 2018 with dual master’s degrees in urban planning and in social work from the University of Michigan.