MultiFamily Market Outlook - December 31, 1969
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Key Differences Exist between Private Sector and Nonprofits in Tax Credit Development
When Congress established the Low Income Housing Tax Credit program, the law included a requirement that 10% of the credits be allocated to non-profit developers. In practice, however, many states far exceed this 10% statutory set-aside when allocating the credits. Yet an examination of LIHTC allocation and project data by NAHB economists reveals that private-sector developers can actually produce affordable housing for substantially less money per unit than their non-profit counterparts.
Data Examined from Several Sources
Most information about LIHTC activity traditionally has come from the National Council of State Housing Agencies (NCSHA), the nonprofit organization whose members are state Housing Finance Agencies. NCSHA’s data includes the total allocations of credits at the time they are made, but it does not provide information about the lag time between credit allocations and the time projects are placed in service. It also does not provide characteristics of individual properties, because NCSHA collects data at a very broad aggregate level (entire states).
The General Accountability Office (GAO) collected information on LIHTC projects placed in service between 1992 and 1994.1 City Research of Chicago collected more detailed information from a sample of projects placed in service between 1987 and 1996.2 Both efforts were one-time only research projects, where the data were collected once and never subsequently updated.
A more valuable database is maintained by HUD and its contractor Abt Associates Inc. because that database has been regularly updated since it was first compiled in 1997. HUD’s LIHTC Data Base is compiled by collecting data from the HFAsand its most recent update includes projects placed in service through 2004.
HUD released its most recent update of theLIHTC Data Base last month, along with a report that tabulated many of the basic characteristics of these properties. (Readers interested in general statistics are encouraged to consult that report.3 )
The HUD LIHTC Data Base contains information on roughly 24,500 LIHTC projects with 1.2 million rent-restricted units placed in service through 2004.4 NCSHA’s State HFA FactBook shows cumulative allocations for about 1.5 million rent-restricted units (including tax-exempt bond allocations) through 2003. Given lags and other differences between allocations and placing units in service, as well as gaps in the data reported by HFAs (despite follow-ups, some projects in the HUD LIHTC Data Base don’t report number of units, for example), the difference between HUD- and NCSHA-reported totals is not excessive.
The NCSHA and HUD numbers for credits allocated between 1998 and 2002 are compared in Table 1 (above). Data are available in a consistent format from NCSHA beginning in 1998, and a large share of credits allocated after 2002 would not have been placed in service yet by 2004 (the cut-off year in the HUD LIHTC Data Base).
Allocations: Nonprofit vs. For-profit
Over that time horizon, dollars allocated to nonprofits have remained relatively close to 30% of total (non-tax-exempt bond) allocations. Nonprofits also accounted for roughly 30% of the new construction LIHTC projects in 1998 and 1999, but the percentage dropped afterwards—all the way to 22% in 2002.
A caveat: There is possible ambiguity over the definition of nonprofit developer, as some LIHTC developers classified as for-profit could include joint ventures with nonprofit partners. Little can be done to adjust the data for this possibility, so readers are advised to keep this in mind when viewing the following tables and graphs.
Because for-profit developers tend to build larger projects,5 the nonprofit share is generally smaller if the percentage is based on the number of units, rather than projects-placed-in-service. However, the trend toward a lower non-profit share is the same.
Thus, Table 1 shows an apparent discrepancy, in that NCSHA’s nonprofit share of allocations remains relatively constant, while the HUD numbers show a strong decline, especially in the most recent year. The universe for each of the two sets of numbers is different, however. The NCSHA statistics include rehab projects, but exclude projects with tax-exempt bonds. The statistics based on the HUD LIHTC Data Base exclude rehab projects but include those with tax-exempt bonds.
If, for some reason, nonprofit projects experience a greater lag between the time they receive LIHTC allocations and the time they’re placed in service, this could explain some of the decline in the nonprofit shares in Table 1, particularly for the most recent allocation year shown, 2002. An apparent decline would occur if a disproportionate share of nonprofit units receiving allocations in 2002 were still in the queue waiting to be placed in service in recent years. This can’t be tested directly for the year 2002 with current data, but in earlier years the share of projects with a two-or-more year lag between the allocation and placed-in-service dates was higher for nonprofits than it was for for-profit developers—although the gap has been narrowing and disappeared entirely in 2001 (Figure 1).
Key Differences between Nonprofits and For-Profits
An assumption underlying the nonprofit set-aside is that nonprofits behave differently than for-profit developers do. The HUD LIHTC Data Base can be used to look at some of the differences, and how they have changed over time.
A key change in the LIHTC program over the past decade is the increase in the use of 4% credits in combination with tax-exempt bond financing. The increase has occurred primarily among for-profit developers, for whom the share of LIHTC projects placed in service with tax-exempt bonds increases from roughly 3% to 30% between 1995 and 2001 (Figure 2).
Over the same time, the share of projects with 4% credits (indicating that they are receiving some type of federal subsidy) but without tax-exempt bonds has declined (Figure 3).
Tax-exempt bonds differ from other federal subsidies that reduce the credit percentage from 9% to 4% in that they are not subject to the per capita limit on LIHTCs (under the theory that the total amount of private-activity, tax-exempt bond authority is subject to its own per capita limitation).6 Other federal subsidies reduce the credit percentage without conveying this particular advantage.
More specific behavioral tendencies sometimes attributed to nonprofits include possibly stronger inclinations than for-profits to serve particularly distressed locations or particularly disadvantaged households.
For example, it may be tempting to assume that nonprofits would be more likely to build LIHTC projects in central cities or non-metropolitan locations, while the for-profits would be more likely to focus on suburban areas where incomes are generally highest. However, over the 1995-2003 period, the share of for-profit projects placed in service in central cities has been slightly higher than the nonprofit share every year (Figure 4).
The share of for-profit projects placed in service in non-metropolitan areas has been somewhat higher than the nonprofit share in all but two of the years, when the for-profit and nonprofit shares have been about the same (Figure 5).
Two categories of distressed areas are called Qualified Census Tracts (QCTs) and Difficult Development Areas (DDAs). HUD maintains the lists of QCTs and DDAs, and LIHTC properties built in these areas are eligible for a 30% increase in basis, and therefore 30% more tax credits per dollar of project cost. For new LIHTC construction project placed in service over the 1995-2003 period, the share of nonprofit projects receiving an increased eligible basis has often, but not always, been greater than the for-profit share (Figure 6).
In terms of serving populations with special needs, a little more than 30% of the projects placed in service between 1995 and 2003 have targeted the elderly. In some years the elderly share has been higher among the nonprofits. In other years it has been higher among the for-profits. There seems to be no systematic tendency one way or the other (Figure 7).
Also of interest is the tendency of for-profit and nonprofit developers to target the disabled. But because the data are so incomplete (missing for more than 21,000 properties), it’s impossible to say much about this based on the information in HUD’s LIHTC Data Base.
Are For-Profits More Efficient?
Questions about costs can’t be investigated with recent data, since neither NCSHA’s published reports nor HUD’s LIHTC Database contain the relevant information. Both GAO and City Research collected cost information in their studies, however, and reports from both organizations included results on cost differences between for-profit and non profit developers. Although somewhat dated, these reports still provide the best information available on the subject, so a brief review is worthwhile here.
First, there is a solid economic reason to suspect that for-profit developers create housing at lower cost. In a competitive industry, the profit motive forces businesses to operate more efficiently and learn how to control production costs. Nonprofit firms, not subject to these competitive pressures, may operate less efficiently and experience higher production costs.
According to the City Research study, tax credit projects with non-profit sponsors have development costs that are 43% higher per unit. Although some factors (apartment size, type of construction, and neighborhood characteristics) explain part of the difference, even after statistically controlling for these factors, tax credit units cost 15% more if they are built by nonprofit developers.
According to the two GAO reports, tax credit projects with non-profit sponsors have development costs that are on average $18,000 higher per unit. Again, there are some factors (type of area built in, type of structure, type of tenant the projects intend to serve) that partially explain the difference. But even after controlling for those factors, the nonprofits’ development costs are still $5,600 higher per unit.
GAO’s statistical analysis of this number shows a better than 85% chance that for-profit developers build LIHTC units for lower cost than nonprofits. Because that’s slightly below the 90% or 95% often used as rule of thumb, the Executive Summary classifies the result as statistically insignificant. However, the GAO result doesn’t miss the 90% threshold by much. Moreover, GAO’s best point estimate is still that, even after controlling for a large number of other factors, a for-profit developer can build an LIHTC unit for $5,600 less than a nonprofit developer can.
1. U.S. General Accounting Office, Tax Credits: Opportunities to Improve Oversight of the Low-Income Housing Program, GAO/GGD/RCED-97-55, March 1997; and U.S. General Accounting Office, Tax Credits: Reasons for Cost Differences in Housing Built by For-Profit and Nonprofit Developers, GAO/RECED-99-60, March 1999.
Starts Continue to Bounce and Correct
In January, the starts rate for apartments in buildings with five or more units completely reversed the surge it made the previous month. The preliminary (seasonally adjusted annual) starts rate for January came in at 276,000. That represents a 20% decline from December's 347,000, and takes the five-plus starts rate nearly all the way back down to the 274,000 posted in November.
As usual, when interpreting the numbers, it's advisable to keep the historical volatility of the multifamily starts series in mind, and judge the monthly changes relative to long-run trends. On this basis, a starts rate of 347,000 is clearly too high to be sustained for long. Meanwhile, the (seasonally adjusted annual) rate at which new five-plus permits were issued was unchanged in January at 370,000. This was down 13% on a year-over-year basis, however. The national building permit series (based on a larger sample and less influenced by weather conditions) show somewhat less volatility than starts and can be an indicator of future production.
NAHB's forecast calls for the five-plus starts rate to bottom out at 260,000 in the second quarter of 2007, and to improve steadily thereafter, getting back close to 300,000 by the end of 2008. The forecasts for total activity during the calendar years are 268,000 five plus starts for 2007, and 288,000 for 2008.
Real Rent Index Hits All-Time High
Residential rents continued to outpace inflation at the start of 2007, according to the latest Consumer Price Index (CPI) data released by the Bureau of Labor Statistics (BLS). In the February release, BLS also revised many previously issued CPI numbers. The indices for 2005 are now in final form, and those for 2006 are now in "revised interim" form that will be subject to one more revision.
BLS also started publishing the CPI data to two additional decimal places, and altered the way it rounds percentage changes. Despite these adjustments, the historical pattern of the real rent index (which uses CPI data to adjust rent changes for overall inflation) was not greatly affected.
Based on seasonally adjusted Consumer Price Indices; U.S. Department of Labor, Bureau of Labor Statistics. The annual rates indicate what the percentage change would be if the current monthly rate were sustained over a 12-month period.The real rent index is the CPI for rent of primary residence divided by the CPI for all items and scaled so that January 1995 is 100.
Rents have been rising faster than inflation since August, and this trend continued in January, with rents increasing at an annual rate of 4.6% while the overall CPI increased at a rate of 2.1% — taking the real rent index up to an all-time high of 109.5.
Interest Rates Stable, but "Sub-par" Growth May Bring Change Later
The Commerce Department has now reported that annualized growth of real gross domestic product (GDP) was only 2.2% in the final quarter of last year, down from the “advance” estimate of 3.5%. This means that the economy turned in a sub-par performance during the final three quarters of last year, largely due to a dramatic contraction in the housing production component of GDP (residential fixed investment) and weakness in closely associated components of the economy. The domestic auto sector also was fundamentally weak during 2006. NAHB’s forecast shows another sub-par rate of GDP growth in the first quarter of 2007, followed by a strengthening process over the balance of this year and into 2008. A near-term end to the pronounced contraction in residential fixed investment is central to this forecast pattern.
The Federal Reserve held monetary policy steady at both the January and March meetings of the Federal Open Market Committee (FOMC). Indeed, the Fed has held its target for the federal funds rate at 5.25% since mid-2006, a level that’s around a “neutral” monetary policy stance in the prevailing inflation environment. NAHB expects the Fed to maintain this funds rate target until the late-June FOMC meeting. At that time, NAHB still anticipates a quarter-point rate cut—in order to keep the “real" funds rate from rising as core inflation recedes.
Meanwhile, long-term interest rates firmed up to some degree in late January and early February as incoming data on the economy were surprisingly strong, but long rates have receded more recently. The 10-year Treasury is hanging around 4.70%, roughly the same as in March, and more than a quarter percentage point below mid-2006 levels. The Treasury yield curve still is inverted across much of its range, a pattern that may not be sustainable for much longer. NAHB’s forecast shows an essentially flat Treasury yield curve by late this year, at least out to the 10-year mark, as short rates recede a bit and long rates move up modestly from current levels. In this regard, NAHB is not forecasting the 30-year Treasury rate to move above 5.0% in 2007.
MFSI Drops Back from Last Month's Record High
During the month of February, the MFSI fell by 278 points, giving back almost all of the increase it experienced the previous month. The February decline of a shade less than 7.5% is one of the largest monthly declines registered by the MFSI ever. With this substantial decline, the MFSI finds itself almost 8% off its all time high—set just last month—but is still more than 22% higher than it was just 12 months ago. During the past month, the value of the S&P 500 with dividends reinvested declined by a relativelty modest 2% and, as a result, it now stands almost 12% above where it was one year ago.
Because the MFSI declined by about three times as much as the S&P 500 with dividends during the month of February, the performance gap—or percentage difference—between the two indexes declined from 190 last month to 174 percent in February, its sixth highest reading ever. Despite the very strong 87% rise in the S&P 500 since its most recent low set in October 2002, the MFSI has risen a staggering 150% during the same 53 month time period. In addition, the MFSI continues to dramatically outperform the S&P 500 over longer time periods including the past five, six and seven years. Since December 1998, the MFSI has risen by a whopping 257% while the S&P 500 with dividends reinvested has gained a meager 30%.
During the month of February, the price-to-earnings ratio (P/E) of the MFSI eased slightly and now stands at 20.96 while the dividend yield, defined as the total cash dividend payments divided by the current stock price, and which moves in the opposite direction rose to 3.35%. The MFSI is an index of 23 publicly traded US headquartered firms, including 19 REITs, principally involved in multifamily ownership and management.