FRONTLINE Misrepresent the LIHTC
On May 9 the television series FRONTLINE aired an installment titled “Poverty, Politics and Profit” (some of the content will air on National Public Radio in the coming weeks and has been published on NPR’s website). The episode discussed the history and state of affordable housing in the country, examined two of the largest federal programs—the low-income housing tax credit (LIHTC) and Housing Choice Voucher, and illustrated the plight of low-income people navigating the unsubsidized housing stock. While highlighting the nation’s housing affordability crisis is welcome, there also are many unsupported and unfair depictions of the federal programs.
In particular, the broadcast presented misleading depictions the LIHTC, which is, in fact, widely-accepted as the nation’s most successful federal affordable rental housing production program. The mischaracterizations are particularly disappointing in light of the extensive, detailed information LIHTC professionals provided to FRONTLINE and NPR.
Profits and Apartment Production
FRONTLINE distorts the nature of how LIHTC participants realize financial gain by leaving out the context and resulting benefits. Compared to other complex real estate or public/private partnerships, LIHTC returns are quite modest. The ability to earn money makes possible the private sector’s efficiency, innovation, and rigor (including both for and nonprofit stakeholders). More importantly, the interests are aligned: profits are possible only after performing as promised and proving compliance with federal rules up front and every year afterwards.
FRONTLINE also implies that financial gain and fraud are two significant reasons why the rate of production has not kept pace with the amount of LIHTC allocated. This isn’t the case. In fact, program participants’ returns actually have declined over time as market competition drove yields down from double digits in the early to mid-1990s to 4-6 percent today and developer fees, controlled by state policies, have increasingly been deferred over time.
Novogradac & Company conducted an analysis demonstrating how certain factors contributed to affordable apartment construction and rehabilitation declining slightly despite increases in LIHTCs. More tax credit equity per rental home is necessary now than in the past because:
- construction costs have risen faster than inflation;
- operating expenses increased faster than LIHTC rents;
- appropriations for federal “gap financing” subsidies have decreased, and
- properties have less private sector debt because they are underwritten to serve an ever-growing number of lower-income households.
Other factors also played a role but lack sufficient available data to measure, including allocating agency design requirements and land costs.
Oversight and Administration
One of the LIHTC’s key strengths, by design, is that the federal government is involved but most of the work is done by state (and a few local) agencies. The LIHTC fundamentally involves real estate development and management. As such, it makes sense to manage at a state level considering the vast differences in geography and housing needs from state to state. Despite a long track record of positive outcomes and little to no evidence of problems caused by this structure, the broadcast suggests that insufficient oversight has contributed to the reduced rental home production and increased possibility of wrongdoing Allocating agencies conduct careful reviews, gather public input, regularly revisit previous decisions, and update policies to meet evolving housing needs. Equity investors also play a crucial role in ensuring compliance.
Isolated Instances of Wrongdoing
FRONTLINE highlights an infinitesimal sliver of the nation’s 40,000 LIHTC properties and 3 million rental homes in one state where malfeasance occurred. Over the LIHTC’s 30-year history, industry veterans know of individuals from only a handful of development companies who were criminally guilty of fraudulent activity. There is no evidence presented to justify a presumption that such activity is widespread, nor that such activity is causing the reduction in the number of rental homes financed by the LIHTC.
Moreover, the multiple parties involved in each LIHTC transaction help ensure compliance to a greater degree than occurs in many other programs. They include:
- allocating agencies,
- equity providers,
- Internal Revenue Service,
- lenders, and
- management companies.
As noted above, the ability of program participants to claim LIHTC and earn revenue depends on complying with federal requirements.
That said, any illegal activity is of course unacceptable. Last year allocating agencies, in their role as gatekeepers of the LIHTC, began the periodic process of revising their allocating and underwriting recommended practices. The subsequent changes likely will mean even more careful review of LIHTC properties to prevent wrongdoing.
The LIHTC and Demographic Patterns
Numerous academic papers have attempted to answer the intensely complex question of whether the LIHTC has contributed to concentrations of poverty and/or racial minorities. Taken as a whole, the findings are inconclusive.
Some studies, including those cited in the show, do claim a connection. However almost all of those studies’ methodologies are flawed. For example, they assume allocating agencies were responsible for the siting of all LIHTC properties, when in fact many of the locations were determined years before by different programs. This failure happens because of:
- treating allocations for rehabilitation the same as new construction, and
- not recognizing when the LIHTC replaced existing subsidized rental homes (often public housing).
Other research has come to different conclusions. Most notably, professors at New York University recently determined LIHTC properties “do not contribute to increased segregation, even in high poverty neighborhoods.” The study authors went on to say they found “that increases in the use of [LIHTCs] are associated with declines in racial segregation.”
What’s True about the LIHTC?
The LIHTC is many things: successful, efficient, broadly supported and sorely needed. It has produced nearly 3 million affordable rental homes serving more than 6.5 million low-income families in urban, suburban, and rural communities. There are examples of high-quality LIHTC properties all over the United States that are home to working families, veterans, seniors, first responders, people with disabilities and numerous others. The ACTION Campaign has extensive information available on those served, jobs created, and more.
At the same time, the LIHTC could be improved and made even more effective. To this end a bipartisan group of lawmakers have introduced the Affordable Housing Credit Improvement Act, a bill that would provide additional resources and make technical changes to strengthen the LIHTC. Supporting and advocating for this legislation should be the focus of the affordable housing community’s energy. It is unfortunate that FRONTLINE’s and NPR’s portrayal of the LIHTC isn’t accurate, because the deep need for more affordable rental housing is undeniable and the LIHTC is a key resource in the efforts to meet that need.