Anthony Zoppo: Welcome to Tax Notes Talk, a podcast from Tax Notes, the leading source of tax news, information, and analysis.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: priced out.

Housing projects in America, funded by the low-income housing tax credit, often called LIHTC, are intended to remain affordable for at least 30 years. But recently, some LIHTC properties have been transitioning to market pricing after only 15 years. This has left low- and middle-income tenants across the country with even more limited options for affordable housing.

Tax Notes senior Capitol Hill reporter Cady Stanton recently did a deep dive into how this tax policy from the '90s is worsening the housing crisis today. Cady, welcome back to the podcast.

Cady Stanton: Thanks for having me.

David D. Stewart: Could you tell us how your investigation got started?

Cady Stanton: Sure. I started digging into the LIHTC program for a story last summer about shortcomings in IRS and Department of Housing and Urban Development data around the program. During that process, I heard from a source about how a provision within LIHTC has led to the premature loss of thousands of homes from affordability requirements. After some more interviews, I heard about Teresa Myers's story in Missouri and the lawsuits she and her neighbors have brought against their property owners. I talked directly to tenants affected by the issue about the human impact of this policy.

David D. Stewart: Now, today's episode is a bit different from our usual ones. Could you tell listeners what they're about to hear?

Cady Stanton: So for my investigation, I talked with tax policy and housing experts about LIHTC to get the full picture of the affordable housing crisis today, from how the tax credit works and its flaws to how it affects people in the real world. You'll hear their perspectives in this episode.

David D. Stewart: All right. Let's go to those interviews.

Cady Stanton: Teresa Myers lost her sight at nine years old and much of her hearing by her 30s. For the now 69-year-old, finding a home that was both affordable and accessible in her hometown of Springfield, Missouri, was not easy.

Teresa Myers: I'm from the Springfield area, and in looking for housing, I need to garden when possible because I'm a cancer survivor, and I want to be really careful about what I eat. And also, I am severely hearing impaired. Technically, I'm classified as deaf-blind. I keep very silent rooms and wear two hearing aids and have an amplified phone, etc. So I really appreciate a house where I can play music and shut the windows and doors and not disturb anyone. In an apartment, of course, that's not an option. For me, those are my main accessibility needs.

Cady Stanton: So when Teresa signed a lease at Rosewood Estates five years ago, she felt lucky. The apartment was considered affordable and accessible housing. The neighborhood was easy for her to navigate with her guide dog. And at Rosewood, Teresa found a community of neighbors who, like her, were navigating the world with a disability.

Teresa Myers: Honestly, Springfield is very limited in affordable housing to begin with. And then when you add the need for accessibility to the need for affordability, it gets really complicated. I saw homes that had holes in the floor. I saw homes that weren't warm at all. And I went looking in the summer and they were still kind of so drafty, you knew that in the winter, they were going to be miserable. So Rosewood was really a treasure for those of us on low incomes who needed affordable and accessible housing.

Cady Stanton: But that dream would soon turn into a nightmare. Just three years later, Teresa would be pushed out of her home at Rosewood and left with no choice but to start the process of finding a new home all over again.

Teresa's apartment at Rosewood was an affordable housing unit under the low-income housing tax credit program or LIHTC. The program incentivizes developers and owners to construct or rehabilitate affordable rental housing. In exchange, they receive a tax credit on their federal tax liability. Jennifer Schwartz of the National Council of State Housing Agencies, which works with state administrators who distribute housing tax credits to developers, said LIHTC was created to boost the affordable housing supply in the United States.

Jennifer Schwartz: So the housing credit has been around since the mid-1980s. It is the primary way that we build affordable rental housing production in this country. And the way that it works is that it is a tax incentive for private sector investors to invest in affordable housing, which is something that they wouldn't otherwise do absent this kind of incentive because it just doesn't make financial economic sense for them to invest in something if they were to lose money on it. This program provides that incentive so that we can bring private sector investors—in the case of the housing credit, it's largely banks and to a lesser extent, insurance companies and some other corporations—to put their money in and invest in affordable rental housing. And then that housing is rent restricted and income restricted to households who generally make 60 percent or less of area median income, and the rent restrictions are supposed to last for at least 30 years under the federal program.

Cady Stanton: But under a provision of the program known as qualified contracts, housing developers and owners can exit the income restrictions of the program 15 years early. This allows the owners to convert the affordable housing units into what is known as market-rate housing and significantly hike up the rent. Jennifer explained how LIHTC allows housing owners to exit before 30 years.

Jennifer Schwartz: So the housing credit program has a 30-year total affordability period. That's really two different components. The first component is a 15-year compliance period during which time the investor who is part of the partnership that owns the development remains part of that partnership, and they're on the hook throughout that first 15 years for anything that goes wrong with a property. After the first 15 years, we have what's called the extended use period, and during that period, the property, it remains affordable still to the same households who otherwise would've been living in it prior, but that credit period is over and so the property's affordability is enforceable under a land-use restriction covenant that is enforceable in state court. So after year 14 of the affordability period, an owner can come to the State Housing Finance Agency that administers the housing credit program and say, "I want you to find me a qualified buyer who will come in and purchase the program under the qualified contract provision." And what that means is that there's a formula that's written into the tax code, and that formula determines what that qualified contract price would be.

So when an owner comes to the state and says, "Find me a qualified buyer," the state needs to find a buyer who's willing to pay that qualified contract price. And because that price is based off of a statutory formula, that formula really doesn't reflect what the fair market value is for the property as affordable. So that means that unfortunately, in many cases, the formula's qualified contract price is much higher than the actual real-life value of the property with those affordability restrictions. And that can mean that it can be difficult and oftentimes impossible for the state to find a buyer for the project.

So if the state has a year in which to find a buyer, and if they're unable to do that, then after that year period, the state needs to take those affordability restrictions off of the property, which means that as soon as year 15 starts, assuming that the owner came in at year 14 and asked for this, we could lose the affordability on that property so that it no longer would have that extended use period that provides an additional 15 years. If we're unable to find a qualified buyer, that property is lost to the affordable housing stock long before it was anticipated to be lost and long before the land use restriction covenant would otherwise allow it.

Cady Stanton: Jennifer has been tracking the number of properties that have left LIHTC early under that provision since 2018. She estimates that more than 120,000 affordable housing units have been prematurely lost from LIHTC via the qualified contract provision over the life of the program. And one of the affected units was Teresa's apartment at Rosewood.

Teresa heard about Rosewood Estates from a friend several years ago.

Teresa Myers: They lived at Rosewood and loved it, and I didn't know anything about the low-income tax credit program at the time, but I understood that it would be affordable housing, so I went and applied and got put on a waiting list. And then in 2022, I believe it was, I went to there and was told: "There is an apartment available. There is a home available. You have to choose today whether to accept it or not." So I went through it with my sighted sister, who made notes of all the problems I did not cause that were there, like some stains in the carpet, that kind of thing. And I chose to live there. I intended to live there for life, to be honest.

Cady Stanton: It wasn't perfect, but it was home. And for many like Teresa, Rosewood became a village and a support system of neighbors helping neighbors.

Teresa Myers: The community got to be pretty close-knit. I could walk a few houses down and visit with another blind person and say, "Hey, have you had trouble with this or that and how do you handle it?" And they would know or they would say, "I don't know, but my cousin's blind and I'll ask her and I'll find out." Or, "We'll ask this neighbor. They're not blind, but they've been here a long time and maybe they'll know." And so we became friends actually, and it was just a short walk to find people who either understood or were willing to try and understand.

Any place you find affordable housing, you're likely to find people with disabilities because some of us are bank officers and that sort of thing, and that's wonderful. I'm all for it, but that isn't true in many of our cases, even if we have worked and paid taxes. So the community was really good. I made friends there. I had friends who didn't live at Rosewood, but lived about five blocks away and I could walk to their house and get a ride to my religious organization. I could garden there in containers so I could eat healthy food and share it out with my friends.

There were a lot of advantages. We had driveways, so all I had to do to find my house was not wander through a huge parking lot and teach my dog to find the right one by bribing her with treats, but count the driveways. It was much simpler. And when the paratransit bus came, it pulled up in our driveway. It didn't pull up somewhere in the parking lot where there were also other large vehicles, and I had to try and guess where it was. Honestly, I don't ever expect to find that kind of community again.

There are several houses there that were homes for people who needed 24/7 care. So some of us were blind. Many of us were not disabled, but low income. One lady who was a sweetheart of a lady had a son who was deaf and she lived on a low income. There was a wide variety of people there. There were working people there who were on low incomes. And I liked the variety in the community, both in race and in circumstance, and I felt really at home and safe there, and I don't expect to find that again.

Cady Stanton: But in March of 2024, Teresa said she heard through neighbors that signage had gone up around the estate advertising for luxury senior living. After a misleading conversation with the property's management, Teresa feared she might be forced to vacate her home with little notice if her rent was raised from its current rate.

Teresa Myers: If I understand the law correctly, and I'm not a lawyer, we were supposed to be notified if the owners chose to opt out of the low-income tax credit program. We weren't. The first I heard of it was we got a note saying, "This property's been sold and it's now going to be managed by another company." And it was like, "It's been sold; get over it." And then a friend said, "Did you know there's a big sign on the back fence saying 'Luxury living for people over 50' advertising the property?" And I said, "Well, I can't read that, so of course I didn't know it." And it turns out that the property was going to be used for at-market rent homes for those who could afford them and some evictions began happening, both at Cedarwood Terrace, which is another low-income property owned by the same people and at Rosewood, we were told we would have to move out.

Cady Stanton: Under federal law, when a LIHTC housing complex like Rosewood leaves the program's requirements, the building owners cannot raise rent on existing tenants for three years, but the state requirements for when residents have to be notified can vary. In Missouri, where Teresa lives, building owners must inform tenants as soon as they apply for a qualified contract, a requirement her lawsuit claims the property owners didn't follow. In many cases, residents are caught off guard by the changes and can be led astray on the process and timeline as a result of the power dynamics between owners and residents. That's on the minds of many affordable housing advocates like Gina Chiala, the executive director and staff attorney at the Heartland Center for Jobs and Freedom. Her organization provides legal advice at no cost to tenants like Teresa with housing issues.

Gina Chiala: The power dynamic is hugely out of balance. The owners and the managers have all of the information and they have control over something you need to survive, your housing. The power is extremely out of balance. However, that's when tenants are unorganized. When tenants are organized, that really can change the game because as you can see, when tenants are organized, they're able to get lawyers, they're able to get the attention of city council. There's a lot that they can do to exercise power, but it requires that they organize and form unions and come together in order to protect their rights. So without organizing, the power imbalance is extreme, it's oppressive, it's totally unfair, and it's profit-driven, which is hugely problematic when it comes to something that we consider to be a human right, that's housing. You need it to survive, and it shouldn't be dependent on whether the developer used all their tax credits and now has the opportunity to make a huge profit. So those odds are very, very unfair.

Cady Stanton: LIHTC finances a large swath of affordable rental housing available in the U.S., funding the construction of over 3.7 million rental units since it was created in 1986. Despite the program's success, it can often harm the very people it's trying to help according to Gina.

Gina Chiala: To me, it seems pretty obvious that the profit motives in LIHTC properties are harmful because first of all, the tax credits that are received in order to finance the development of the property are very, very valuable. And so there's a built-in safety net for those developers, and the vouchers that they are able to use to also fund their property add another layer of profit that they receive for rents that aren't even that low. So it just starts out from the beginning that it's a good profit model for developers. They get major tax breaks and then between the vouchers and the amount of rents that they're still allowed to charge, it's a good profit model for them, I think.

And then if they can opt out— which a lot of states have started to put a stop to allowing these folks to opt out of the LIHTC program early, but those provisions are still there for the older properties. And if they can opt out after 15 years after grabbing all of the tax benefits, then you're talking about huge, huge profits and selling a property at market value. The qualified contract process is not one that requires them to get the property into the hands of a buyer that's going to maintain affordability, and in fact, it incentivizes the opposite, that the property be purchased by somebody at market rate. And so it's really a process that encourages these folks to sell the property at market value and get a huge windfall after squeezing it dry of all of the tax benefits.

And then of course, there's not enough enforcement around habitability issues. And so oftentimes they're further profiting by not putting new roofs on when the roofs need to be replaced, not updating the plumbing, not using proper extermination processes. And so you have LIHTC housing that the taxpayers are funding on many different fronts that are infested with mice, roaches, bedbugs, that have huge water leaks and that are unsafe. But they are experiencing profit from that so-called deferred maintenance, from not maintaining the properties and not investing properly in upkeeping those properties. So there's lots of fronts of profit for private companies in these processes that really don't, unfortunately, benefit the tenants themselves.

Cady Stanton: After her experience with the program, Teresa agrees. She said, "LIHTC is a temporary fix to the affordable housing crisis in America, not a long-term solution."

Teresa Myers: The low-income tax housing program does not solve the problem of homelessness. The reason it does not is because I moved in and was essentially kicked out two years later. That wasn't solving the problem of me needing a good place to live. It wasn't solving the problem of anyone there or at Cedarwood Terrace needing a good place to live. They had a community; there were several working families who watched each other's kids. They are facing the same thing. They are facing the same struggle and more struggle than I am because they have children who may have to switch schools, who will lose their friends. Their kids are depressed; the parents have to deal with that and work. So it has a big impact. The LIHTC program's a boon for developers. It's not necessarily a boon for us because we deserve to know when we apply for a house there, "OK, this is going to end in two years." If I had known that, I would never have moved to Rosewood. I'd never have left the house I was living in.

Cady Stanton: Today, Teresa is suing the owners of Rosewood with help from the Heartland Center for Jobs and Freedom. Her lawsuit claims she and other tenants were misled by the property owners that they had months, not years, to vacate their apartments before rents were raised. The owners of Rosewood Estates did not respond to requests for comment.

So how did we get here? Well, the low-income housing tax credit was enacted as part of the 1986 Tax Reform Act. Just a few years later, Congress expanded the affordability requirements for LIHTC projects from 15 years to at least 30 years. This was a huge win for affordable housing advocates at the time. But lawmakers and Capitol Hill staffers were worried about the long-term costs of the tax credit, so they put in place the qualified contract provision as a means of an early exit option. It hasn't exactly been smooth sailing since. To be fair, the problem isn't just with the provision itself, but more specifically, the formula to calculate a LIHTC property's value, said Jennifer Schwartz.

Jennifer Schwartz: That's really the problem. When the formula was initially considered, nobody expected the output to be a dollar amount that was so much higher than actual appraised value for a property. The program was very, very different back in the early '90s when this was put in place. It wasn't a permanent part of the tax code. The equity that had gone in on the front end was much less than it currently is, and we had a completely different investor base than we have right now. So no one was expecting this issue to happen, and the price ended up being so much higher with this formula than it otherwise would be, which means no housing provider is going to go in and purchase a property at a price that's so much higher than the appraised value of that property. So that's why changing the formula instead to allow for the price to be the appraised value with those affordable rents in place would do a ton to really further mitigate this because then you could actually have mission-oriented entities come in and purchase the properties at reasonable values so that they can maintain the affordability.

Cady Stanton: In one court case in 2015, a LIHTC property in Hawaii attempted to exit the program through the qualified contract provision. The fair market value of the property was just under $9 million. The qualified contract price? A much higher $15.4 million.

The difference makes it near impossible for buildings to maintain income restrictions through the process, leaving them bound to end up rented out at market rate. Affordable housing advocates like Jennifer have pushed to change this formula to preserve the current number of affordable housing units, but any change would require federal legislation.

Democrats have introduced bills in recent years to include a change to the formula, and it was floated for inclusion in the Build Back Better Act of 2021, as well as in a bipartisan tax package in 2024, but the provision has never crossed the finish line. The bipartisan 21st Century ROAD to Housing Act, a package of affordable housing legislation aimed at boosting residential supply that passed the Senate a few weeks ago also didn't fold in the fix.

Congress has instead focused most of its attention around the LIHTC program on increasing its funding. The One Big Beautiful Bill Act, the large tax bill that became law last July, made LIHTC permanent, a change that is estimated to cost $16 billion over 10 years. However, Gina says boosted funding isn't enough to address the affordable housing crisis we are facing today. More and more properties are reaching the 15- and 30-year marks to leave or exit income restrictions after a few decades.

Gina Chiala: At this moment in history, we're facing what a lot of policy advocates call a housing cliff when it comes to LIHTC properties, that we're hitting the 30-year mark on a lot of properties and that's going to impact the affordable housing stock. And there's this invisible 15-year cliff that exists as well. And that's kind of where we come in and are trying to start monitoring the program to ensure that anyone who's exercising those opt-out rights is actually following the law. And of course, the other flaw with the program is that the rents are not actually affordable. So they're still relatively high for a working person, but they are also very hospitable to vouchers. And so you end up with a lot of people who have additional subsidies that are being used to help generate income for these private business owners through the voucher process. So they're getting tax credits, and they're often getting support from the housing authority through the voucher program.

Cady Stanton: So what can be done? Gina says to fix the issue of affordable housing supply in the United States, we should start by looking outside the LIHTC program.

Gina Chiala: I think that all localities need to be establishing housing trust funds and developing large swaths of affordable housing for tenants. On the LIHTC front, I think we need better models than the LIHTC model. And as we see these properties move toward the 30-year mark or the 15-year opt-out mark, we need creative solutions that will allow those properties to be transitioned into the hands of nonprofits and into the hands of government-funded projects that can make sure we keep these properties and actually make them even more affordable than what they are now.

Here at Heartland, we are at the center of the eviction crisis. We handle a lot of eviction cases, and we know that the lack of affordable housing is extreme. And in Springfield, I think it is for every available unit, there are over 80 tenants who need that unit. So the lack of affordable housing in Springfield is extreme. It's extreme everywhere; it's especially extreme there. And so it's just clear this should be at the top of every policymaker's agenda.

Cady Stanton: When Teresa found out she had to leave Rosewood, she fell into a deep depression. She didn't leave her bed for two weeks except to care for her guide dog.

Teresa Myers: I was really scared, and a blind friend of mine was telling me stories about three blind men who tried to look out for each other in a different city and were homeless and the horrors they ran into and the things that were done to them. I was very scared and I was also very angry. I spent money to move here. I was given money to move here by my sisters. We all agreed I could stay here for life because it was a great little place to live. I've been here two years and now I'm out? I wasn't a happy camper and I was very depressed.

Cady Stanton: Since Teresa thought she had no choice but to move out of Rosewood, she began looking for a new place to live, spending two to three hours each day scouring housing websites like Zillow and Trulia.

Teresa Myers: It was really stressful wasting that much time on it that I could have been doing other things that I'd rather have been doing. And it was also depressing. It was like all these houses running for over $1,000 that they just weren't an option for me, and they weren't an option for my friends either. My sister drove me to a few places that were affordable, and they were the ones with the holes in the floor or with folks nodding out on drugs all over the front porch or with really serious living problems.

Cady Stanton: Teresa eventually found a new apartment, but after almost being hit by a car near her new home, she was forced to move again shortly after.

Teresa Myers: If you have friends and you don't drive, when your community is destroyed, you're destroying a great many relationships. You're not just destroying a community and making people go live somewhere else. I have not seen most of the people I hung out with at Rosewood and were friends with, and we shared meals or sat outside on a Saturday or Sunday afternoon when it was nice in many, many months. I've seen some of them within the last year. But those relationships essentially are destroyed, and no, that's not going to make anybody money. No, that's not going to make Congress care probably, but that's what they're doing. They're not just destroying affordable housing; they're destroying relationships. And you want tourists to come to Springfield and think that it's a friendly, jolly, happy city and a great place to live, then you need to take care of the people who live here.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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