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  • Comment Detail

  • Date: 08/12/22
    First Name: William
    Last Name: Brauner
    Email: bbrauner@cedac.org
    Organization Type: other
    Organization: Community Economic Development Assistance Corp.

  • Comment

    Thank you for the opportunity to submit this comment to the Federal Housing Finance Agency (FHFA) about how Fannie Mae and Freddie Mac can further promote the preservation of Low-Income Housing Tax Credit (LIHTC) properties as part of their Duty to Serve obligations.

    The Community Economic Development Assistance Corporation (CEDAC) is a public-private community development finance institution that provides flexible early-stage capital financing and technical expertise for community-based and other non-profit organizations engaged in effective community development in Massachusetts. Established in 1978 under Chapter 40H of the Massachusetts General Laws, CEDAC’s work supports two key building blocks of community development: affordable housing and early care and education. CEDAC is also active in state and national housing preservation policy research and development and is widely recognized as a leader in the non-profit community development industry.

    Right of First Refusal
    We appreciate the FHFA’s commitment to hear from stakeholders relating to the LIHTC program, and specifically about the threat that challenges to nonprofits’ Right of First Refusal (ROFR) pose to preservation and the mission-driven nonprofits seeking to meet community needs and extend affordability. We have seen this issue play out as two nonprofits we work with in Massachusetts have endured challenges to their ROFR’s. CEDAC thus strongly supports Freddie Mac and Fannie Mae’s use of language in partnership agreements that unambiguously prevents ownership transfers to bad actors who have no demonstrated commitment to affordable housing.

    In our experience, these challenges most often arise from limited partners who were not the original tax credit investor, but rather purchased the interest during the initial fifteen-year LIHTC compliance period. In Massachusetts, these challenges have occurred on properties in high-cost markets (Boston and Cambridge) where rents and property values have escalated over the compliance period and there was perceived value in the real estate, ongoing cash flow, and/or in the reserves held for the benefit of the property. These challenges jeopardize long-term housing affordability and risk further displacement of people of limited economic means in high-cost markets. Further, we have seen no discernible public purpose to these challenges, only financial motivation. We understand that nationally, multiple firms have adopted these challenges as a business model or as standard operating procedure.

    Nonprofits are trusted partners that undertake challenging transactions and partnerships to reinvest in communities that have suffered disinvestment and injustice. If this ROFR trend continues, it will cause lasting financial harm to nonprofit housing providers and the communities they serve by diverting resources, potentially removing homes, and making partnerships more difficult to forge.

    The Qualified Contract Loophole
    The federal LIHTC statute contains a loophole permitting owners to submit a Qualified Contract (QC) after Year 14. If the state housing finance agency (HFA) is unable to find a buyer for the property at the QC price who will maintain the property as affordable for the extended use period, then the owner is permitted to phase out affordability restrictions over a three year period. While Massachusetts and some states have taken measures to close this loophole, many others have not, and some LIHTC owners are making strategic use of this provision to prematurely terminate affordability requirements.

    There are at least two steps FHFA can take on its own to immediately curtail owners’ use of the QC option:
    • FHFA should direct Fannie and Freddie to include riders in their loan agreements with LIHTC owners that stipulate they may not exercise the qualified contract option for the duration of the loan term.
    • FHFA should direct Freddie Mac and Fannie Mae to require a waiver of the qualified contract option as a condition of receiving equity investments through any of its syndicators.

    Conclusion
    LIHTC properties are home to some of the lowest-income renters in our communities. Certain features of the LIHTC program, however, create inherent preservation risks that threaten the housing stability of these renters. CEDAC strongly supports any further actions that FHFA and, by extension, Fannie Mae and Freddie Mac, can take to support the preservation of LIHTC properties. CEDAC believes the actions outlined above would help the Enterprises better promote affordable housing preservation under the Duty to Serve program.