Troubled Tax Credits: Prevention and Cure
Theobald, Ruth L., Journal of Property Management
The distress in the voice at the other end of the phone was obvious. "Why aren't these units leasing? We are not reaching our projections." The general partner of this new tax-credit development was calling every day; the limited partner was demanding performance; the asset manager was trying to determine if the problem was the management company or the market; and the management company was trying to decide what was wrong with its approach.
This scenario plays out daily in tax-credit developments across the country. While the majority of properties succeed, some are unable to reach even the minimum set-aside requirements of the program. As the guarantee deadline approaches, screening standards are ignored and concessions soar. The cash flow and economic stability of the property is put in jeopardy. While everyone is looking for someone to blame, the most important question remains, "what can be done about it?"
Price and Quality
If we look at the household income limits established by the LIHTC program, we know we are dealing with residents [TABULAR DATA FOR FIGURE 1 OMITTED] that are generally without cash reserves and for whom even a temporary loss of income could be devastating. At seniors properties, individuals are generally living on a fixed income and may be facing high expenses for medicine and health care. As Figure 1 demonstrates, even a family of four at the maximum income permitted in tax-credit housing has less than $300 a week to spend on living expenses, once permitted rent and taxes have taken their bite.
Obviously, our customers are affordability driven. They care very much about the cost of housing, and we must be very conscious of their economic realities and market our properties accordingly.
But at the same time, tax-credit housing residents, just like every other consumer, also are interested in getting the best value for their dollar. In the tax-credit industry, we spend considerable time and money researching the marketplace, but too little studying the customer and how the customer defines value. Every consumer has a basic expectation of what housing should offer.
A woman walks quickly down the aisle of the local supermarket, one child in the shopping cart, another trailing behind her. As she studies the cans of soup, checks the coupons, and looks for any specials, she is considering which product gives her the best value for her money. For her, as for most shoppers, the decision will be focused on two issues - affordability and quality - her perception of value.
While housing is usually the most expensive commodity most people "purchase," the fundamental principles of marketing are no different than selling that can of chicken noodle soup. It must be something that the customer needs and which provides an acceptable balance between affordability and quality to make it a good value.
It also is important to remember that it is the customer who defines value. If the customer is not "buying" our product, it is because there is a gap between our perception of value and his. To bridge this perceived value gap, we must do one of two things - enhance the resident's perception of value, or alter our own. How do we create additional value, amenities, or services that will meet the needs of the customer? The answers to these questions require careful, objective analysis and creativity.
Who is the target market, and what is it saying? No one knows the answers to these questions like the prospective renters. In a universal sense, if the community is a family-oriented one, issues are likely to include time, money, and children. A seniors' property will need to show more concern with money, social needs, and health care. What specifically is the property doing to meet these needs? It doesn't require money, but it does require listening and responding.
The first year of the credit period is the most critical for tax-credit properties because minimum set asides must be met and units must be occupied by qualified households in order for the owners to receive the credits. …