Skip to main content
OCC Flag

An official website of the United States government

Community Developments Investments (March 2017)

Banks and the Recapitalization of Existing Affordable Housing

< View Table of Contents

Todd Crow, Executive Vice President, Manager of Tax Credit Capital, PNC Real Estate

Timber Pines is a fictional 90-unit low-income housing tax credit (LIHTC) property in Louisville, Ky. It was built in 1996 and serves low- and moderate-income families earning between 50 percent and 60 percent of the HUD-published area median income, which in the Louisville area means an annual income of between $33,500 and $40,200 for a family of four. Families meeting these requirements are able to rent a two-bedroom, two-bathroom apartment for $675 per month, estimated to be as much as 30 percent below market rents for a comparable unit.

The property has performed very well but is now 20 years old and showing signs of stress. In the next few years, the property will need new roofs. Kitchen and bathroom appliances have been replaced as needed, but annual operating costs are increasing. While the property is covering debt service and producing modest cash flow, it is not sufficient to fund any meaningful renovation. As a LIHTC property, the property is covered by a land use restriction agreement (LURA), which requires rents to remain restricted for 10 more years (for a total of 30 years of restricted rents).1 As a result of these restrictions, the owner is unable to increase rents to generate an economic return from making the investment necessary to rehabilitate the property. Timber Pines is clean and safe, but aging and becoming more expensive to operate.

The partnership that owns Timber Pines in this fictional example is a typical LIHTC limited partnership with a local real estate developer acting as the general partner and a syndicated fund as the investor. The 15-year term of the compliance period is over. On behalf of the investors, the syndicator would like to liquidate its investment and has requested that the general partner either repurchase its interest or sell the property. The general partner of this partnership is a subsidiary of a small real estate company whose principal is trying to retire. As such, the property is listed for sale. Since Timber Pines is a nice property with a strong track record, there is third-party interest in acquiring the property.

Approximately 64 percent of all rental households earn under $50,000 per year, and affordable rents for these households are less than $1,250 per month. Only 41 percent of new multifamily units have rents less than $1,250 per month.
Note: Percentages do not add up to 100 because of rounding.
Approximately 64 percent of all rental households earn under $50,000 per year, and affordable rents for these households are less than $1,250 per month. Only 41 percent of new multifamily units have rents less than $1,250 per month. (Joint Center for Housing Studies of Harvard University)

During the listing period, there are several offers for the property. Three of these offers are from real estate investors that intend to benefit from the property's cash flow over the remaining 10 years at restricted rents. Ultimately these investors intend to renovate the property and increase the rents by 30 percent to 40 percent in 2027. Importantly, starting in 2027, this renovation will displace the existing low- and moderate-income tenants with more affluent tenants who can afford the higher rents. These buyers believe they can get a modest return on their investment over the holding period, but their interest in the property is driven primarily by the prospect of selling or refinancing the property after the rents are increased at the end of the restricted rent period.

The remaining three offers are from smaller developers who plan to redevelop the property and keep it affordable by securing a new LIHTC allocation and immediately performing $40,000 of rehabilitation per unit. Given the uncertainty of a tax credit allocation, the buyers who seek to maintain the property's rent affordability each propose to take an option for the property for 12 months and close only if they receive a tax credit allocation.

The top offer is from a market rate buyer from the first group who proposes to close as an all cash purchase in 45 days. This offer is selected by the seller, and the property is sold.

For stakeholders in the creation and preservation of affordable rental housing, what has just happened? What are the implications? What does "preservation" mean in this context?

First, please keep in mind that this scenario is fictional. At PNC Bank, however, we see versions of this scenario play out on a regular basis when selling from our approximately $9 billion syndicated LIHTC portfolio. While having sold interests in over 400 LIHTC projects on behalf of our investment funds over the past five years, we've seen only a small percentage of these projects developed with extended affordability.

Second, no one in this story has done anything wrong in this writer's opinion. Each party has honored its contractual commitment and has pursued its own economic interests within clearly prescribed program boundaries. No good guys. No bad guys. No harm. No foul.

Third, it is important to have this example in mind when you think about "preservation." What is preservation? Currently, the term seems to be used very loosely. For some, it can be shorthand for rehabilitating an existing property. For others, it seems to mean simply the acquisition of an existing affordable housing project, often with no specific intent. For purposes of this discussion, preservation means something different: the acquisition of an existing affordable project for the specific intended purpose of contractually extending the affordability period by utilizing a LIHTC allocation, a Section 8 housing assistance payment (HAP) contract, or other forms of subsidy necessary to address the physical needs of the project.

So then, why is the outcome described in this fictional example so unsatisfying? Primarily because this scenario will likely lead to the eventual displacement of families and seniors who rely on this type of housing. And because we know that the cost per unit of preserving the quality and affordability of this housing is far less than the cost of replacing it. But what should be most troubling is the knowledge that the same private and public sector forces that created this housing could be doing more to preserve it.

PNC Bank has taken an innovative approach to preservation. PNC and its affiliates offer a variety of balance sheet and agency finance products to assist clients in acquiring and preserving affordable housing. But beyond lending, PNC Bank has been an active investor and has expanded one of the industry's largest LIHTC syndication platforms to include sponsorship of syndicated preservation funds. PNC Bank has invested equity in multiple preservation funds sponsored by third parties and has recently syndicated an investment fund that raised $100 million in equity that has been levered at 60 percent to acquire $250 million in at-risk affordable housing projects nationally. The fund is designed to deliver a very attractive risk-adjusted return while pursuing extended affordability via a LIHTC recapitalization (see an actual example in "Bolton Housing: The Preservation Cycle").

Whether lending or investing, banks can, and do, play an important role in preservation of affordable rental housing. Working with our top developer clients as well as stakeholders in state and federal government, banks have an opportunity to do more, much more.

The views expressed by Mr. Crow are his own, and this article was prepared for general informational purposes only. The information and views in this publication do not constitute legal, tax, financial, or accounting advice or recommendations to engage in any transaction. For more information, visit the PNC website or contact Todd Crow.

1 It should be noted that some jurisdictions require rent restrictions beyond 30 years.

Bolton Housing: The Preservation Cycle

Bolton North Apartments, a senior-housing community in Baltimore, Md., was preserved as affordable housing through the year 2045 by a joint venture among the NHP Foundation, Urban Atlantic, and PNC Bank.
Bolton North Apartments, a senior-housing community in Baltimore, Md., was preserved as affordable housing through the year 2045 by a joint venture among the NHP Foundation, Urban Atlantic, and PNC Bank. (NHP Foundation) 

Bolton North is a senior affordable apartment building located in Baltimore, Md. The property consists of 208 one-bedroom, one-bathroom units in a 16-story high-rise building on 1.266 acres. All of the residential units are supported by a long-term project-based HAP contract that expires in 2031. The project was acquired in September 2014 for just over $23.3 million by a preservation fund owned by a joint venture among the NHP Foundation, Urban Atlantic, and PNC Bank. Of the purchase price, $7.7 million was funded with equity from the fund while $15.6 million was funded with a balance-sheet loan from PNC Bank.

At the time the project was acquired by the preservation fund, the asset strategy called for redevelopment utilizing 4 percent tax credits, a moderate rehabilitation of the property (estimated at $15,800 per unit), and an extension of the restricted rent period to 2045. Working with the city of Baltimore and the state of Maryland, the fund is working to address the necessary entitlements, arrange for a payment in lieu of taxes, and secure an allocation of tax-exempt bonds and 4 percent tax credits. Under the current plan, investment objectives of the fund will be satisfied.

Currently the property is scheduled to be acquired from the preservation fund in March 2017 and recapitalized on terms that allowed for an attractive return to the investment fund, a per unit rehabilitation budget that exceeded original projections ($27,300 versus $15,800), and a contractual extension of the long-term affordability of the project for an additional 30 years. Two additional projects in this fund, also in Maryland, are expected to close as tax credit transactions in 2017. According to Richard Burns, President and CEO of the NHP Foundation, "Preservation of the nation's supply of affordable rental housing is critical and a central part of the NHP Foundation's mission. The collaboration and partnership with PNC has been essential in preserving the affordability of the Bolton project and others like it."

< Previous Article

Next Article >

This publication is part of:

Collection: Community Developments Investments

  • Deputy Comptroller
  • Barry Wides
  • Editorial Staff
  • Rafe Ellison
  • Emily Gold
  • Design Staff
  • Victor Battista
On the Cover

Clockwise from top left: R Street Apartments, residents of the St. Dennis Apartments, St. Dennis Apartments, and Galen Terrace Apartments, all in Washington, D.C. (Photos courtesy of the National Housing Trust)

Questions or Comments

Call (202) 649-6420 or email This and previous editions are available on the OCC's website at


Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.

Community Affairs Email Updates