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Four and a half years ago, the newly formed business enterprise purchased a low-income residential complex with 264 apartments in Phoenix. The property received more than $4 million in federal tax credits and was instead considered to remain affordable for decades.
The company has since used legal loopholes that stripped its affordable protection from its apartments. The pilot seemed to have had an advantage for the company, buying the property for less than $20 million and flipping it over two years later for $63 million. Today, rents for advertising there are around 50% higher.
Similar stories have been unfolding over the years as developers and real estate investors take advantage of an obscure section of tax law known as the “qualification agreement” provisions. This allows owners of generous tax credits to rent low-income properties to raise their rents much faster than the law normally requires.
According to one estimate, around 115,000 apartments in the US have lost rent restrictions as a result. Experts say these conversions exacerbate the country’s shortages for affordable housing, which has been intensifying in recent years. One report recently concluded that there are 5 million fewer housing units in the country than necessary. The problem is most serious for low-income people.
The loophole remains open for decades despite widespread agreements between regulators and supporters about its harm. Congressional efforts to repeal the clause have failed – most recently in 2023 – state reforms reduced its effectiveness. President Donald Trump has pledged to cut housing costs, but some reform supporters doubt he’s skeptical of attacking laws that allow his administration or Republican-controlled Congress to lure the real estate industry. It’s target. (The White House did not respond to requests for comment.)
“We have an affordable housing crisis almost everywhere in the country,” said Robert Rozen, a former Senate aide who helped draft the clause and is now calling for repeal. “We can’t afford to lose more affordable units, especially as a result of a loophole in the law.”
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The law is part of the law that defines low-income housing tax credits, which has become the main catalyst for new affordable housing in the country. The program offers developers a potentially multi-million dollar tax subsidy in exchange for keeping units affordable and renting them only to poor class tenants. Usually, that means that the household earns less than 60% of its median income. Last year, three families in Phoenix would have had to earn under $55,560 to qualify for qualifying.
Rent and income restrictions are expected to last at least 30 years. But just 14 years later, property owners can ask the state to find a buyer. This opt-out clause aims to provide prudent investors with an early withdrawal from the program while maintaining affordable price protection for the property. However, it contained significant unintended flaws. The state can almost always sell only at prices set by formulas that overestimate the property. As a result, buyers are rarely found. If the state cannot find a buyer within a year, the owner is free to raise rents on vacant units or existing tenants a few years later.
“It was clearly a mistake to include this in the law,” said Rozen, a lawyer who now specializes in affordable housing. “When we built the buy-in ceremony, we didn’t know what we were doing.”
Beneficiaries of this operation are often protected from public places. Previously known as Sombra Apartments, Arizona real estate was incorporated under the name Sombra Apartments LLC just before the purchase and was flipped over by a Delaware limited liability company with a low online footprint. Propublica received an application that causes loss of affordable protection through its request for public records. This shows that the LLC is managed by a Scottsdale, Arizona real estate investment company called Renue Properties. On Renue’s website, the company specializes in “acquiring and rejuvenating poorly performed multi-family properties,” generating an average return of 81%. Michael Christiansen, whose LinkedIn profile lists him as Renue’s CEO at the time of the transaction, did not respond to requests for comment. (More than 5,700 low-income units in the state lost affordable protection through the same opt-out methods, according to a 2023 Arizona Republic report.)
Some companies exploiting loopholes seem to be doing so with the indirect support of Fannie Mae and Freddie Mac. Government sponsored businesses typically support the country’s housing sector by purchasing mortgages and injecting cash into the mortgage market. Real estate records show that businesses were involved in lending to low-income homeowners. Corporate involvement is at odds with declared support for affordable housing. Fannie and Freddie spokesmen did not respond to requests for comment.
Two industry officials defended the qualifying contracting process as a way to combat the shortage of middle-income housing. This is the position of Charlie Moline, CEO of Moline Investment Management, who said he used the mechanism to remove affordable protection from around 20 multifamily facilities in the Midwest.
Usually, low-income housing tax credit assets are too old and worn out and cannot be converted into high-end market rate units. However, with income and rent restrictions being released, after some basic renovations, the property could become attractive to middle-income people. “No one is evacuated to what we’re doing,” Moline said. “Our goal is to expand affordable housing into the middle of missing.”
That goal is little profitable for Rashunda Williams, a resident of a low-income apartment in Omaha, Nebraska, for Rashunda Williams, who Moline purchased last year and has gone through the opt-out process. Williams, 33, said he would make $17 an hour as a custodian in an Amazon warehouse and pay $899 for a one-bedroom apartment. “I can barely keep up with half the hour’s rent,” she said. If that increases, “I have to move.”
Moline’s argument was no equally Estair for Rosen, a former Senate aide. “The bottom row is that owners are increasing rental income and tenants whose programs intended to serve are losing affordable rent,” Rozen says. . “And the federal government is being used.”
The court has blocked Trump’s federal funding freeze. The agency is holding back money anyway.
Affordable housing advocates have long sought to eliminate eligible contract clauses. However, former Congressional staff involved in the abolition effort said that the council’s efforts to do so were attributed to lobbying from developers and private equity companies that interest low-income housing. Sometimes it can.
Advocates have achieved more success in pursuing state-level reforms. According to National Housing Trust Moha Thakur, the majority of the states currently encourage or require applicants for a low-income housing tax credit to waive their right to opt-out. Rural Housing Services from the Housing and Urban Development Agency, the Federal Housing Finance Agency and the Ministry of Agriculture have also recently proposed or enacted policies to combat the issue. This includes the 2023 FHFA requirement where Fannie Mae and Freddie Mac no longer invest in low-income housing eligible for early opt-out. However, Fannie and Freddie can withdraw loans on such property. This is more generally how they are involved. (Freddie says it’s studying the issue.) And given the Trump administration’s regulations, particularly the massive attempt to destroy regulations adopted under the Biden administration, It is unclear whether the new policy initiative will survive.
State-level changes have been impacted, resulting in the number of apartments lost each year between about 10,000 and 6,000 to 7,000 per year through opt-outs. But without Congressional action, the loophole remains in the book, leaving a threat to poor tenants. “That loophole shouldn’t exist,” said Joy Noll, a tenant of Arizona property. If the rent goes up further, Noll fears that she will move.
