The Housing Loophole That Lets Wealthy Investors Raise Rents on Poor Tenants

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ProPublica was the initial publisher of this story.

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A recently established corporate company bought a 264-unit low-income housing development in Phoenix four and a half years ago. The property was expected to stay inexpensive for decades after receiving almost $4 million in government tax incentives.

The business subsequently took advantage of a legal loophole to remove the flats’ affordability protections. The corporation purchased the property for less than $20 million and sold it for $63 million two years later, suggesting that the move was profitable. The advertised rentals have increased by about fifty percent today.

For years, similar tales have been told all over the nation as developers and real estate speculators use the qualified contract provision, a little-known part of the tax code. It permits rent increases much earlier than the law normally mandates for owners of low-income rental homes that have benefited from large tax credits.

As a result, an estimated 115,000 residences in the US are no longer subject to rent limits. According to experts, these conversions are making the country’s already severe affordable housing scarcity worse.The US has over 5 million less housing units than it requires, according to a new research.The issue is particularly severe for individuals with low incomes.

Despite broad consensus among advocates and regulators regarding the harm caused by the loophole, it has remained open for decades. Although state reforms have lessened the significance of the provision, congressional attempts to abolish it most recently failed in 2023.Despite President Donald Trump’s promise to cut housing costs, several reformers doubt that his administration or a Republican-controlled Congress would enact legislation that may benefit the real estate sector. (A request for comment from the White House was not answered.)

Former Senate aide Robert Rozen, who helped draft the provision and now advocates for its repeal, stated that there is an affordable housing issue almost everywhere in the nation. We cannot afford to lose additional reasonably priced flats, especially because of a legal loophole.

The law defining the Low-Income Housing Tax Credit, which has emerged as the nation’s main driver of new, reasonably priced rental housing, includes the laws. In return for keeping the flats inexpensive and solely renting them to working-class and impoverished tenants, the program pays developers a tax credit that might total millions of dollars. Usually, those households earn less than 60% of the local median income. In Phoenix last year, a family of three would have needed to earn $55,560 or less to be eligible.

Restrictions on income and rent are meant to be in place for at least 30 years. However, property owners may ask their states to locate buyers after just 14 years. The purpose of this opt-out provision was to provide hesitant investors a way to leave the program early while keeping the properties’ affordability guarantees. However, it has a significant unforeseen consequence: States are only allowed to sell at prices determined by a formula that nearly always overvalues the properties. Consequently, purchasers are hard to come by. Owners are free to increase the rent on unoccupied apartments and, a few years later, on current tenants as well, if states are unable to find buyers within a year.

The inclusion of this in the statute was clearly a mistake, according to Rozen, who is currently an affordable housing lawyer. When we created the buy-out formula, we had no idea what we were doing.

The people who benefit from this tactic are frequently hidden from the general public. A Delaware limited liability company that established under the name Sombra Apartments LLC just prior to the purchase and has a modest internet presence flipped the Arizona property, which was formerly known as Sombra Apartments. The application that led to the loss of affordability safeguards was obtained by ProPublica through a public records request. It reveals that the LLC was owned by ReNue Properties, a Scottsdale, Arizona-based real estate investment firm. According to its website, ReNue has produced an average 81% return and specializes in the purchase and revitalization of underperforming multifamily properties. Requests for response from Michael Christiansen, who was ReNue’s CEO at the time of the transactions according to his LinkedIn profile, were not answered. According to a 2023 Arizona Republic investigation, the same opt-out technique has resulted in the loss of affordability protections for over 5,700 low-income units in the state.

It seems that certain businesses that took advantage of the loophole did so with Freddie Mac and Fannie Mae’s covert help. In order to strengthen the country’s housing sector, government-sponsored businesses usually purchase mortgages to provide liquidity into the mortgage market. According to property records, the businesses have lent money to low-income housing owners who have since removed affordability restrictions from their buildings or are attempting to do so. The company’s stated support for affordable housing seems to be at conflict with its involvement. Requests for response from Fannie and Freddie’s spokespeople were not answered.

The qualifying contract process was advocated by two industry insiders as a means of addressing the middle-income housing crisis. The CEO of Moline Investment Management, Charlie Moline, has stated that he has utilized the method to eliminate affordability protections from approximately 20 multifamily properties located throughout the Midwest.

According to him, low-income housing tax credit properties are usually too dilapidated and worn to be turned into upscale market-rate apartments. However, following a few minor improvements, the properties can appeal to middle-class renters once the income and rent restrictions are lifted. No one s displaced by what we re doing, said Moline, who contends that he keeps rent increases moderate. Our goal is to expand affordable housing to the missing middle.

That goal would be of little benefit to Lashunda Williams, a resident of a low-income apartment complex in Omaha, Nebraska, that Moline purchased last year and is taking through the opt-out process. Williams, 33, said she makes $17 an hour as a custodian at an Amazon warehouse and pays $899 for a one-bedroom apartment. I can barely keep up with my rent half the time, she said. If it increased, I would have to move.

Moline s argument was similarly unpersuasive to Rozen, the former Senate aide. The bottom line is the owner is increasing his rental income and tenants who the program was intended to serve are losing their affordable rents, Rozen said. And the federal government is being taken advantage of.

Affordable housing proponents have long called for repealing the qualified contract provision. But congressional efforts to do so have fizzled, in part due to lobbying from developers and private equity firms with interests in low-income housing, according to a former congressional staffer involved in the repeal effort.

Advocates have had more success pushing for state-level reforms. A majority of states now incentivize or require applicants for low-income housing tax credits to waive their opt-out rights, according to Moha Thakur of the National Housing Trust. The Department of Housing and Urban Development, the Federal Housing Finance Agency and the Department of Agriculture s Rural Housing Service have also recently proposed or enacted policies to combat the problem. That includes a2023 FHFA requirementthat Fannie Mae and Freddie Mac no longer invest in low-income housing eligible for early opt-outs. However, Fannie and Freddie can still back loans on such properties, which is more commonly how they are involved, according to Rozen. (Freddiehas saidit is studying the issue.) And given the Trump administration s mass-scale attempts to demolish regulations, particularly those adopted under the Biden administration, it s unclear whether the new policy initiatives will survive.

The state-level changes have had an impact, bringing the number of apartments lost annually through the opt-out from around 10,000 a year to between 6,000 and 7,000. Without congressional action, however, the loophole remains on the books and a threat to poor tenants. That loophole shouldn t exist, said Joy Noll, a tenant of the Arizona property, who lives on modest housing and disability subsidies. If rents rise further, Noll fears she will have to move: It made it impossible for those of us who are low income to stay.