Arizona nonprofits, struggling to maintain aging rentals, opting out of low-income program
Directly across from the “Welcome to Downtown Yuma” sign sits Hotel San Carlos, a five-story Art Deco building dating back to 1930. The building, which was once a fashionable gathering place for Hollywood stars and other members of high society, is listed in the National Register of Historic Places.
But for nearly three decades, Hotel San Carlos has served a very different purpose: affordable housing. The building houses formerly homeless people in its 60 housing units and received over $2 million in federal subsidies to keep rents low for 30 years.
That purpose, though, will soon come to an end. Despite being roughly two years away from the 30-year finish line, the nonprofit that owns Hotel San Carlos is moving residents out and is planning to put the building on the market. When it sells, it will likely no longer remain housing.
“We’re just on a break-even budget, and I realized I was losing a lot of money on this property,” said Carol Carr, president and CEO of Achieve Human Services, which owns the property. “And I just had to make a choice.”
Hotel San Carlos is one of 70 affordable housing properties in Arizona that, despite receiving government subsidies to stay affordable for at least three decades, are prematurely opting out.
While many of those properties are owned by investors or developers looking to make a quick profit, seven are owned by a handful of nonprofits. The majority of those nonprofits say they simply can no longer afford to keep rents low while maintaining the aging properties. Achieve Human Services, for instance, operated at a loss for all but one year since 2018, according to the organization's federal tax filings.
The result is an unexpected loss of affordable housing units at a time when Arizona desperately needs them. The state is short 136,000 rental homes for extremely low-income renters, according to the National Low Income Housing Coalition. Federal data shows Arizona’s homelessness crisis jumped 23% between 2020 and 2022.
It’s possible to stop the loss of the affordable units, and many other states have, experts said. But so far in Arizona, most solutions have either been underutilized or haven’t been tried.
Several of the nonprofits said they wanted to keep their properties attainable to the lowest-income renters but simply couldn’t. With the rising cost of utilities, insurance, repairs and maintenance, the extremely low rents simply don’t generate enough revenue to be sustainable, they said.
Native American Connections, one of the Valley’s longest-standing affordable housing nonprofits, owns two properties that will soon cut their 30 years short.
“At least we had 15 years of affordability,” said Joe Keeper, the organization’s senior director of real estate development. “Yeah, we would love to see it affordable in perpetuity. But where are the dollars to recapitalize it?”
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Some affordable housing experts expressed sympathy for the nonprofits and noted how difficult it is to finance affordable housing.
“There are reputable organizations that are using this to restructure their ownership so that they can get money into the properties to fix them up,” said Helen Dunlap, a national affordable housing expert.
Other experts criticized the nonprofits’ decision to leave the program early, saying it goes against their mission of providing affordable housing.
“If there are nonprofits going through it, it’s even more egregious than for-profits, in my view,” said Robert Rozen, a national affordable housing expert and policy consultant.
Future for properties and residents remains uncertain
Hotel San Carlos in Yuma and the six other nonprofit-owned properties became affordable housing complexes through a federal program called the Low-Income Housing Tax Credit program. Housing created through the LIHTC program is significantly subsidized by the federal government through tax credits and, in return, is supposed to stay affordable to low-income renters for a minimum of 30 years. But because of a section in the federal tax code called the qualified contract provision, property owners can effectively opt out of the program after just 15 years. Doing so is completely legal.
Since 2010, 70 Arizona properties have gone through the qualified contract process and prematurely left the program, costing the state more than 5,700 LIHTC housing units, according to Arizona Department of Housing records. The state is at risk of losing up to 10,000 more units in years to come.
Nationwide, more than 100,000 affordable units have likely been lost due to the qualified contract provision since 1990, according to estimates from the National Council of State Housing Agencies and the National Low Income Housing Coalition.
Many affordable housing advocates say the provision is being used in unintended ways and has become a loophole for LIHTC property owners to exploit.
The fates of the seven nonprofit-owned properties in Arizona — and the people who live there — vary.
All of Hotel San Carlos’ residents will be relocated to other housing arrangements by the time the property is sold, Carr said.
Willie Robinson, who has lived at the property for about five years, said his case manager took him to his future apartment, which is larger than his current one and comes with a TV.
“I’m excited to move into a bigger place,” he said.
Current residents of St. Luke’s Home, an assisted living facility for low-income seniors in Tucson, will be allowed to stay and will likely not have their rents raised, said Terri Waldman, its executive director. But the facility will begin charging new residents higher rents, which will help supplement the low-income units.
“I’m going to have people paying $800 for the same room I might have people paying $3,000,” Waldman said.
Whispering Palms and Carefree on North Central, two Phoenix apartment complexes owned by Native American Connections, are still required to have some of their units remain affordable to the lowest-income renters because they received other sources of restricted funding when they were being developed, Keeper said. Rents for the remaining units will be raised but will still be affordable for households with incomes between $46,000 and $75,000, he said.
“We don’t want to raise rents on individuals,” Keeper said. “But we also have to understand what it costs us to operate the property.”
While Native American Connections does have significant expenses, its annual net income has been rising steadily over the past few years, reaching $9.7 million in 2022, according to federal tax filings. A representative of the organization did not respond to The Arizona Republic's inquiry about the net income in time for publication.
Mountain Village Apartments in Show Low, which was owned by Foundation for Senior Living and Rural American Communities, has already been sold to a company in Honolulu. Foundation for Senior Living is helping residents apply for housing vouchers and other housing waitlists, said Steve Hasting, the organization’s chief of real estate — though such vouchers can be notoriously difficult to secure, as there are far fewer vouchers available than there are people in need.
Two properties, Roosevelt Commons in Phoenix and Willcox Townhomes in Willcox, are co-owned by a California nonprofit called Central Valley Coalition for Affordable Housing and, as of recently, a national affordable housing company called April Housing, which is owned by the massive investment firm Blackstone, which has bought thousands of homes across the U.S. (The Guardian called the company “the largest commercial landlord in history.”) Representatives of those entities said they plan to keep both properties affordable.
“As we explore long-term preservation solutions, we are voluntarily maintaining affordable rents in line with the prior regulatory agreement,” a spokesperson for April Housing said in an emailed statement.
The entities did not respond to additional questions from The Arizona Republic, such as at what income level the properties will remain affordable and whether current residents can stay if they can’t afford future rent increases.
Central Valley Coalition for Affordable Housing has drawn media scrutiny in the past for its CEO’s salary, which one year exceeded $500,000, as well as for dramatic rent increases, coupled with other issues, at one of its California properties. Since 2019, the organization has had between $2 million and $3 million in net income annually, according to tax records.
Some Roosevelt Commons residents said their rents already went up more than $100 in the past year and are worried they won’t stay affordable for much longer.
“I’m a native Phoenician, 60 years old, and I feel like I’m being thrown out of my own state,” said Tim Gronek, who has lived at Roosevelt Commons for two years.
Solutions will require money, political will
There are solutions to the problem, experts said. But they will take money, political action or both.
Over a dozen states have never lost any affordable housing units to the qualified contract provision, said Jennifer Schwartz, director of tax and housing advocacy at the National Council of State Housing Agencies. That’s because those states established policies early on that required LIHTC property developers to waive their right to go through the process.
Now, at least 39 states have that requirement, according to the National Housing Trust, a nonprofit that works to create and preserve affordable housing. In some of those states, properties are required to stay affordable for even longer than 30 years.
In November, Arizona began requiring developers applying for low-income housing tax credits to waive their right to go through the qualified contract process. The requirement applies to both 9% and 4% tax credits.
Until November, Arizona did not require developers to waive their right to the qualified contract process, but it did incentivize some to do so by ranking applications for 9% tax credits higher if they agreed to waive that right. Developers of every 9% tax credit deal since 2010 voluntarily waived their right to the qualified contract process, meaning those properties will stay affordable for the full 30 years.
But properties financed before 2010 can still opt out.
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State governments can also set aside funding for LIHTC properties that need reinvestment, which could keep some financially distressed properties from going through the qualified contract process.
But no such funding exists yet in Arizona. The state received one-time federal funding from the American Rescue Plan Act in 2022 to rehab LIHTC properties, but that money has been spent. Recurring funding would likely have to be allocated by the Legislature.
Owners who wish to keep their properties affordable but need more money for upkeep can “resyndicate” the property, or apply for another round of tax credits. The owner can then leverage the new credits to fund necessary repairs and maintenance. In exchange, they must agree to keep the property affordable for another 30 years.
But the most common and most valuable type of tax credits, known as 9% tax credits, are competitive and difficult to get in Arizona. In the past 10 years, the Arizona Department of Housing has not provided any 9% tax credits for resyndication.
The most impactful solution, experts said, would be to change the federal law and repeal the qualified contract provision, making it impossible for newly built LIHTC properties across the U.S. to leave the program before year 30.
In the past five years, members of Congress, primarily Democrats, have made three attempts to repeal the qualified contract provision nationwide. All have failed.
But one of those efforts was recently revived. The Decent, Affordable, Safe Housing for All Act, which was originally introduced in 2021 but stalled in committee, was reintroduced in March.
The bill, which is once again in committee, would make it impossible for LIHTC properties financed after 2023 to go through the qualified contract process and would make the option less appealing for older properties.
“At the end of the day, if we’re going to push owners on how to solve for this — the qualified contract — we’ve got to change the law,” said Dunlap, the housing expert.
Juliette Rihl covered housing insecurity and homelessness for The Arizona Republic. She can be reached on Twitter @julietterihl.
This article was reported through a fellowship supported by the Lilly Endowment and administered by the Chronicle of Philanthropy to expand coverage of philanthropy and nonprofits. The Arizona Republic is solely responsible for all content.
Coverage of housing insecurity on azcentral.com and in The Arizona Republic is supported by a grant from the Arizona Community Foundation.
This article originally appeared on Arizona Republic: Arizona nonprofits leave low-income program
