12 Questions for New State LIHTC Programs

Published by Mark Shelburne, Michael Kressig on Tuesday, March 9, 2021 - 12:00am

Across the country more and more states are creating their own low-income housing tax credit (LIHTC) programs. Doing so can generate many positive outcomes, as demonstrated by Colorado’s 2020 annual report.

Below are 12 questions decision-makers must answer when taking this step. The key with each is basing decisions on input from tax and policy experts.

Program Design

1.    Is there a separate annual maximum?

Some states mandate the state LIHTC amount awarded each year cannot exceed the federal LIHTC (which is limited) by saying the two equal each other for eligible properties. Other states set a distinct authority, such as California’s recent $500 million expansion. The latter creates the need for its own allocation system, because demand may exceed supply. The criteria are best left to housing agencies to determine (see #2).

2.    Should the statute contain set-asides, selection criteria, or threshold requirements?

Specific priorities enshrined in law may not age well, and then become difficult to change. Whenever possible states should follow the example of Internal Revenue Code Section 42 and leave implementation to housing agencies. These professionals have extensive experience in determining the appropriate standards for eligibility and resource distribution, including in qualified allocation plans (QAPs). Any priorities written into statute should be subject to periodic review by appointed oversight committees.

3.    When does the program begin (effective date)?

The cleanest approach is to start with properties awarded in the next cycle. While agencies are able to re-underwrite properties already in the development pipeline, doing so can lead to complexities. The time between enactment and accepting applications is best spent on working out implementation specifics.

4.    Does the LIHTC have a sunset?

Some states create an artificial end date, which is unnecessary because legislatures can terminate credits at any time. The fewer years until the sunset, the less time stakeholders will spend on how to make the program more effective. Additionally, it can take at least three annual cycles to demonstrate program effectiveness given that it often takes up to six months to close after credit awards are made, more than a year to construct the property, and another year to stabilize.

Property-Level Issues

5.    Is the credit available with the federal 4% LIHTC, 9% LIHTC or both?

A state LIHTC can help the financial feasibility of tax-exempt bond transactions and/or allow agencies to award more 9% LIHTC applications (less to each, spread the resource farther). For both, the additional equity can make certain policy goals more possible, such as deeper targeting or enhanced design features. If the program has a separate maximum, the agency should be able to shift between 4% and 9% applications to provide for maximum flexibility. Creating a stand-alone credit available without any federal LIHTCs would not make sense.

6.    How many years does a property generate the LIHTC?

The main consideration is usually budgetary. Although it may seem obvious, an important reality is the same total amount of credits spread over a longer period means less forgone revenue annually. Another reason many states mirror the federal 10-year period is simplicity.

7.    What is the calculation of the amount awarded to each development?

In other words,

  • can the agency separately determine the state LIHTC amount, or
  • does it automatically equal the federal?

If the program has a separate maximum (see #1), for practical purposes the answer must be the former. Otherwise the allocation process would be intensely and unnecessarily complex. Note some state constitutions contain what are known as “uniformity” requirements which limit officials’ power to vary the effects of taxation.

8.    How do the parties involved document the tax reduction?

As with all aspects of implementation, the housing agency is in the best position to determine the process, in this case by working with the with state department of revenue or taxation. Overall the documentation should correspond to the federal, including a Form 8609 equivalent.

Tax Law Considerations

9.    Which taxes can the LIHTC reduce?

Naturally the answers to this question vary by state. Covering a broader range of taxes is better because it results in a wider array of potential investors, which is especially important in states with a large number of competing credits. Also, a credit that can be used against a variety of taxes creates a diverse pool of potential investors, mitigating price fluctuations due to economic and tax law changes. Different investor types have more or less interest depending on the state of the economy.

10.  Will the credit be allocated, certificated or allow for either?

The differences between these options are beyond the scope of this discussion. While the specifics may seem esoteric, this is in fact a fundamental, sometimes debated question. What matters in drafting the law is seeking input from multiple knowledgeable parties, especially those involved in syndication.

11.  May an equity investor transfer its interest in the ownership entity to another party?

An inability to end participation forces investors to factor in the possibility of their circumstances changing in the future, which results in lower equity pricing. Conversely, equity pricing is maximized in a free-flowing, efficient market. This outcome is achieved under an allocation model that allows syndicators to add and subtract investors from year to year such that investors are not committed to the full LIHTC stream. Several states have adopted this model.

12.  How does the state enforce compliance?

Most statutes tie the standards and consequences to the federal LIHTC; what happens for federal purposes is the same for the state. Housing agencies have monitored the federal program for more than three decades. The duration of these requirements should correspond to the number of years the property generates state LIHTCs.

Conclusion

Creating a state LIHTC is one of the best decisions elected officials can make to help with the affordability crisis and spur their economies. Novogradac professionals with expertise in structuring transactions and implementing rental housing programs are available to help.