Everything You Need to Know about State LIHTCs in 2022
State low-income housing tax credit (LIHTC) incentives are an attractive source of equity when financing the development of affordable housing. More states are realizing that.
Since January, bills were introduced to create state LIHTC incentives in six states–Ohio, Kansas, Mississippi, Illinois, Indiana and Kentucky. The Mississippi bill has since died in committee while the Indiana bill was signed into law.
“It’s become normal in the last few years to see this many new bills to create various state LIHTC programs,” said Mark Shelburne, senior manager at Novogradac. “But it’s a big increase from a few years before that.”
“Now, over 20 states have a state LIHTC program,” said Philip Gilman, director of tax policy at Sugar Creek Capital, a state LIHTC syndicator. “At this point, states are seeing the success of existing state tax credit programs.”
But what makes state LIHTC incentives so attractive?
State LIHTCs are either allocated credits–like the federal LIHTC incentive–or they are certificated credits. In the allocated credits model, credits are awarded to developers who allocate the credits to an investor partner. Typically this is done in the form of a limited partnership interest. Certificated credits, on the other hand, are sold outright to taxpayers who take no ownership in the affordable housing development.
While certificated state LIHTCs are helpful, industry experts find the allocated credit more beneficial.
Advantage Capital is a state LIHTC syndicator in Arkansas, Colorado, Georgia, Hawaii, Missouri, Nebraska, Oklahoma, South Carolina and Wisconsin, all of which have allocated state LIHTC incentives. “Advantage Capital invests in LIHTC properties in exchange for special allocation of the state credits, which allocation will be respected as a partnership investment for federal income tax purposes,” said Ruth Sorrell, principal at Advantage Capital. “Allocation of state credits is not an income-producing event, thus preventing loss of tax credit equity to tax. Transferable credits [also known as certificated credits] are more competitive when corporate income tax rates are low, but are still less efficient than allocated credits.”
Sugar Creek Capital also prefers allocated credits to the transferable model, which typically comes into the development as debt as a way to deal with the taxable income created by the sale of credits. “Allocated state tax credits provide clear benefits across the life of a deal,” said Gilman. “The allocated model brings equity into a deal and those dollars never need to be repaid.”
Sugar Creek Capital lauds simplicity in a state LIHTC incentive and it does all it can to simplify closings as well. “The strength of a state tax credit program is not adding complex structures, but amplifying the federal program,” said Gilman. “Sugar Creek is pretty much always willing to mirror terms with the federal investor. This helps for simplicity in closing.”
Gilman said this ability to mirror the federal LIHTC is a key strength of the state LIHTC. “One thing that makes [a state LIHTC incentive] effective is simplicity of execution,” said Gilman. “When housing finance agencies run state tax credit programs parallel to the federal LIHTC, there are minimal new rules and no need for a different QAP to follow. Make a program that mirrors the federal program. Underwriting, compliance, oversight should all be parallel to the federal program.”
Lou Bosso of Cabretta Capital, said one state LIHTC incentive rises above the rest.
“Georgia, Georgia, Georgia, that’s the one we look to emulate,” said Bosso. “For over 20 years, Georgia has been giving a 1:1 matching state credit to both the 9% and 4% programs. This is a state that understands the importance of building and sustaining an economic engine from the ground up and its performance relative to its neighbors bears that out. If you don’t build it, they aren’t coming.”
State LIHTCs Pair Well with the 9% and 4% Federal LIHTCs
“Some state tax credits are paired with the 9% credit and some with the 4% credit,” said Sorrell. “The Georgia state LIHTC is paired with both. But some [state LIHTC incentives] pair with just the 4% credit or just the 9% credit.”
There are reasons a state might choose to pair state LIHTCs with only 4% or 9% federal LIHTCs. Pairing a state LIHTC with the 4% federal LIHTC is a good idea for any state that isn’t using all of its private activity bond (PAB) volume cap.
“It’s important to consider a state’s needs,” said Sorrell. “The first thing we consider is whether the state is using its volume cap. If it’s not, it makes sense to pair [state LIHTCs] with the 4% credit. That way, you can unlock unused federal resources.”
“In some cases, states pair state credits with the 4% LIHTC,” said Gilman. Gilman said this is important because, “some states give back hundreds of millions of dollars when their unused bonds expire, not to mention the foregone 4% federal credits.”
State LIHTCs are often used to fill the gap in the capital stack for 4% LIHTC developments.
“Four-percent deals frequently have a gap, but state tax credits can often close that gap in strong rent markets and make more 4% deals feasible,” said Gilman. “State tax credits can also act as key gap filler to cover cost increases. Now, states who left money on the table with unused PABs can generate more affordable housing.”
When a state has reached its bond cap, then pairing the state LIHTCs with the federal 9% LIHTC might become a more attractive option.
“California is an interesting example in that regard,” said Gilman. “California maxed out their bond cap, so they introduced legislation to allow state tax credits to go to 9% deals. State tax credits with the 9% LIHTC can spread the federal credit further so more 9% deals can get done overall.” Gilman went on to say that when paired with the 9% LIHTC, a state credit can help fill gaps when inflation rises and it’s great for making affordable rural developments pencil out, a major priority in legislatures across the country.
Look Out for Several State LIHTC Programs in the Near Future
In March, Indiana enacted a state LIHTC incentive that is available to recipients of federal 4% LIHTCs. The credit will be for up to 100% of the federal credits issued to the property. The statewide annual cap is $30 million and the tax credit ends with the fiscal year ending June 30, 2027.
Sugar Creek Capital is active in the advocacy and creation of state LIHTC incentives. “We invest early with no guaranteed return,” said Gilman. “Investing in legislation upfront is a way to continue to push the envelope.”
Gilman said that Sugar Creek Capital helped draft the bills that created the LIHTC programs in Colorado, Virginia and Arizona, among others.
“We support the creation of new programs,” said Gilman. “We want to eliminate artificial barriers to competition. Competition brings a better market and better credit pricing. It’s better for developers, better for the industry and better for these programs long term.” One example Gilman notes is the ability to bifurcate the federal and state credits as being key to ensuring maximum competition.
Sorrell agrees. “I believe the bill to expand the Colorado LIHTC will pass,” said Sorrell. Introduced in January, H.B.22-1051 would expand the state LIHTC through 2034 and increase the annual allocation cap from $10 million to $15 million beginning in 2023.
Gilman is interested in several states that are looking to create or expand state LIHTC incentives.
“Kansas (create incentive), Colorado (expand incentive), Virginia (expand incentive) and Wisconsin (expand incentive) would all be interesting,” said Gilman. “For new programs, I’d say Kansas has a lot of momentum. The Virginia bill (expand incentive) is in conference committee right now. Kentucky (create incentive) is interesting because the team there is taking a strong grass roots approach with a lot of earned media articles.” Sugar Creek Capital testified to support the Kansas bill (S.B. 369), Colorado bill (H.B. 1051), and Virginia bill (S.B. 47).
“We believe Kansas has the best opportunity for passage this year,” said Sorrell, who helped draft S.B. 369. “I’m optimistic Kansas and Colorado will come to fruition.”
“Kansas is the 15th largest state by size and the 34th by population,” said Alissa Ice, director of housing development at Kansas Housing Resources Corporation (KHRC), which would allocate the state LIHTC if it passed into law. “We have to cover so much land with our allocation. A state tax credit would help us serve our state in a way that we haven’t done before.”
A state LIHTC would give KHRC much more flexibility.
“We try to make as many deals pencil out as we can, which makes rents a little higher than we would like,” said Ice. “A state tax credit would allow us to do deeper income targeting.”
Bosso hopes the bill to create a state LIHTC in Ohio passes through the House this year, but said it would face strong headwinds in the Senate.
Bosso said to keep an eye out for a state LIHTC in Texas in 2023.
“It’s been a five- or six-year push to create a state tax credit in Texas, maybe longer,” said Bosso. “A good bill got through the House in 2021 but died quietly in the Senate. I think everyone realizes that a Republican-led growth state like Texas needs to address its housing affordability problem in the key of [former President Ronald] Reagan. This concept is not new to the legislature there; it’s been socialized. Keep an eye toward Austin in 2023–there are serious people at work there.”
“It’s getting harder and harder to make deals pencil as 2022 rolls on,” says Bosso. “The gaps are widening and what will fill them? The states need to step in and not just with one-time soft money appropriations. Affordable housing is a health care-level issue that has gone bafflingly overlooked for far too long. Let’s hope that bellwether states like Ohio and Texas look to Georgia as a model.”
It’s important that industry practitioners continue to take an active role in supporting these state LIHTC incentives.
“It’s very important for developers and local advocates in the market to advocate for the enactment and expansion of these programs,” said Sorrell. “It’s great to have syndicators interested in bills, but legislators need to hear from developers and other stakeholders active in their state. Every state has tremendous need for affordable housing subsidy.”
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