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Experts Share Key Characteristics of Successful State LIHTCs

Published by Teresa Garcia on Thursday, January 4, 2024

Journal Cover January 2024   Download PDF

The challenges of financing affordable rental housing continue to evolve, but so do the solutions.  

“There was a time when you had your tax credits, you had your construction loan and maybe you had one other loan, and the capital stack doesn’t look like that these days for a variety of reasons–interest rates, construction costs–everything that people have been talking about the last couple of days,” said Erin Nave, a Denver-based real estate finance attorney at Holland & Hart LLP and panelist at the State of States session at last month’s Novogradac 2023 Housing Tax Credit Finance Conference in Las Vegas.

Panelists, representing a variety of roles in affordable housing financing, gathered to discuss how state-level low-income housing tax credits (LIHTCs) have become a crucial component of the capital stack for many affordable rental housing developers. 

“In today’s landscape, I can’t imagine not having [a state LIHTC],” said panelist Christine Hess, chief financial officer of the Nevada Housing Division, Nevada’s federal and state LIHTC allocating agency. “I think with the gaps that we’re hearing about and the projects that are still waiting to get done and in the pipeline, we absolutely need it and, in fact, we have to maximize it.”

There are state-level LIHTCs for 29 states, plus a district-level LIHTC in the District of Columbia. However, not all state LIHTCs are built the same. Various characteristics of state LIHTCs can influence not only tax credit equity pricing and structuring options, but can also affect the overall efficacy of a state LIHTC in attracting affordable housing investment.

Key Characteristics of State LIHTCs

Panel moderator and Novogradac principal Aaron Sherrard, CPA, asked panelists to discuss some of the key characteristics of state-level LIHTCs.


Aside from program size, one of the biggest differentiators in tax credit equity pricing among state LIHTCs is the duration of the state credit. “The quicker we can get our money back through the sale of credits, the more valuable those credits are,” said panelist Tom Schaefer, senior vice president of LIHTC syndication for Advantage Capital, who has syndicated state LIHTCs in 14 states. 

For comparison, Schaefer said that states with 10-year credits–such as Kansas, Oklahoma, Missouri, Georgia, South Carolina and Virginia–see state LIHTC equity pricing in the low-to-high 50-cent range, depending on offtake. States with six-year credits–such as Wisconsin, Nebraska and Colorado–typically see tax credit equity pricing in the mid-60s to low-70s, while states with five-year credits–such as Indiana and Hawaii–see slightly higher pricing.  

Hess said that Nevada’s new state LIHTC is a certificated credit with a one-year credit period and that the price per credit for the transactions that closed in 2023 had pricing around 90 cents per credit. 


Panelists said that bifurcation, which is the ability to have separate investors for the federal and state tax credits, helps expand the investor pool and creates upward pressure on tax credit equity pricing. Bifurcation is especially helpful in states like Nevada with no state income tax, said panelist Audra Hamernik, president and CEO of Las Vegas-based Nevada HAND, a nonprofit with 35 apartment communities that serve about 8,000 residents in southern Nevada. 

Because there is no Nevada state income tax, Nevada’s state LIHTC is typically taken to offset gaming and licensing fees, insurance premium taxes and general business taxes (primarily payroll taxes). “Bifurcation is really important because you can imagine if you’re a federal buyer, you may not have a payroll consequence here in Nevada that makes any sense or gaming or insurance [taxes],” said Hamernik. “That being so narrow really does limit our buyers and without bifurcation, I just don’t know how the program would work.”

Schaefer said bifurcation is also useful in states lacking corporate investors with enough appetite to take both the federal and state LIHTCs. “’The only way that they can maximize their federal and state credits is by splitting up who acquires both,” said Schaefer. “Obviously the state tax is lower than the federal income tax. You’re talking about anywhere from 5%-7% on average for state tax liability versus 21% for the federal. If you weren’t able to bifurcate that, you would start running out of federal investors who are interested in acquiring investments in areas where you can’t bifurcate because they would run out of state tax liability far faster than they would run out of federal liability.” Because of this, Schaefer said states that do not allow bifurcation often see a lower price per credit for both federal and state tax credits compared to states that do allow bifurcation. 

Certificated, Allocated and Refundable Credits

Another important aspect of state LIHTCs is whether the state tax credits are allocated, certificated, refundable or a hybrid of those options. Allocated credits flow through the tax credit partnership, as is the case with the federal LIHTC, while certificated credits can be transferred or sold outright to a third party. Refundable credits allow taxpayers to receive a tax refund for the credit amount in excess of one’s tax liability. Each approach has advantages and disadvantages to consider, so panelists advised the audience to consult their accountants to learn more about the potential consequences of each. 

For example, Schaefer noted how a certificated credit sale could indirectly affect tax credit equity pricing. “If you go through the certificated route, you could have the unintended consequences of diluting your federal purchase price per credit because they’re having to absorb income at the lower tier,” said Schaefer. “There are two benefits of the federal credit: the main two benefits are losses and the credit itself. If you reduce your lower-tier benefit of losses, you could inadvertently reduce your pricing on the federal credits if you went with a state certificated credit.”

Building a Successful State LIHTC

Panelists expanded on those key characteristics of state LIHTCs and shared their list of recommendations for states to create a successful state LIHTC:

  • Keep the program broad. Allow credit allocating agencies the flexibility to set up priorities/guidelines and administer the credit through a qualified allocation plan (QAP), as opposed to creating an overly nuanced statute that will be more difficult to update or fix in the legislature. “If you want a set-aside, whether it be for homeless veterans or seniors, let it be handled in the QAP,” said Schaefer.
  • Protect affordable housing funding by inviting lawmakers to see the benefits of LIHTC properties in person. “The best way to play defense is to play offense,” said Schaefer. “If they’re talking about expanding it, they’re not talking about cutting it.”
  • Make sure the state LIHTC is compatible with the federal LIHTC. “It would be so silly to have a different basis calculation or a different income range or a different priority than what we’ve already established in this affordable housing industry,” said Hamernik. 
  • Allow the state LIHTC to be bifurcated. “You’re really going to kill yourself as a state if you can’t bifurcate between the federal buyer and the state buyer,” said Hamernik.
  • Redeem tax credits as soon as possible. “The best way to maximize your pricing is to ensure that the credits can be redeemed as quick as possible,” said Schaefer. “States like Wisconsin and Colorado actually have a great idea. One hundred percent of the state credits are earned as soon as the project is placed in service.” 
  • Don’t discourage tax credit transfers. “Make sure that when a state tax credit gets transferred, that it’s not a taxable event for the person buying it,” said Hamernik.
  • Broaden the investor base. “The largest price per credit we see right now is in Missouri, which is 95 cents, but they also have the broadest audience,” said Schaefer. “The states we see with the lowest price per credit are by far the states with the most narrow band of investors. …. For one-year certificated credits, the end user price should be probably somewhere between 94 and 95 [cents], which would mean that if you had a broad enough investor base, the lower tier could see 91, 92 cents.”

In conclusion, panelists agreed that communication, cooperation and practicality are essential to the success of any state LIHTC. “Affordable housing is a great story,” said Nave. “There’s a reason why we’re all here. We love what we do. Get all of the stakeholders in the room so that everybody understands, for lack of a better term, how the donuts get made–it’s not always pretty. Keeping it simple, keeping it practical, keeping it flexible to the extent that you can, will help.”

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