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State LIHTC Programs Growing, Evolving into Essential Part of Capital Stack

Published by Nick DeCicco on Wednesday, January 3, 2024

Journal Cover January 2024   Download PDF

State-level low-income housing tax credits (LIHTCs) have evolved to become an essential part of the capital stack in 2024, according to several industry professionals.

“Most states have moved beyond that gap filler,” said Chris Hite, president and CEO of Sugar Creek Capital, a LIHTC investor with offices in St. Louis and Atlanta. “They’re as essential as federal credits. … A deal isn’t contemplated without state tax credits.”

The demand comes at a time when states are creating or expanding their programs. The number of states with a state LIHTC program has more than doubled during the past decade–17 states have added the incentive since 2013, bringing the nation’s total to 29, along with the District of Columbia.

“It’s significantly exploded over the last few years,” said Cindy Colvin, managing director with Advantage Capital.

Hite echoed those sentiments. “I’ve been involved with state LIHTC programs since the 1990s and I’ve never seen a time like this,” Hite said. “We have states that are prioritizing affordable housing programs.”

Inflation Situation

Hite attributed the plethora of new state LIHTC programs–at least in political terms in the past four years–to inflation. 

“If you’re running for president and your first five sentences out of your mouth don’t address inflation, the average viewer is tuning out,” Hite said. “You have to address it. It’s on everyone’s mind.”
Food costs are rising and so, too, are rents, one of the largest nonvolatile contributors to the rise in inflation, Hite said. 

Challenges Posed

With so many programs launching, Hite and Colvin said it’s important to create a program that works legislatively for the needs of the state. Both said how the qualified allocation plan (QAP) is put together matters. Both emphasized not putting priorities in the state statutes and leaving more leeway for state housing finance organizations to control the QAP, allowing the vagaries of each state to apply how it’s needed.

“They have boots on ground,” Colvin said. “Let them have that discretion. Keep it out of the statute and keep it more in housing authorities’ hands.”

Hite was one of the participants on the Affordable Housing Tax Credit Coalition’s (AHTCC’s) panel that put together the State Low-Income Housing Tax Credits: Recommended Practices & Considerations tool, which was released in October 2023. 

Hite said it was Mark Shelburne, a Novogradac housing policy consultant who has helped several states build their QAP in recent years, who encouraged a “keep it simple” ethos.

“Really, that means don’t put your QAP priorities in the statute,” Hite said. “Model it after the federal program and start with that. If it gets more complex than that, states need to be very careful.”

Colvin said that states need to make sure the size of the program suits the needs of the state, while also being mindful of how restrictive it is to apply and access.

“If you create a program, if the program isn’t of a meaningful size or it has too many restraints, the overall impact is diminished,” Colvin said. “If you limit it to a small amount of credits per deals, you limit the amount of investors if only so many people can access the state’s credit. Is the juice worth the squeeze?”

Hite said another issue for state LIHTCs comes around “phantom income,” which occurs with certificated and refundable credits. The structures for them can result in less cash getting to affordable housing despite the fact that may appear more efficient in their nominal pricing.

Hite said a downward impact on pricing could come as investors question the value of capital losses associated with state LIHTC investments. The issue is structure dependent, Hite said.

Getting So Much Better All the Time

Though there are challenges, there are upsides to state LIHTCs, too.

Hite said state LIHTCs are a way to inject equity into a development without diminishing income or basis. “We see deals that could not have gotten done with federal credits alone,” Hite said.

The proliferation of state-level LIHTC programs has meant sharing knowledge and best practices between housing authorities, Colvin said. This is helpful in considering how to apply geographic distribution, rural vs. metro, application timing and more. When it comes to structure, Colvin said her ideal vision is one that mirrors the federal legislation and leverages Federal Housing Administration resources.

Colvin mentioned Georgia and Missouri as examples of states that have instituted a state LIHTC in a way that works well for those locales. “It’s a learning process for each individual state,” Colvin said.

2024 and Beyond

Hoping to peer into the next five years or even into the 2030s for state-level LIHTCs, Colvin and Hite emphasized that the state LIHTC can be an affective tool in combating the affordable housing crisis.

Hite said polling in multiple states shows affordable housing is a priority for people in many places and state governments are reacting to that, leading to mass expansion of state tax credit programs. He said the $1.9 trillion American Rescue Plan Act stimulus package in 2021 contributed to the rise in programs. 

Still, if budgets tighten, Hite said political advocacy may need to rise to keep programs supported.

“As long as states are feeling financially healthy, they’re going to do something for affordable housing,” Hite said. “When states don’t feel healthy and they feel fiscally imbalanced, they will look to cut these programs, but for now, wind is at our back and we’re sailing.”

Colvin reiterated that the size of a state’s program needs to fit the state while also being big enough to do its existence justice. She pointed to Texas and the gulf between possibilities of a $2.5 million and a $25 million program.

Colvin said the timing of Internal Revenue Service Form 8609 will also be important going forward. In Hawaii, state-level LIHTCs can be claimed and then amended on tax returns after the Form 8609 is filed, for example.

Hite emphasized the need, particularly for developers in states that are coming online to state LIHTCs, to hire professionals with experience.

“They really need to talk to national accounting firms that understand the taxation of state tax credits,” Hite said. “Local accounting firms that don’t have the experience with state tax credits are probably not prepared to deal with the complexities.”

Complexities arise during operation as well as development. When looking into the next decade, Colvin anticipates that adding much-needed social services will be a vital component in development and operation. Such services are beneficial especially for families with parents working multiple jobs, she said. The need for social services as well as using the state LIHTC to build affordable housing is an issue that cuts to the core of Colvin.

“I genuinely believe every human has the right to basic, safe, sustainable housing,” Colvin said. “That’s a big reason why I joined the Advantage team. Rising interest rates and inflation have hit lower-income families the hardest. Then those units are delayed, causing more capital stack issues. These state tax credit programs can get these developments going and start breaking ground.” 

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