State LIHTCs and the Federal 4 Percent LIHTC
State low-income housing tax credit (LIHTC) programs are powerful tools when financing affordable housing nationwide.
Their impact can be that much more substantial when paired with the 4 percent federal credit.
California, Colorado, Connecticut and Georgia are among the states with state LIHTC programs that pair with the federal 4 percent credit, but each allocating agency has its own approach to whether and how to incentivize pairing the federal and state credits.
“More and more people are realizing that state tax credits help to utilize tax-exempt bonds, which is important because tax-exempt bonds often go to waste in most states,” said Mark Shelburne, senior manager of public policy at Novogradac.
Colorado’s state LIHTC program, the affordable housing tax credit (AHTC), in May doubled its annual allocation (from $5 million to $10 million) and in 2018, the program was extended five years, through 2024.
In order to receive a state AHTC allocation in Colorado, the affordable housing development must also use the federal 4 percent LIHTC. “We exclusively pair the AHTC program with the federal 4 percent LIHTC. The best use is to pair it with the 4 percent credit,” said Tasha Weaver, manager of the tax credit department at Colorado Housing and Finance Authority (CHFA), which administers the federal and state credits across Colorado. “Doing this takes some pressure off the competition for the federal 9 percent LIHTCs.”
Weaver said pairing the AHTC and the 4 percent LIHTC makes both programs more efficient and impactful. “These hybrid deals cover 45-to-50 percent of project costs,” said Weaver. “The 9 percent LIHTC supports 70 percent of project costs. Those are successful on their own.”
The AHTC was renewed in 2014 and has proven to be very successful. Since 2014, the AHTC has helped finance the construction of 6,140 affordable housing apartments.
“In 2014, we were excited to see the state credit program kick off (again). We weren’t sure it would be successful. It totally exceeded our expectations,” said Weaver. “The state credit received more investor interest than we expected.”
“I can’t say enough about the Colorado state credit,” said Shelburne. “It’s a great example for other states to follow.”
This program is truly needed in Colorado.
“Half of the renters in Colorado are housing cost-burdened, meaning they spend 30 percent or more of their income on rent,” said Megan Herrera, public relations and communications specialist at CHFA. “One in four renters are extremely cost-burdened, meaning they spend 50 percent or more of their income on rent. It’s so important to have this resource. That’s one of the reasons it’s so successful.”
Another key to the success of AHTC is the incentive’s ability to work well with other federal and state resources.
The Colorado state AHTC pairs well with HOME funds. CHFA also pairs it with the Capital Magnet Fund (CMF)—CHFA recently received a $7.1 million allocation of CMF funds from the Community Development Financial Institutions Fund. Weaver also said the state credit pairs well with the Colorado Health Foundation’s Healthy Housing Fund.
California’s 2019-2020 approved budget came with great news for the state’s LIHTC program—increasing the annual state LIHTC allocation by $500 million, a five-fold increase on the 2019 level.
Furthermore, like Colorado, all of the additional $500 million state LIHTC allocation must go to new construction developments that receive tax-exempt private activity bond financing and the federal 4 percent LIHTC. The legislation only mandates the extra LIHTC allocation for 2020, but allows the $500 million LIHTC allocation in future years if the Legislature approves it.
Georgia’s state LIHTC program, the Georgia housing tax credit, can be paired with both the federal 9 percent and 4 percent LIHTC programs. In fact, the state credit is automatically allocated on a dollar-for-dollar basis with either federal credit.
The state LIHTC program has a significant impact on 4 percent LIHTC developments.
“Due in large part to the state credit, the number of bond deals has quadrupled from about three years ago,” said Ryan Fleming, director of the Office of Housing Finance at the Georgia Department of Community Affairs, which administers the federal and state LIHTC programs. “If we didn’t have the state tax credit, we wouldn’t get 80 percent of our bond applications. Along with sources of soft funding, the state credit equity closes the financing gap in many bond deals that otherwise would never pencil out.”
Fleming said that Georgia’s state LIHTC is bringing out-of-state affordable housing developers into Georgia.
The Georgia Department of Community Affairs acts as a lender for HOME, Community Development Block Grant, National Housing Trust Fund and Tax Credit Assistance program loans, which all pair well with the state LIHTC program.
The Connecticut housing tax credit contribution (HTCC) program, Connecticut’s state LIHTC program, can also be paired with the federal 9 percent and 4 percent LIHTCs. However, like Georgia, the state’s QAP doesn’t incentivize stacking the state and federal LIHTCs.
“The HTCC program is designed to assist housing programs (e.g. homeownership, supportive housing, workforce housing and rentals) other than just LIHTC deals,” said Joe Voccio, director of multifamily at the Connecticut Housing Finance Authority, which administers the federal and state LIHTCs throughout Connecticut. “As such, it doesn’t lend itself to being awarded in conjunction with the QAP and LIHTC.” That being said, the Connecticut Housing Finance Authority noted that many properties do apply for and receive both HTCCs and federal LIHTCs.
Voccio said that the Connecticut Housing Finance Authority allocates up to $10 million annually in state tax credits under the HTCC program exclusively to nonprofit entities developing very-low, low- and moderate-income housing in Connecticut. Furthermore, state law requires annual set-asides of $1 million for workforce housing and $2 million for permanent supportive housing. And, the maximum tax credit allocation is $500,000 per applicant.
While the execution may be different from state to state, pairing state LIHTCs with the federal 4 percent LIHTC can be an effective way to finance affordable housing development.
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