Construction is underway on Centerline on Glendale, the first project to utilize Arizona’s new state low-income housing tax credit (LIHTC).
Gorman & Co. recently broke ground on the development that will bring 368 units of mixed-income housing and will be the single-largest private investment in Glendale’s Centerline redevelopment area.
“The new state housing tax credits were critical to the success of the Centerline project,” says Brian Swanton, president and CEO of Gorman & Co. “Due to the size of the development, being 368 units on 13 acres, we exhausted all gap funding sources available in the market and continued to have a large gap due to elevated construction costs, Davis-Bacon prevailing wages, and the current interest rate environment. The state tax credits filled the gap that the available soft funding sources couldn’t fill.”
The Arizona state credits are providing about $14.8 million, and the federal credits are providing about $36.2 million in equity to help finance the $120 million project across two phases.
Centerline on Glendale will serve households earning up to 80% of the area median income, including single individuals, families with children, the elderly, veterans, formerly homeless, and households with special needs.
“State credit programs have been wildly successful in the states that we work, including Georgia, Wisconsin, Colorado, and Arizona," says Swanton. "Because of that success, I see more and more states jumping on the state LIHTC bandwagon.”
About half of the nation’s states, as well as Washington, D.C., have some form of a state housing tax credit, with several more looking to follow, says Cindy Colvin, managing director of the housing tax credit business at Advantage Capital, an impact investor.
Illinois, Louisiana, Montana, North Carolina, Ohio, Oregon, and Texas are among the states that have introduced legislation or taken other steps to establish their own housing credits this year.
“States are seeing the affordability crisis grow and grow, and they’re starting to look for ways to explore state programs or even expand the ones they currently have,” Colvin says, noting that Wisconsin lawmakers have introduced a bill to more than double their state program’s annual cap to $100 million.
On the other side, legislation to create a Mississippi housing credit died in the Senate Finance Committee earlier this year.
Programs can take years to establish, but one big advantage exists—an established infrastructure. “Every state already has a federal LIHTC program in place so resources can be leveraged to implement a state credit,” Colvin says.
For developers, it’s often another critical tool in their toolbox.
“There has been an increase in activity with states either expanding or creating new state tax credits,” says Jennifer Schwartz, director of tax and housing advocacy at the National Council of State Housing Agencies (NCSHA). “I think the real benefit of a state tax credit is providing additional equity. Because we’ve seen such significant cost challenges over the last couple of years and volatility with certain commodities, having that other source of equity in addition to the federal LIHTC is critical.”
NCSHA’s focus is at the federal level, but state housing credits are an important complement to the federal LIHTC, notes Schwartz. The council is also a forum for state housing agencies to share information on a range of programs that they oversee.
While loans and soft funds are always critical to affordable housing transactions, state and federal LIHTCs come into a deal as equity. That’s important because it not only brings in key financing, but it helps the project by reducing the amount of debt that needs to be secured and eventually paid back, she says.
The State Credit Market
State housing credits make up between a $1 billion and $2 billion market, says Chris Hite, principal and CEO of Sugar Creek Capital, a leader in structuring these deals. His St. Louis-based firm works with developers and investors in 14 states.
He’s not surprised to see growing interest in state credits.
“States are recognizing the need for their citizens to have affordable housing, and they’re trying to figure out the most efficient way to do it,” he says. “When they realize the federal credit creates 90% to 95% of new affordable units, they figure out the most efficient way is to supplement that with a state tax credit.”
While federal LIHTCs drive deals by providing a significant portion of the project’s budget, state credits deliver important gap funding. They’re especially helpful in rural deals and projects serving veterans or residents with special needs that have very low rents and need to limit the amount of debt they are taking on.
State credits also are often critical in developments financed with tax-exempt bonds and 4% LIHTCs because these deals typically have less federal equity in them than 9% LIHTC transactions.
Big banks are the major investors in the federal credits. These banks also invest in state credits, but their appetites are limited. That means different investors are needed for state credits, and they can range from the major banks to individuals who pay a lot of taxes, according to Hite.
The price per credit is lower than the federal credit as investors do not receive depreciation. The price also varies from state to state, with investor demand and the time that the state spreads out redemption of the credit among the drivers in the price differential. In recent years, some states have seen prices range from about 55 to 65 cents per credit, and in others the range has been closer to 65 to 75 cents per credit.
In addition to seeing more states creating their own housing credits, industry leaders say investor interest is expanding.
“We continue to see investor demand grow as more states pass LIHTC programs and investors see the direct impact of their tax dollars being directed to help solve the nation’s housing crisis,” says Anne Johnson, a principal at Advantage Capital.
Program Details
The state programs usually mirror the federal LIHTC program, often utilizing the same application process and following similar rules. Even so, as more states look to establish or expand their own program, a number of important issues need to be considered.
“The longer time period that a program is authorized, the better it can be because it allows for more participants to invest time in figuring out how to make the program as efficient and consequential as it can be,” says Mark Shelburne, housing policy consultant with Novogradac. “That’s key.”
Another question is does the program have an overall maximum amount that can be awarded to projects in a year or over several years. This is the most common approach, with state lawmakers setting a cap.
Another way is to pair state credits one for one with the federal credit as is the case in Georgia, which enacted its credit in 2000. Widely held up as a model program, the Georgia credit is a 100% match of the federal housing credit. Other states may provide a partial match of the federal credits, while others award their state credits using different formulas.
It’s also important to pay attention to the effective date of a new program, adds Shelburne. It’s tempting to jump-start a program as soon as it’s authorized, but it’s often worthwhile to be more patient and deliberate. For example, Indiana didn’t roll out its program until about a year after it was created, giving the Indiana Housing and Community Development Authority and its partners time to determine the rules and what kind of projects would be funded, Shelburne says.
