During the "Leveraging and Maximizing State Tax Credits" session at AHIC’s 2024 Fall Affordable Housing Summit, industry experts shared valuable insights into the growing importance of state tax credits in affordable housing finance. Moderated by Jill Goldstein of Kutak Rock, the panel featured Chris Hite from Sugar Creek Capital, John Lee of Hunt Capital Partners, Mitch Kelly of Georgia’s Department of Community Affairs, and Kris Schweitzer of U.S. Bancorp Impact Finance. The discussion focused on the prevalence of state housing credits, strategies for combining state and federal LIHTC, and the role of state credits in addressing financing gaps.

The Growing Popularity of State Tax Credits
State tax credits have expanded rapidly over the last decade, largely due to favorable state budgets and growing demand for affordable housing. Currently, 30 states have some form of state housing credits. Chris Hite emphasized that the success of these programs often starts at the grassroots level, with local housing advocates pushing for legislative support. "It’s the housers in the state who need to advocate for these credits," Hite noted, explaining that successful legislation requires cooperation between housing agencies, chambers of commerce, and even farm bureaus in some states.

Once enacted, state credits provide a crucial financial boost to housing developments. As federal tax credits alone are often insufficient to cover the full cost of development, state credits help bridge the financing gap, especially in high-cost environments where interest rates, inflation, and construction costs are on the rise.

A State-Level Success Story: Georgia
Mitch Kelly highlighted Georgia as one of the most successful examples of a state leveraging tax credits. Georgia’s state tax credit program is unique in that it offers a one-to-one match with federal LIHTC, making it one of the most robust programs in the country. The state’s ability to fund nearly 7,000 affordable housing units annually—5,600 of which come from the 4% program—demonstrates the power of state credits to drive housing production.

Kelly explained that without Georgia’s state tax credits, affordable housing production would drop by 60%, and the state would be unable to meet the growing demand for affordable units. He emphasized that the combination of state and federal credits provides critical equity, particularly in the 4% program, where developments often face significant financing gaps due to high interest rates and rising construction costs.

Successful Program Structures and Investor Preferences
Panelists also discussed the attributes of successful state credit programs. Kris Schweitzer noted that investors prefer state credits that are transferable and free of recapture provisions. States like California, New York, and Massachusetts have transferable credit programs that make them particularly attractive to investors, as they offer flexibility and lower risk.

However, not all states have adopted this approach. In some states, allocated credits, which cannot be transferred, remain the norm. This can complicate the investment process, as allocated credits typically involve greater risk, especially if they carry recapture provisions. Despite these challenges, allocated credits remain an important tool in states that do not offer transferable credits, and they can still attract investors if properly structured.

Schweitzer and Hite both praised states like Georgia and Colorado for their well-managed programs. These states have housing agencies that actively promote the benefits of state credits, working closely with developers and investors to ensure the success of their programs. In Georgia, for example, the state housing finance agency plays a pivotal role in advocating for state credits within the government, including the governor’s office, budget office, and department of revenue.

Challenges and Misconceptions
While state tax credits have been instrumental in closing financing gaps, they are not without challenges. One major concern raised during the session was the potential for oversaturation. Kelly explained that in states like Georgia, which have robust housing production goals, there is always a risk that too many state credits could flood the market, driving down investor demand and pricing. "We’re always thinking about that balance," Kelly said, noting that Georgia is careful to manage its bond allocation process to prevent oversaturation.

Another issue that surfaced during the discussion was the complexity of using state credits in different tax environments. John Lee highlighted the importance of understanding the types of income that state credits can offset, as not all credits can be applied to every form of tax liability. For example, certain credits may not offset franchise taxes or premium taxes, making it essential for investors to do their due diligence before entering a deal. "We haven’t had a deal where the investor couldn’t use the credits, but it’s something we watch carefully," Lee said.

Panelists also touched on the legal complexities of structuring state credit deals. In states like California, where developers can choose between allocated and certificated credits, the structure of the deal can have significant implications for investors. Certificated credits often offer higher pricing because they can be transferred more easily, but they also come with added layers of complexity, such as the involvement of nonprofits and loan structures.

The Future of State Credits
Looking ahead, panelists expressed optimism about the continued expansion of state tax credit programs, but they also highlighted several areas of concern. For example, Chris Hite pointed out that state legislators are becoming more familiar with the mechanics of state credits and are increasingly scrutinizing programs for potential risks, such as the lack of recapture provisions. "Legislators want to make sure these credits are being used properly, and they don’t want to be the ones to defend a failed program," Hite warned.

Despite these challenges, the panel agreed that state credits are an indispensable tool for affordable housing development. With rising construction costs, interest rates, and inflation, state credits provide the equity needed to move projects forward. By working closely with state housing agencies and advocating for strong, well-structured programs, developers and investors can continue to leverage state credits to meet the growing demand for affordable housing.

Conclusion
The "Leveraging and Maximizing State Tax Credits" session highlighted the critical role state credits play in the affordable housing finance ecosystem. By filling financing gaps left by federal LIHTC, state credits enable more housing projects to move forward, particularly in states like Georgia and Colorado, where well-structured programs have driven significant housing production. However, as the use of state credits continues to grow, investors and developers must remain vigilant about oversaturation, market trends, and legal complexities to ensure the continued success of these programs.