State tax credits for affordable housing projects can be critically important in the capital stack, helping developers bridge financing gaps, accelerate project timelines, and build innovative projects that meet local needs. But they’re also ripe with inefficiency.
Federal low-income housing tax credits (LIHTC) typically deliver upwards of 80 cents on the dollar plus depreciation, which unlocks other tax subsidies. But state credits can affect federal tax liability and are often worth significantly less if they are allocated over 10 years like the federal LIHTC.
Problems can arise when states cookie-cut the federal LIHTC program without understanding how today’s investors and developers need state credits to work more efficiently within their capital stack.
Efficient state programs help developers determine early on whether a project is financially feasible, so they can move from concept to reality more quickly, says Tim Wright, Director of Investment Analysis at Boston Financial. “It’s whether things can actually go from a spreadsheet to actual plans that are going to get consummated. That’s what we’d like to see.”
Some states stand out for their innovations, Wright says. Here’s what three of those states — California, Maine and Colorado — are doing, and examples of projects that Boston Financial, the longest-standing syndicator dedicated solely to affordable housing, has helped turn into reality.
California: Closing the timing gap
In 2023, California streamlined its state LIHTC program to help developers better manage cash flow, allowing them to obtain and sell certificates once a project is placed in service and the preliminary cost certification is complete, Wright says.
“It means there's a much smaller gap between completion and certificate and state credit money than there was before,” he says. “It means a lot less fear, uncertainty and doubt.”
That streamlined approach has bolstered projects like Pointe Common in Fullerton, Calif. The project, developed by Boston Financial’s long-time partner Meta, sits in the heart of Orange County and provides desperately needed housing in the high-cost region for households that earn between 30% and 70% of the area median income. More than half the homes are family-sized, and the community features amenities such as a playground, afterschool programs, and adult education classes.
Maine: Refundable credits for nonprofits
Maine offers a one-year state credit program designed to help 4% bond deals pencil out, since many don’t work without state subsidy, Wright says. The credit can be allocated to any entity, including a nonprofit partner. Because it’s refundable, a nonprofit developer serving as general partner can apply for a refund when it files a tax return for the year of placement in service.
Maine also offers a bridge loan program that makes money available right around placement in service instead of having to wait for the tax refund. Because the credit is refundable and aimed at nonprofits, Wright notes, “the amount of proceeds from it winds up being very close to the total dollar value of the credit.”
That kind of flexibility for nonprofits has made projects like Winter Landing in Portland, Maine, possible. Boston Financial worked with Community Housing of Maine, a nonprofit, to build the 52-unit project that was designed to be fossil fuel free and was built to Passive House Performance standards. On-site amenities range from a community lounge and kitchen to tele-med capabilities.
Colorado: Front-loading credits, maximizing value
Colorado has a two-pronged approach that sets it apart. The state offers a six-year state credit that’s earned starting the year a project is placed in service, not when it is fully leased up, which tends to be the norm elsewhere, Wright says. Colorado also offers a new secondary credit for transit-oriented communities that creates a five-year credit which is earned at 70% the first year, 8% for the next two years, and 7% the last two years.
The program reduces the time-value-of-money problem that erodes the value of federal credits, Wright says. “It’s going to make it easier to get a higher price for these credits and less economic friction between what they're allocating with and what they're getting.”
Innovations like these helped get Sanctuary at Potomac in Aurora, Colo., off the ground. Boston Financial worked with Aurora Housing Authority to develop this permanent supportive housing project, which features 43 one-bedroom units and is located on the Aurora Mental Health & Recovery campus. It provides accessible housing and vital mental health and medical services to residents.
Helping Good Developers, Fueling Good Deals
Bottom line, these creative state programs reflect the needs of developers and make projects happen, reducing roadblocks and bringing more certainty to an uncertain sector, Wright says. That’s a critical part of the solution to the ongoing affordable housing crisis.
“Most of the developers I've seen are doing this because this is what they want to do. This is the vision they have for their company,” Wright says. “If we have a more efficient way to fill the gaps … it's going to be easier to have good developers do more good deals. That's what everyone wants to see.”