United States: The limits of SC’s new affordable housing tax credit
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Adopted last year, South Carolina Seniors Workforce and Affordable Housing Act attracts the attention of developers.
The law allows a tax credit on certain state taxes or fees for costs associated with reserving part of a project for affordable housing and workforce housing. Credits under the Act would equal the amount of federal credits under the LIHTC (Low Income Housing Tax Credit) program and can be very lucrative – at least, on paper. Notably, the state credit is “attributable,” allowing developers to monetize the credit by offering potential investors future tax credit allocations in return for up-front cash investments.
While every developer wants money for the debt pile, credit may only work for a fairly specific type of project:
- The pro forma must support the submarket rates for affordable housing. Using credit (and other incentives) can help the calculations justify the affordable housing component, but it complicates the matter.
- The credit is designed to pair closely with the federal LIHTC program and the project must meet the LIHTC program criteria. LIHTC projects are hyper-competitive and complex. A careful reading of the law suggests that a project that simply qualifies for a LIHTC deal may become eligible for state credit (perhaps without receiving LIHTC credits and the hassle that goes with it). But in practice, the State Housing Authority should endorse this approach and may view it with skepticism.
- A project must find an investor willing to accept long-term risk exposure. Tax credit “syndicators” bring together investors who end up financing the cash to invest in these projects, in exchange for the credits. These syndicators are understandably and rightly cautious about the risk to their investors. Since the state’s affordable housing tax credit is subject to the same capture rules as the federal housing tax credit, trustees should be familiar with a 15-year clawback potential on credits. they allocated to their investors, if a developer is deemed to have failed to comply with LIHTC requirements. Additionally, even if the syndicator and investors are comfortable with the exposure, it could lead to a decrease in credit value, which means less money for the developer.
The state’s affordable housing tax credit could ultimately serve as a “bonus” for projects already moving forward with LITHC credits, and could potentially allow the State Housing Authority to extend its federal LITHC allocation to more than projects. Despite the potentially limited application of credit, for the right project and the right pool of investors, this credit could very well make reserving units at sub-market rates more acceptable to developers.
If this credit leads to too much paperwork, public parties might offer other incentives that might be easier to work with.
Originally published in the Northern State Business Journal, August 26, 2021.
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