The low-income housing tax credit (LIHTC) has been around for decades, created to help fill the void of affordable housing via partnerships among the federal and state governments and private investors and developers. Program details vary among the states, but one thing is certain: Funds are available for qualified projects. How you access them is a different story in every state — regardless, with the right help, they should be accessible to you no matter where you are.
At Baker Tilly’s first affordable housing workshop geared for underrepresented developers, DevelUP, a panel of industry professionals discussed the nuances among LIHTC programs in Illinois, Michigan and Wisconsin. The panelists, Emily Francis, tax credit program manager for Wisconsin Housing and Economic Development Authority (WHEDA) and Baker Tilly’s Kaitlin Konyn, senior manager, and Diana Dyste, manager, spoke about their experiences with the three programs during “Navigating LIHTC in Midwest markets as an underrepresented developer,” which was moderated by Ethan Tabakin, manager at Baker Tilly.
The federal government allocates two types of LIHTC to the states: 4% (noncompetitive) and 9% (competitive). Each state housing finance agency oversees distribution of the credits to developers through their respective application process, called a qualified allocation plan (QAP). Once a developer is awarded credits, they sell the credits to an investor or syndicator in exchange for equity. The developer and investor form a limited partnership, and the investor is able to use the credits to offset their tax liability over a 10-year period.
The 4% credit is tied to the state’s tax-exempt bond value cap authority and can be awarded at any time throughout the year by the state. The 4% credit represents less equity for the project.
With the 9% credit, the federal government allocates the amount of credit states can award on a per capita basis, though each state receives at least $3 million. For example, in 2022, Illinois expects to allocate about $29 million in credits, while Minnesota’s allocation is around $14.7 million in 2022 LIHTC (projects have been awarded) and $11 million for 2023 (for 2022 applications) and Wisconsin’s is about $15.1 million. States typically award this type of credit once or twice a year through a competitive application process.
Every state is slightly different in how they allocate their tax credits and other housing-related funding. The panel focused on those in the Midwest, specifically Illinois, Minnesota and Wisconsin.
The federal LIHTC credits allotted to the state are divvied up among four “set-aside” locations: city of Chicago, Chicago metro, other metro and nonmetro. The Illinois Housing Development Authority (IHDA) has a two-step application process for its 4% and 9% transactions. In the first step, developers submit a preliminary project assessment (PPA), and IHDA requests certain initial information, such as location, unit mix, rough development numbers and the site plan. Then IHDA uses the information to vet the project to ensure it’s a viable development in a location with no environmental concerns. The state finance agency will also consider the strength of the market, proximity to amenities as well as to other tax-credit projects.
PPAs are due in the fall and IHDA takes about 60 days to review the information and provide the developer with feedback, Konyn said. At this point, IHDA will notify the developer that the development is approved to move forward with a full application, or that it’s approved to move forward as long as certain changes or issues are made or addressed, or that the PPA was rejected and will not be allowed to move forward in the process.
Once the PPA is approved, the developer has 60 days to submit the full application. With the 9% credit application, IHDA has threshold items that are required and a 100-point scale to score the projects. Developers can gain points based on their projects’ sustainability, community characteristics, project design, among other items. For 4% credits, no scoring items are required, but if the project is on a qualified census tract, IHDA requires the developer to complete a community revitalization strategy.
Also, this most recent QAP expanded its minority- and woman-owned business enterprises (MBE and WBE, respectively) point category. In the past, developers could get points for project teams that involved architects, property managers and general contractors with MBE or WBE certifications. Under the new parameters, Konyn said IHDA has increased the number of points available when the developers or lead sponsors of the application are Black, Indigenous and People of Color (BIPOC). Points vary based on the percentage of BIPOC ownership.
In addition to the 9% and 4% credits, IHDA offers other funding resources and programs, including the Illinois Affordable Housing Tax Credit (IAHTC). It’s also known as the state donation tax credit and encourages private investment in affordable housing by providing donors of qualified donations with a one-time tax credit on their Illinois state income tax. The only caveat is the donation has to flow through a not-for-profit affordable housing sponsor to qualify.
Minnesota offers a healthy number of resources for affordable housing, though within a complex system, Dyste said.
For developers structuring deals with volume-limited tax-exempt bonds (TEB), developers apply to the Minnesota Management and Budget (MMB) by way of local cities or counties to secure the limited resource annually in January's Housing Pool and/or July's Unified Pool. Once TEB is secured, developers apply to the Minnesota Housing Finance Agency (MHFA) for 4% LIHTC unless the project is located in a sub-allocator jurisdiction in which case they would apply for 4% directly to the sub-allocator (more on this below). It is important to note that transactions must close within 180 days of TEB allocation or the resource will be clawed back by the MMB. State legislators have developed a tiered priority system for the TEB, whereby projects are prioritized in the following manner: preservation, 100% at 30% AMI; 100% at 50% AMI; 100% at 60% AMI.
For developers seeking the 9% and 4% credits, they can go through the MHFA or sub-allocator jurisdictions, including Minneapolis, St. Paul, and Washington and Dakota counties (Duluth, Rochester and St. Cloud are technically authorized sub-allocators; however, they have a joint powers agreement the MHFA, which administers their tax credits.). Each have their own QAP process and application cycle. To improve a project's chances of award, projects can apply to both the state’s housing finance agency and sub-allocator jurisdictions. Dyste said it’s important to have conversations with the sub-allocators first to make certain the whole funding environment is aware of the structure and the plan for the deal because funding partners do talk with each other in the state.
Minnesota’s QAP process is two years, with the annual request for proposal due in July. The agency also has a second round due in the first quarter of every year, where it distributes any remaining or returned tax credits from previous rounds.
The state’s competitive 9% and 4% application process funds a range of transactions, including family, senior, supportive housing and preservation. Many projects submit a dual application, structured as competitively as they can be to get as many points as possible, Dyste said. The state will determine if it will be funded as a 9% or alternatively as a 4% transaction, filling the gap with deferred financing from the state or other funding partners.
The state’s threshold requirements look at metro versus nonmetro as well as projects for people with disabilities, preservation deals and rural development transactions.
On top of that, the housing authority’s scoring is split in six different areas:
In the fourth area listed above, the state allocates points to majority BIPOC- or women-owned business enterprises, Dyste said. Moreover, points are awarded if the project sponsor, general contractor, architect or management agent are partners with a BIPOC- or woman-owned business enterprise with the goal of building the entity’s capacity to ultimately develop, manage, construct, design or own affordable housing.
The state of Wisconsin administers three types of tax credits: the federal competitive 9%, the federal noncompetitive 4% and a state 4% tax credit that is always paired with 4% credits. The Wisconsin Housing & Economic Development Authority (WHEDA) uses different categories to ensure the credits are distributed among different housing project types throughout the state. The set-aside types are not-for-profits, preservation, rural, supportive and innovative, while the set-asides for the state tax credit are geographic, split among rural, small urban and then the balance of the state.
During the tax credit application process, WHEDA looks at each project at three points in time. Initial application is where all of the scoring commitments are made and the scope of the project is determined. In the second phase, WHEDA confirms the project is moving forward and that necessary approvals have been awarded and the full capital stack was committed. Finally, once everything is built, WHEDA ensures all of the commitments made on the front end were upheld and the project was built as it was represented in the application.
Similar to Illinois and Minnesota, WHEDA divides its application into threshold and scoring elements, Francis said. The state finance agency is looking to make sure that if the project is awarded the tax credits, it will be in a position to move forward and be completed. For instance, some states don’t require zoning to be in place, but WHEDA requires that permissive zoning has been approved prior to the tax credit award. The state also looks for the project to have about 80% of the capital stack to be secured at the time of application. The project should also adhere to WHEDA’s design standards, which sometimes exceed basic code requirements.
The scoring categories mainly fall under a couple types: project design (e.g., sustainability, large units and universal design), tenants served (e.g., lowest-income residents, supporting housing, veterans housing) and location (e.g., near public transit, areas of economic opportunity, proximity to employment).
Another category, though, WHEDA looks closely at is development team. The state finance agency will look at a developer’s track record, projects completed and years of experience. WHEDA has an evaluation of capacity based on prior interactions and demonstrations of success as a developer. Points are also awarded for working with a not-for-profit developer as well as to new developers. Most recently, WHEDA added a new category that offers incentives for participation of developers who identify as BIPOC.
One of the driving goals for WHEDA in adding this last category is encourage capacity building and wealth building for participants, which is why it put a strong emphasis on the ownership structure. To prevent “tokenizing,” WHEDA stipulated that the developer fee sharing must be proportionate to ownership. A name can’t just be listed on the application without actual representation in the development or true equitable sharing of the financial benefits.
WHEDA also created an emerging business program for the construction side of the project that promotes involvement of small businesses owned, operated and controlled by people who are at an economic disadvantage. The hope is those tax dollars are incorporating and incentivizing equity and participation throughout the development process.
Baker Tilly’s DevelUP: affordable housing workshop is an event designed to help underrepresented developers conquer affordable housing, scale their business and build diversity. Through comprehensive consulting services, Baker Tilly assists emerging developers of affordable housing by helping them navigate the many steps necessary to bring a project to successful completion — from funding to project management.
For more information on this topic or to learn about services for underrepresented developers, contact our team.