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LIHTC priorities capture state affordable housing needs

In determining how to direct their federal Low Income Housing Tax Credit allocations, states set their course for addressing current and future demand for affordable housing.

April 21, 2015


Jacob Wascalus Community Development Project Manager
LIHTC priorities capture state affordable housing needs

Video Supplement: - How Can a CDC Transform a Neighborhood Through Affordable Housing?

In 2011, the Minnesota Housing Finance Agency (Minnesota Housing) awarded $1 million of Low Income Housing Tax Credits (LIHTCs) to Sand Companies for its proposed West View Estates development. According to Jamie Thelen, chief executive officer of the Minnesota-based construction, property management, and real estate developer, the federal tax allocation was instrumental in enabling his company to build the 67-unit building and offer the apartments at affordable rates.

“We could never have provided a project of this high quality at our rent price without the tax credits,” he says, explaining that rents in the building are 20 to 25 percent lower than those for comparable apartments in the area.

Among the reasons Sand Companies received the tax credits was the project’s location and targeted tenants. Situated ten miles west of Minneapolis in Plymouth, Minn., and containing primarily two- and three-bedroom units, West View Estates met two of Minnesota Housing’s affordable housing priorities: developments in areas with higher incomes and plenty of jobs, and developments for families.

Every year, state housing agencies such as Minnesota Housing examine their affordable housing needs to determine how best to direct the LIHTC, a federal tax credit program designed to spur private investment in affordable housing. For example, do a state’s demographic trends show a need for housing in central cities, suburbs, or smaller cities? Do they show a need for housing for long-term homeless, families, or seniors? What kinds of projects do developers have an appetite to build? And what needs are social service agencies seeing? The answers to these questions and more form the priorities housing finance agencies (HFAs) use to allocate the tax credits.

Community Dividend interviewed representatives from state HFAs in the Ninth Federal Reserve District to learn more about how their affordable housing priorities have changed over time, what they are currently, and where they may lie a half-decade from now. Common themes emerged from the respondents, such as the need for preserving existing affordable housing, but states also responded with priorities and predictions that reflected the specific needs within their boundaries.

How the tax credit works

Established in the Tax Reform Act of 1986, the LIHTC Program is the largest federal program for building or preserving affordable rental housing for low-income households. Under the program, each state receives a block of federal tax credits every year that it then allocates to nonprofit or for-profit developers to help finance affordable housing projects. The total value of the tax credits distributed to each state is based on either a calculation of $2.30 per state resident or a minimum of $2,680,000, whichever is higher.[1] For example, a state with 10 million residents would receive total tax credits of $23 million, while a state with 1 million residents would receive a total of $2.68 million.

Although the LIHTC Program is part of the federal tax code, state HFAs are charged with administering much of it, including allocating the tax credits to individual projects. By law, each HFA is required to produce a document called a qualified allocation plan (QAP) that reflects its state’s affordable housing priorities. The QAP, which is updated annually or at another regular interval, depending on the specific state, explains how the HFAs will evaluate and score project proposals that developers submit for LIHTC consideration. Federal regulations require HFAs to give preference to projects that, among other things, serve the lowest-income residents and provide affordable housing for the longest period of time. At minimum, the program requires housing units to remain affordable for a period of 30 years.

The application process for the tax credits is highly competitive, with states often receiving many times more proposals than they can award credits to. But developers who do receive a tax credit allocation can then sell the credits to banks or other investors to raise capital for their projects.[2] In turn, this reduces the debt the developer needs to take out, which enables the developer to ultimately charge lower rents.[3]

Location, location, location

The location of an affordable housing project, whether in an amenity-rich area or close to an employment center, emerges as a common LIHTC-allocation priority for several states in the Ninth District. One such state is Michigan. According to Andrew Martin, the allocations manager for the Michigan State Housing Development Authority (MSHDA), affordable housing developments proposed for city centers and areas in close proximity to services are viewed favorably in the Wolverine state.

“We’re very interested in supporting projects that advance neighborhood revitalization,” he says, noting that a project’s cost containment, walkability, [4] “green features,” and its developer’s track record are also important factors in making allocation awards, as is its economic integration (i.e., its mix of low-income and market-rate units).

Martin cites a project’s accessibility to multi-modal transportation options as something that MSHDA currently prioritizes. Although the Michigan HFA has recently awarded a lot of LIHTCs to projects located in larger population centers, it also favorably views proposed projects in smaller cities and towns that meet many of the MSHDA-expressed location priorities, such as if the site’s physical address is situated near a lot of services.

Minnesota is another state where location efficiency is an important priority. Projects that are situated near public transportation and that are deemed walkable may receive a favorable evaluation by Minnesota Housing. According to the agency’s commissioner, Mary Tingerthal, the state also emphasizes the importance of a project’s proximity to employment opportunities, particularly jobs whose workers would qualify to live in these income-restricted developments. Minnesota, as is also the case in Michigan, is finding a growing need for workforce housing and will likely prioritize this type of development in the future.

“We need to build affordable housing in communities, including smaller communities, where there are more jobs than there are people to fill them,” says Tingerthal.

As an example, she cites the city of Jackson, Minn., which has a population of approximately 3,300. The small, rural city is home to a large employer but has few affordable housing options within its border. In fact, the closest cluster of multi-unit subsidized housing properties is more than 30 miles away, and for a rural area with limited busing options—just a Community Action bus that serves three counties—the reliance on personal vehicles for getting to and from work can strain a household budget.

The Bakken effect

Some LIHTC priorities have arisen from the Bakken oil-shale region of western North Dakota and eastern Montana, where the frenetic drilling activity over the past half-decade has had a tangible ripple effect on the housing market. The unprecedented in-migration of workers, coupled with a limited supply of housing, has caused rents for once-affordable market-rate rental units to swell to the point that many people on fixed incomes are struggling to find housing that they can afford. During the run-up to the energy boom, the North Dakota Housing Finance Agency (NDHFA) had been more focused on ensuring that the state’s existing affordable housing inventory remained on the books and available to qualifying renters. But the recent tightening of the housing market has prompted the department to prioritize the construction of new units to help meet the increase in demand.

According to Jolene Kline, executive director of NDHFA, the difficulty in filling the state’s 10,000-unit affordable housing gap is compounded by increased costs of construction, which have been driven upward by higher labor and material costs. Still, NDHFA is currently adding about 150 units a year across four or five projects, with one priority being the creation of units targeted to seniors and people with special needs, many of whom are on fixed incomes.

“A lot of seniors and other people are living on fixed incomes and it’s becoming increasingly difficult for them to afford housing in an environment with escalating rents,” she says. “When you keep hearing about seniors being forced out of communities, it’s a state need to keep those people adequately housed in their local communities.”

Kline mentions that the recent dip in global oil prices has slowed the oil-extraction activity lately, which in turn could lower demand for housing in many parts of the state should workers start leaving their jobs. Under such a scenario, NDHFA may return to prioritizing the continued affordability of its existing subsidized housing inventory, as it did before the oil boom.

In the state to the west, the Montana Board of Housing (MBOH) allocates LIHTCs to a variety of projects, including to developments located close to public amenities. However, the agency has more recently reacted to the need for affordable housing near its border with North Dakota by making a $403,000 allocation in 2012 to a project in Sidney, Mont., that added 20 affordable units to the area. According to Mary Bair, program manager at MBOH, the department prioritizes projects that are appropriately sized for their market area, including projects in small rural communities. The MBOH also prioritizes projects that use green building and energy conservation standards.

People-based priorities

Multiple states in the Ninth District have also identified LIHTC allocation priorities based on the needs of specific populations. For example, South Dakota’s HFA, the South Dakota Housing Development Authority, places a priority on reducing homelessness and serving difficult-to-house individuals, and Minnesota Housing currently supports proposed developments that serve the long-term homeless. Minnesota Housing’s approach is integration-based: rather than allocate credits to a project that is entirely dedicated to housing these families and individuals, the agency prefers that a developer set aside a small number of housing units for this targeted population within a larger development—for instance, a building with 60 units that reserves 4 units for long-term homeless.

“Doing it this way has helped us to deconcentrate these very, very low-income families,” says Commissioner Tingerthal. “It gets people into a positive environment where other people are going to work and going to school. It’s been a really successful model for us.”

Tingerthal sees her agency gradually shifting its priority of setting aside units for the long-term homeless into a priority for housing families with children and also housing unaccompanied homeless youth, a demographic she says is on the rise.

As in North Dakota, both Minnesota Housing and the Wisconsin Housing and Economic Development Authority (WHEDA) identify seniors as an emerging priority. David Sheperd, a commercial lending officer at WHEDA, explains that his state’s demographic trends lead him to believe that housing for elders will become a priority in the coming years. Wisconsin currently prioritizes housing for special-needs populations, including homeless veterans and people who require supportive services. Sheperd believes those areas will continue to be a priority several years from now.

In Minnesota, Tingerthal states that her department is just now beginning to explore appropriate ways to target housing for very low-income seniors, who she says are ill-positioned to retire comfortably: “We have the Baby Boomers moving into their senior years, and unfortunately a lot of them don’t have much in the way of retirement savings.”

Maintaining affordability

For all of the states in the Ninth District, preserving their inventories of affordable units is another top priority—currently and in the coming years.[5]

For instance, although NDHFA currently prioritizes adding to its roster of 9,700 units, the agency reserves the right to allocate LIHTCs to existing developments should properties’ owners indicate that they may allow the 30-year affordability requirement associated with the LIHTC Program to expire. Many residential buildings nearing three decades of service require physical upgrades and rehabilitation, and a fresh allocation of tax credits could help finance a renovation. By using the LIHTC, such a property would then remain on a state’s affordable housing roster for another 30 years. But without a new allocation, the owner of such an affordable housing property could allow the tax credits to expire, take out a commercial loan to pay for physical enhancements, and subsequently increase rent prices to match market rates. This is a real concern in a state like North Dakota that has seen so much upward pressure on its housing market. According to NDHFA’s Kline, even though only 3 to 5 percent of the state’s portfolio of affordable housing currently is eligible to opt out, if a developer signals that its property could be lost from the state’s inventory, the agency will revisit the developer’s application for a new allocation of tax credits.

Minnesota currently has an affordable housing inventory of approximately 100,000 units, according to Minnesota Housing’s Tingerthal, who also notes that an estimated 600,000 households in Minnesota are considered cost-burdened.[6] Like in North Dakota, the inventory includes LIHTC-subsidized housing as well as developments supported or created through other programs, such as the U.S. Department of Housing and Urban Development’s Section 8 program or the U.S. Department of Agriculture’s Rural Development program. And some of these units are four decades old.

“We’re getting to the point where we need to start paying attention to some of the oldest LIHTC properties in the state,” Tingerthal says. “We take very seriously our stewardship of our existing affordable housing inventory because we think it’s such an important and precious resource for the state, and preserving existing affordable housing is a lot less expensive than building new affordable units.”

Michigan’s Martin, whose state has more than 230,000 units of affordable housing, sums up the compounding problem associated with building new affordable units: “Every time you make an award of credit for new construction, you’ve essentially created a new preservation deal at some point in the future.”

Changing the grade

For developers, knowing, understanding, and even reacting to the priorities of state HFAs can help them better prepare for the competitive LIHTC application process. States will often release in their QAPs a self-scoring worksheet that weights their varying priorities. Developers fill out the worksheet and can see how closely their proposed developments sync with state needs.

“We’ll make modifications to our project proposals if we can get points for certain items,” says Thelen, the developer of the West View Estates apartment building outside Minneapolis. “As long as the project still makes financial sense, we’ll typically follow the housing agency’s priorities.”


Total Population-Based LIHTC Allocations to Ninth District States, 2003–2012

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Total Population-Based LIHTC Allocations to Ninth District States, 2003–2012

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[1] For more information about the amounts of tax credits distributed to states each year, visit

[2] The credit is actually applicable for a ten-year period, meaning a bank that buys $1 million of tax credits, for instance, can claim a $1 million reduction in federal tax liability every year for a decade.

[3] It is worth noting that the rents of the affordable units, as well as the income earned by the tenants, are subject to limits based on area median gross incomes. For more information on these limits, visit and enter “LIHTC” in the search box.

[4] To help evaluate the strength of a project’s location, MSHDA and MHFA use the website, which measures a project’s proximity to amenities and its centrality.

[5] For a searchable database of affordable housing preservation policies for all 50 states in the U.S., visit

[6] A cost-burdened household is one that pays 30 percent or more of its monthly gross income on housing.