The Limitations of SC’s New Affordable Housing Tax Credit

September 01, 2021 - J. Philip Land

Enacted last year, the South Carolina Workforce and Senior Affordable Housing Act is garnering attention from developers.

The Act allows for a tax credit against certain state taxes or fees for the costs associated with reserving a portion of a project for affordable 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 quite lucrative — at least, on paper. Notably, the state credit is “allocable,” allowing developers to monetize the credit by offering potential investors future tax credit allocations in exchange for upfront cash investments.

While every developer wants cash for the debt stack, the credit might only work for a fairly specific kind of project:

  1. The pro forma needs to support submarket rates for the affordable housing units. Using the credit (and other incentives) can help the math justify the affordable housing component but these add complications to the deal.

  2. The credit is designed to pair closely with the federal LIHTC program and the project must meet the criteria of the LIHTC program. LIHTC projects are hyper-competitive and complex. A close reading of the statute suggests that a project that merely qualifies for a LIHTC deal can become eligible for the state credit (maybe without receiving LIHTC credits and the hassle that comes with it). But practically, the State Housing Authority would have to sign off on this approach and might look skeptically on it.

  3. A project must find an investor willing to accept a long recapture risk exposure. Tax credit “syndicators” pool together investors who ultimately fund the cash to be invested in these projects, in exchange for the credits. These syndicators are naturally and rightfully cautious about risk for their investors. Because the state affordable housing tax credit is subject to the same capture rules as the federal housing tax credit, syndicators must get comfortable with a 15-year clawback potential on credits they’ve allocated to their investors, should a developer be deemed to have failed to comply with LIHTC requirements. Further, even if the syndicator and investors are comfortable with the exposure, it could cause the per-credit value to diminish, meaning less cash for the developer.

The state affordable housing tax credit ultimately might serve as a “bonus” for projects already moving forward with LITHC credits, and could potentially allow the State Housing Authority to spread its federal LITHC allocation to more projects. Despite the credit’s potentially limited application, for the right project and the right pool of investors, this credit could very well make reserving units at submarket rates more palatable for developers.

If this credit presents too much red tape, public parties might offer other incentives that might be easier to work with.

Originally published in the Upstate Business Journal, August 26, 2021.