Commission wants to speed payouts for Missouri low-income housing tax credits

Significant changes are being considered for Missouri’s low income housing tax credits, one of the state’s most expensive and controversial incentive programs, that proponents claim would make it more efficient and provide more housing at the same cost.

The Missouri Housing Development Commission on Thursday unanimously approved the draft plan for tax credits that will be issued later this year. The commission will take comments on the draft before a final vote is taken in August, Lt. Gov. Mike Kehoe, chairman of the commission, said during the meeting in Jefferson City.

The changes stem from a pilot program to accelerate redemption of the credits, used for 20 percent of the projects approved for credits in December. A study committee led by State Treasurer Scott Fitzpatrick found that the credits, which are sold to investors to raise money for construction, bring a higher price if they can be used sooner.

Under the draft plan, half of the credits available this year will be allocated to projects on an accelerated basis and half will use the traditional redemption model.

“As a developer, to be able to get more equity into the project means less debt and lower rents,” said developer Matt Fulson, chair of the Underwriting Committee of the Missouri Workforce Housing Association. “I think that is where you want to be. I was glad to see that there was going to be an increase.”

Missouri has two types of low-income housing tax credits but the most expensive one, and the one most sought by developers, is awarded in conjunction with federal credits. Under commission policies, when it approves federal tax credits for a project, it awards state credits equal to 70 percent of the federal credits.

In recent years, the credits have cost the state as much as $169 million. Final figures are not available for the fiscal year that ended June 30, but through March 31, $88.9 million had been redeemed, the lowest amount by that point in the year for at least five years.

When the commission met in December, it awarded credits to 36 projects to build or renovate 2,234 low-income units throughout the state. The credits for each project are redeemable over 10 years and the project must remain as low-income housing for 30 years. 

In the past, all the credits were redeemable in equal amounts each year. Under the change, redemption is front-loaded, with about 72 percent of the state credits redeemable in the first five years and the remainder over the next five.

The accelerated redemptions, Fitzpatrick’s study committee report states, mean the state could build more units with the same amount of credits.

“The state is getting more for its investment, investors are able to redeem more sooner, and we are still maintaining the 10-year duration of the credit stream,” Fitzpatrick said in an interview Wednesday.

Developers turn credits into cash by selling them to investment syndicates. Because the credits aren’t redeemable until a project is finished, it can be two to three years before investors realize a return.

That means they pay far less than face value. A state auditor’s report from 2014 found that investors pay an average of 42 cents for each $1 worth of credits.

One reason the price was so low was the federal tax implications of using a state credit. At the time, every dollar of state taxes paid was fully deductible on a federal return, meaning that at the highest tax bracket, a dollar paid to the state cut a federal tax bill by 39.6 cents.

Controversy over the cost of the program, and the political influence of developers, led to a three-year moratorium on tax credit issuances. Then-Gov. Eric Greitens stacked the commission with opponents of the credits and it voted against issuing any credits in December 2017.

The commission maintained that stance as it waited for legislators to enact changes. When that did not occur, it imposed the cap of 70 percent of federal credits for the state program, a figure that had passed both legislative chambers but not in a bill that became law.

Intervening federal tax changes that cap the deductibility of state taxes have helped make the state credits more expensive. Fitzpatrick’s committee reported that credits issued earlier in 2017 brought, on average, 57 cents on the dollar.

Under the pilot program, seven projects were selected for accelerated redemptions. Those projects, on average, received 67.5 cents from investors for every dollar of available credits, the committee reported.

That increase should quiet some critics who see the program as an inefficient way to build housing for low-income families and seniors, Fulson said.

“The biggest issue that is raised by some of the opponents of the program has to do with pricing,” Fulson said. “If we can increase pricing, that is as much as some people want.”

If extended to the whole program, the report states, the result could be close to 3 percent, or 63, more housing units. Depending on where the projects are approved, that could be several projects in rural areas or one moderate-sized development in an urban area. 

Projects approved in December ranged from 13 to 204 units.

The draft plan approved Thursday will be the subject of public hearings before final approval, Kehoe said at the meeting.

“I did hear from several elected officials who were positive,” he said. “There were others with concerns about upfront costs.”