Colorado has experienced a distinct pattern in affordable housing development compared to the rest of the United States, according to an analysis in the latest edition of the Rocky Mountain Economist. The Low-Income Housing Tax Credit (LIHTC) program, established by the Tax Reform Act in 1986, has been a central mechanism for encouraging private investment in affordable rental housing nationwide. The program requires that a portion of units developed remain priced at affordable levels for at least 15 years under federal compliance, after which state authorities take over monitoring and enforcement for an extended period.
The report highlights that Colorado has surpassed national averages in the growth of LIHTC-financed affordable housing units over the past 15 years. “Preservation efforts of affordable housing advocates, requirements of state housing authorities, and other land use restriction agreements will constrain incentives to transition LIHTC-financed units to market rental rates even when the federal compliance periods close,” states the publication. However, it also notes that while Colorado saw accelerated growth in recent years, the number of new rental units is expected to slow soon.
Developers receive tax credits from state agencies and sell them to investors such as financial institutions or corporations. This process provides upfront equity capital and reduces debt burdens for developers. Investors claim tax credits over a decade if they keep some units at below-market rates for income-qualifying households during a 15-year compliance period. Financial institutions can also gain Community Reinvestment Act credit through these investments. This structure fosters public-private partnerships supporting affordable housing goals.
Between 1990 and 2020, approximately 2.9 million LIHTC-funded affordable housing units were placed in service across the U.S., with about 52,000 developed in Colorado. Including all units built with LIHTC financing—not just those with affordability restrictions—the total rises to about 3.2 million nationally and 58,000 in Colorado.
Nationally, growth in LIHTC-funded developments slowed after 2010. In contrast, Colorado’s development picked up momentum during recovery from the financial crisis and continued at a faster pace over the last decade. This coincided with significant population growth due to high levels of migration into Colorado from other regions.
The downward trend in U.S. development since 2010 means more properties are now leaving their initial federal compliance periods than entering them—a situation not mirrored in Colorado until recently due to its later surge in construction. “Colorado maintained positive, albeit modest, net flows of housing units into federal compliance periods in recent years,” according to the report.
However, data indicate this trend may change soon as multifamily unit deliveries have dropped sharply both for affordable and market-rate projects—reaching levels not seen locally for almost ten years—bringing Colorado’s pace back toward national averages.
Looking forward, analysts note uncertainty regarding whether Colorado’s rate of development will return to its previous rapid pace or align more closely with slower national trends: “Whether the pace of housing development in Colorado will normalize to the relatively faster rate of the past decade or to something closer to the national trend over the medium term remains unclear.”
For further details on individual LIHTC properties nationwide, information is available from HUD at https://www.huduser.gov/portal/datasets/lihtc.html.
The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
