New Developments, Driving Results for the Bond Program
By Thom Amdur
4 min read
According to a recent report published by the Council of Community Finance Agencies (CDFA), 2017 was a record setting year for multifamily private activity bond issuances – $15,302,500,000 in total. Given the national shortage of affordable housing this is great news for affordable housing stakeholders. In many markets around the country, tax exempt bonds are significant contributors to the affordable housing supply; in some states, bonds finance more affordable units than the nine percent Low Income Housing Tax Credit (LIHTC). Yet most states do not fully utilize their volume cap and there are many states where production via the multifamily bond program is a de minimis contributor.
I often talk about legislative solutions in this column and provisions in Senate Bill 548 (Senator Maria Cantwell’s Affordable Housing Credit Improvement bill still in committee) would— among other things—cement the four percent credit rate and increase the utilization of multifamily bonds. As advocates, we cannot take our foot off the pedal this fall and winter to achieve this vital legislative enhancement.
But, in addition, there are other factors that contribute to successful bond transactions, many of which can be enhanced or influenced by local policymakers.
First and foremost, states must have adequate private activity bond volume cap dedicated to multifamily production. While many states do not fully utilize their PAB cap, there are some states where cap is in short supply and there is competing demand with mortgage revenue bonds, industrial development bonds and other uses. Given the power of the LIHTC, it is essential volume cap is dedicated for multifamily use and managed through the use of taxable tails and other strategies to make it go further.
Economics matter. Bond deals tend to work best in markets with high area median incomes (AMIs) and minimal deep income targeting requirements. Higher achievable rents drive proceeds. Availability of gap funding resources, including grants, soft loans and state credits, further enhance the transactional economics. States and local jurisdictions can drive more activity in the bond programs by targeting their scarce gap resources to markets that can maximize leverage.
Enhancing tax credit equity is also an important strategy for success. Prioritizing locations and resources for bond deals located in Difficult Development Areas (DDAs) and Qualified Census Tracts (QCTs) leverages additional tax credit equity. The same goes for markets and submarkets where there are significant Community Reinvestment Act (CRA) players, who can further increase equity pricing and decrease debt spreads. Minimizing the use of eligible basis caps and implementing policies that ensure developer fees are adequate and commensurate with transactional risk further enhance equity proceeds.
Encouraging scale and efficiency is another good game plan. Larger projects (in markets that can accommodate them) should be encouraged since they tend to create economies of scale in design and construction. The ability to spread the fixed soft costs associated with bond deals across a great number of units is a further benefit. Local communities can also take steps to offer zoning incentives and variances for affordable projects to further drive scale.
Local governments can take steps to reduce development and operational costs. Communities that contribute land for development, accelerate zoning and other local approvals, waive impact fees, permit bundling of multiple property transactions and reduce property tax burdens through payment in lieu of taxes (PILOTs) and abatements can make a material difference. Agencies can take steps to remove barriers to entry. This can include low application fees, rolling applications (rather than fixed-funding rounds), permitting and facilitating a choice of financing options, including FHA, rural development, GSE, as well as agency debt.
As you can see, there are many tools and resources at policymakers’ disposal and indeed many, many more flavors to the strategies identified above. Not every solution will work in every scenario but collectively there is much that can be done to drive more bond development. To that end, last summer NH&RA formed a bond policy working group to help better articulate and advocate for local solutions. If you are a state or local government, we would love to work with you to help assess your specific needs and brainstorm local solutions.
