Bonding
By Thom Amdur
4 min read
In our June 2016 issue, we dedicated our cover story to the resurgence of tax exempt bonds. In that issue, Bond Attorney and NH&RA Director Wade Norris asked our readers, “Are we on the verge of a volume shortage?” And the answer in an increasing number of states is yes. This has caught many in our industry by surprise; after all, since the financial crisis, the volume cap across the country has been abundant. But if the current trend continues, the non-competitive credit might soon become competitive in a diverse mix of states including California, Connecticut, Massachusetts, Minnesota, New Jersey, New York, Pennsylvania, Tennessee, Utah, and perhaps others.
The steady increase in tax credit equity pricing (driven by CRA investors and the overall attractiveness of our sector as an investment) and historically low interest rates have driven the drift towards bond deals. Innovative policies, including the elimination of artificially low developer fee caps and targeted new gap financing sources, have had a tremendous impact in some jurisdictions as well. Should Senators Cantwell’s and Hatch’s recently introduced legislation – that would, among other things, fix the rate of as-of-right credits associated with tax exempt bonds at 4% – pass, we should expect even greater demand.
Because of the as-of-right credits that come with multifamily bonds, agencies certainly get more bang for their buck than from other private activity bonds (e.g. industrial development bonds, student loan bonds, single-family mortgage revenue bonds, etc…). But we should not assume that a state agency will automatically increase the amount of volume cap for multifamily bonds just because there is demand. The fact of the matter is many HFAs keep the proverbial lights on with their single-family programs and cannot afford to dedicate cap to multifamily if it means curbing back their single-family. While there seem to be fewer industrial projects financed by tax exempt bonds in recent years, I think a Governor would be hard pressed to not dedicate volume cap to a major new facility promising substantial construction and jobs. And in the current political environment where student debt has become a major political talking point it is even conceivable that student loan bonds could make a comeback in the next administration.
In the short-term, developers (particularly in the preservation space), advocates and practitioners need to watch this trend carefully and be ready to lobby their HFAs, State Treasurer’s offices, Governors, and Legislatures to preserve and expand multifamily volume cap. Even if the LIHTC is expanded and improved as proposed in the Cantwell-Hatch legislation, the 9% LIHTC alone is insufficient to meet our nation’s growing affordable housing needs. In just the “at risk” states I cite above, there are thousands of properties and in excess of 130,000 units of LIHTC properties with subsidies expiring in the next three years.
If these projects are to be preserved and new units developed, we need every tool currently in our tool box, as well as some new, innovative tools. For example, should there be a national pool for unused volume cap? And, in an aggressive tax reform scenario, we may need to defend private activity bonds, which are not loved in all quarters.
We also need to come up with creative state and local solutions to demonstrate that the resource is not just viable in urban centers with high market rents. HFAs can follow the leads of California, Ohio, and Tennessee and eliminate some restrictions or expand developer fee policies to increase tax credit basis and help fill gaps. Existing housing trust funds and state credits can be expanded and targeted to support bond deals in harder to reach markets. HUD, USDA Rural Development, and individual HFAs can take more aggressive steps to coordinate and encourage portfolio recapitalizations that create transactional efficiencies.
The solutions are out there. As an industry, we just need to reach for them, advocate for them, make them policy.
