Better Use of the Bond Cap: Suggestions Would Expand Supply of Affordable Rental Housing

Published by Michael Novogradac on Thursday, February 13, 2014 - 12:00am

The Urban Land Institute recently released a report entitled “Bending the Cost Curve: Solutions to Expand the Supply of Affordable Rentals,” which discussed the continuing shortage of affordable housing and suggested potential improvements to the low-income housing tax credit (LIHTC) and tax-exempt bonds that could help alleviate the affordable housing crisis.

The report suggests considering three major areas of potential reform for the 4 percent credit:

  1. Allow alternate sources of debt financing. In order to qualify for 4 percent credits, at least 50 percent of eligible basis (land and building costs) must be funded by tax-exempt volume cap bonds. These tax-exempt bonds are sometimes more expensive than other forms of financing, cost reduction could be accomplished if rules were modified to allow different forms of debt, such as FHA multifamily loans, to count when meeting the 50 percent test.
  2. Allow private placement of bonds or direct bond purchases. Developers incur the costs associated with mandatory public issuance of tax-exempt bonds. While private placement or direct purchases of tax-exempt bonds are not always less expensive than public issuance, additional flexibility in structuring these investments could lead to savings in certain circumstances.
  3. Explore parity trust indentures. The part of a bond contract that specifies the terms and conditions for the financing is known as a “trust indenture.” Trust indentures are usually separately drafted for each individual financing, boosting legal costs. These costs can be decreased by creating parity trust indentures, which are standardized sets of documents that would apply to financial transactions that are similar in nature.

Analysis of tax-exempt bond use in recent years indicates there is considerably more supply than demand. For example, in 2011, the total percentage of bonds issued out of the total bond cap available to states was 15.4 percent. And while demand in prior years was higher, there was still considerably more bond cap available than issued.


Blog Chart Forfeited Bond Cap
Click to Enlarge


The figures above include all tax-exempt bond authority, of which multifamily rental housing bonds are a subset. Unlike the consistently high demand for 9 percent LIHTCs, 4 percent LIHTCs have been widely underutilized.

Analysis of tax-exempt bond use in recent years also reveals that a significant amount of available bond cap is forfeited every year.


Blog Chart Bond Volume Issued as a Percentage of Total Available Cap
Click to Enlarge


Additional information about the Urban Land Institute’s report can be found in the Tax Credit Tuesday podcast. To learn more about using the LIHTC and tax-exempt bonds to finance much-needed affordable rental housing, join us at the Novogradac Affordable Housing Tax Credit Conference in New Orleans on May 15-14.