California Private Activity Bond Market Took a Big Dive in 2017

Published by James R. Kroger on Thursday, May 10, 2018 - 12:00am

The bond market for affordable multifamily housing in California took a step back in 2017.

A year after the California Debt Limit Allocation Committee (CDLAC), which is responsible for administering the state’s tax-exempt private activity bond program, issued $4.8 billion in 2016 to help fund rental housing developments, the amount dropped to $3.4 billion in 2017 – a 30 percent decrease. The result was 114 properties funded in 2017, a drop from 179 funded in 2016.

The decrease included significantly fewer apartments. In 2016, there was funding for 20,671 apartments, but that dropped to 12,185 in 2017 – a stunning decrease of 41 percent in apartments created.

The decrease is a reason for concern in the Golden State and reflects a nationwide drop in bond deals in the wake of the 2016 election and tax reform.

Bond Basics

Private activity bonds (PABs) go toward various public projects, but the most significant in this context is what’s called the Qualified Residential Rental Projects (QRRP), which goes to subsidize the construction of low-income housing divided into three sub-pools: general, mixed-income and rural. The general pool includes properties that are more than 50 percent low-income (many of which are 100 percent low-income); and the mixed-income pool is those properties that are less than 50 percent low-income (many of which are 80/20 developments that are 80 percent market and 20 percent low-income).

Combining the 2016 amounts and the carryforward from previous years, CDLAC used $4.8 billion of PABs for residential rental developments in 2016. Of the 20,671 apartments funded, 6,642 were new construction, the rest were acquisition-rehabilitation.

In 2017, CDLAC awarded $3.4 billion of PABs for residential rental developments. That funded 127 awards for 114 projects–with the 13 supplemental awards given to properties that requested additional allocation after having received an allocation in a previous year. Of the 12,185 units funded, 5,874 were new construction; the remainder were acquisition-rehabilitation.

Summary of California Bond Market


Blog Chart Summary of California Bond Market 2016 vs. 2017
Click to Enlarge


The number of apartments decreased more than the amount of bonds decreased, probably because there was a significant increase in new construction and a significant increase in the percentage of market rate units (likely 80/20 projects) from 2016 to 2017. Both of these changes would likely lead to fewer units because of the higher construction costs associated with new construction compared to rehabilitation, and typically higher costs associated with 80/20 developments compared to 100 percent affordable properties.

About $46 million of PAB was carried forward from 2017 to 2018, so a very small amount compared to prior years. CDLAC indicated that the $1.4 billion of PAB that was not issued near the end of 2017, was transferred to six multifamily housing issuers to ensure that the 2017 state ceiling allocation would not be lost. The $1.4 billion is not part of the $3.4 billion allocated in 2017 in the summary above. The $1.4 billion is available to the six multifamily housing issuers for projects in 2018.

Reasons for Volume Decrease

Bond volume decreased dramatically in the first half of 2017 with the anticipation of tax reform and the price decrease in low-income housing tax credits (LIHTC) as a result of the corporate tax rate decrease from 35 percent to 21 percent and other tax reform effects. Equity from LIHTC is often used with PABs to finance affordable housing developments. With the decrease in the corporate tax rate, the LIHTC investor’s tax savings from tax losses decreased, and therefore, LIHTC equity prices decreased, making projects less feasible or infeasible.

Another factor in tax reform that affected PABs was the House version of tax reform in the second half of 2017 that proposed to eliminate PABs. This motivated developers with feasible developments to fast track those developments to get PABs issued before the end of 2017. Although there was a big push to issue PABs at the end of 2017 in anticipation of PABs being eliminated, that did not make up for the overall decrease from most of 2017. The Senate version of tax reform retained PABs, and ultimately the final version of tax reform signed by President Trump on December 22, 2017 retained PABs. Many of the PABs that were teed-up and ready to be issued by the end of 2017, then pulled back and were not issued, so December ended up seeing less bond volume than expected.

Although 2018 has started out slow with low bond volume the first quarter, bond volume has picked up recently as complexities of tax reform are understood and there is more certainty in the market. CDLAC has set aside approximately $2 billion of PAB for QRRP in 2018. Approximately $1.7 billion was set aside as unreserved and is available to any of CDLAC’s programs, although they expect the bulk of it to go to QRRP.

PABs continue to be very popular on 80/20 developments and acq/rehabs and master planned communities. There are many advantages of PABs with 4 percent LIHTC in California compared to 9 percent LIHTC without PABs, such as lower interest rates, larger project size limits, higher cost limits, and typically a more predictable funding process with less competition than 9 percent credits. The California Tax Credit Committee (TCAC) and CDLAC both continue to encourage developers to use PABs with 4 percent credits to use the full annual PAB volume cap and alleviate the competition for 9 percent credits without PABs.