The combination of increased competition for tax-exempt private activity bonds (PABs) and increasing interest rates could create a tightening of financing options for low-income housing tax credit (LIHTC) properties.

Competition for PABs increased dramatically in recent years, including the issuance of a record $17.2 billion in multifamily PABs in 2020, despite the COVID-19 pandemic. That pace picked up more steam with the enactment of the 4% LIHTC minimum rate in December 2020.

States have an annual cap on PAB issuance and agencies continue to issue more bonds, specifically targeting multifamily affordable housing. For most of history, state agencies have issued far short of their annual cap in bonds.

While considering competition for PABs and 4% LIHTCs, it’s important to note that the competition is for the bonds. Properties that qualify for PABs are automatically eligible for 4% federal LIHTCs (and in many states, they are also eligible for state LIHTCs) and competition for PABs keeps increasing. According to a map produced by Novogradac and Tiber Hudson, there were 21 states oversubscribed for PABs as of Feb. 28 and an additional seven that achieved parity–meaning 56% of states were at parity or oversubscribed.

For perspective, compare the $17.2 billion in PABs issued for multifamily housing in 2020 to the $2.4 billion similarly issued in 2010. That is an increase of more than sevenfold. The increase in competition for PABs has led to some comparison with the traditional competition for 9% LIHTCs.

The result of the increased competition has meant the agencies administering PABs have had to adjust to changed circumstances and handle the new world of competition. Similarly, many developers who long presumed the availability of PABs now find themselves in a new world of competing for the financial resource.

Now, add the increase in interest rates, pushed by the highest rate of inflation in 41 years. The Federal Reserve in mid-June raised its benchmark interest rates 0.75%, the most aggressive hike since 1994 (which was shortly after the 50% PAB test was created by decreasing the percentage of the aggregate basis of the property required to be financed by PABs and a year after the LIHTC was made an indefinite part of the Internal Revenue Code).

The increase in interest rates will inevitably lead to higher interest rates on construction and permanent loans, increasing the demand for PAB as borrowers seek to take advantage of the economic benefit of lower interest rates that PABs can provide over conventional financing.

How Can Novogradac Help?

For developers and property owners interested in using PABs (and 4% LIHTCs) to finance affordable housing properties, the competition continues to ratchet up. That means an increasing need for expert insight, such as can be provided by Novogradac’s LIHTC team.

For more guidance, the newly released Novogradac Tax-Exempt Bond Handbook is a comprehensive, single-volume resource for those involved in affordable housing, updated with regulations and recent guidance and issuance data.