IRS Data Reveal More Robust Multifamily Bond Market than CDFA
While the multifamily bond market is broadly recovering, some states’ multifamily housing bond markets have bounced back more quickly than others according to Novogradac & Company analysis of Internal Revenue Service (IRS) data. Novogradac also found less volatility in multifamily bond issuance. These two findings are useful for national investors as they plan investment strategies.
In August, this blog examined Council of Development Finance Agencies (CDFA) data from the 2015 Annual Volume Cap Report, and followed up with an analysis of trends in private activity bond (PAB) issuance since 2000. The IRS' data about qualified residential rental bond issuance on a state level (also referred to as multifamily housing bonds) reveal context for those trends.
In general, the IRS’ PAB data is more accurate. This is in part because the CDFA conducts its survey of issuers six months after the end of the calendar year, which may not capture all issuance, while the IRS data captures actual issuance data submitted by issuers to qualify for tax-exempt status. However, because it takes time to capture that data, the latest available IRS PAB data is from 2014.
Changes from 2013 to 2014
The IRS’ data shows 10 states issued more residential rental bonds in 2014 than in 2013. There are probably a few more states that did so, but the IRS does not disclose private activity bond (PAB) data from some states to protect taxpayer privacy. In 2013, 38 states and Washington, D.C. issued residential rental bonds. In 2013, 43 states and D.C. did so. The only state that issued rental bonds in 2013 but not 2014 was Idaho. Conversely, Alaska, Delaware, Mississippi, Oklahoma and West Virginia did not issue any residential rental bonds in 2013 but did so in 2014.
The growth in residential rental bond issuance suggests a more optimistic picture than the one painted by CDFA’s data. The IRS reported $547 million more in residential rental bond issuance in 2014 than 2013, and compared to CDFA, reported $423 million more in 2015 issuance.. The IRS reports 12 states issued no residential rental bonds in 2013 while only 8 states did so in 2014. CDFA reported 15 states and D.C. issuing no multifamily bonds in 2013 while 16 states did so in 2014.
Changes from the Peak
The peak year for residential rental bond issuance was 2007. Nationally, more than $7.3 billion residential rental bonds were issued, according to the IRS. The CDFA data differs significantly on this amount, indicating that $5.8 billion of multifamily bonds were issued.
The financial crisis dried up demand in 2008, plunging total residential rental bond issuance by almost 38 percent. (The CDFA’s data showed a steeper decline, with multifamily bond issuance falling by 78 percent from 2007 to 2008.)
By 2014, national residential rental bond issuance had recovered somewhat, with approximately $6.9 billion residential rental bonds issued, according to the IRS. (The CDFA data indicated $6.9 billion in bonds were issued.)
It’s not unusual for the IRS to report more total annual residential rental bonds than CDFA does. Looking at the years for which data are available, the IRS has consistently reported more bond issuance than CDFA, with the exception of 2006. This discrepancy can be explained by the fact that CDFA included the amount of GO Zone bonds used for multifamily in its 2006 multifamily bonds total, while IRS did not, reporting instead a separate category of all GO Zone bonds not broken down between single family, multifamily, or other eligible uses issued in 2006.
Residential rental bond issuance is driven by three broad factors: demand for residential rental bonds generally, demand for residential rental bonds relative to other types of PABs, and the difference between taxable interest rates and tax-exempt PAB interest rates. Even if demand for residential rental bonds is high, if state PAB allocating agencies choose to allocate more of the bond cap towards other types of bonds, such as mortgage revenue bonds (which support single family housing), the issuance of residential rental bonds can go down.
In 2007, residential rental bonds made up 8.5 percent of total PAB issuance. The CDFA data indicates much higher percentage, with the multifamily bonds making up 20.6 percent of total PAB issuance in 2007. There was a shift towards multifamily housing by 2014. According to the IRS, 19.5 percent of total PAB issuance was residential rental bonds in 2014, while the CDFA data shows a similar, albeit larger shift. The CDFA reports 55.5 percent of total PAB issuance was for residential rental bonds in 2014. Not only does the CDFA appear to have under-reported multifamily bond issuance, but other PAB eligible uses even more so.
To examine the discrepancies further, one should look at the difference between the IRS and CDFA with respect to the number of states issuing no multifamily bonds. As one might expect, the CDFA reports more states with no issuance than the IRS does, with the exception of 2003, when the IRS reported 10 states with no issuance (Alaska, Connecticut, Hawaii, Idaho, Kentucky, Montana, North Dakota, South Dakota, West Virginia and Wyoming), while the CDFA reported 9 states with no issuance, the exception being North Dakota for which they reported $7.5 million in issuance.
In the decade thereafter, the discrepancy between the IRS and CDFA data grew to as much as double in 2011, where CDFA reported 32 states issuing no multifamily bonds while the IRS reported only 16. Fortunately, the difference has narrowed since to 8 states in 2014, with CDFA reporting 16 states with no issuance while the IRS reported 8.
While the IRS data confirms the broader story of a recovering multifamily bond market, analysis of state level trends also tells a more nuanced story of local variation. While some states’ multifamily housing bond markets have roared back to life following the 2008 financial crisis, others have more slowly bounced back.