Looming PAB Crunch a Result of More Demand, Less Supply

Published by Michael Novogradac on Wednesday, January 29, 2020 - 12:00am

A looming crunch for private activity bonds (PABs) is the result of simple math: Demand has dramatically increased in many states, meaning less supply. The result could be bad news for affordable housing development.

Those involved in affordable housing are well aware of the value of PABs. The bonds are accompanied by 4 percent low-income housing tax credits (LIHTCs) to help finance affordable housing properties, a pairing that’s widely beneficial. The result is tens of thousands of units annually. For PABs, it’s an additional federal benefit–unique in the PAB world.

But now there’s a crunch. As detailed in the Washington Wire column in the December Novogradac Journal of Tax Credits, there is a tightening supply of PABs in many states.

Here’s the short version. States used about $44 billion in PABs for residential rental from 2016 through 2018–the most recent years covered in the Council of Development Finance Agencies’ annual report. More than 75 percent of that $44 billion went to 11 states, nine of which have seen a notable decline in PAB carryforward. That’s an indication that those states will likely face a cap crunch soon, some as early as 2020.

Supply and demand.

The tighter supply is largely because of an increased use of PABs for residential multifamily rental. While those 11 states are the leaders in PAB residential rental use, they’re not alone. More than 60 percent of PAB issuance nationally for each year during 2016-2018 went to residential rental housing. That’s twice as much as any year before 2011 and a significantly higher percentage than even five years ago.

Consider this: For the decade from 2001-2010, the average annual allocation of PABs for residential rental was $4.27 billion (taking out the Great Recession years of 2008-2010, the average is $5.41 billion). In 2016, $14.00 billion was issued for residential rental; in 2017, it was $15.30 billion; in 2018, it was $14.74 billion. All indications are that the PAB issuance for residential rental in 2019 was at comparable or higher levels, with 2020 demand expected to follow suit.  Which means, when combined with shrinking PAB carryforward in many states, greater competition among the various types of uses for the bond allocation authority.

Percentage of Annual PAB Issuance to Rental Real Estate
Click to Enlarge


The Washington Wire column details which states face an immediate crunch for PABs, a situation that will lead to unprecedented competition. California is a particularly important state, because the state based much of its approach to deal with an affordable housing crunch on the use of PABs. Now there is competition from such non-housing uses as high-speed rail and desalination plants, as well as a carryover amount that dropped from $7.9 billion in 2014–nearly double the annual cap for that year, effectively tripling the available amount–to an expected zero for 2020.

California isn’t alone in the situation. The carryforward amount for states–the amount of PAB issuance allocated to the state over the previous three years that wasn’t used–dropped from $62.4 billion to $51.1 billion during 2016-2018, with at least seven states seeing a precipitous drop.

A PAB crunch largely means a lesser amount for residential rental, although it’s not universal. It’s widespread, though: roughly half of states (24 of the 51 reporting agencies) that reported PAB use to the CDFA used at least 50 percent of their PAB issuance in 2018 on residential rental.

A tighter cap. Increased use for residential rental. Supply and demand.

While the brightest spotlight is on California and other high-use PAB states that focus on residential rental and have as shrinking carryforward amount (Massachusetts, Colorado, Illinois, New York, Florida and others), this crunch isn’t an issue only for states that issue a large percentage of their PABs to residential rental. In other states (for example, Iowa, Maine and Oregon), an issue with reaching the cap will still affect affordable housing.

That’s because once a state begins having competition for bond cap, residential rental is at risk of seeing its portion drop. Thus in a state like Connecticut (which issued 36 percent, 22 percent and 7 percent to residential rental in 2016 through 2018, but saw its carryforward amount drop from $596 million to $116 million), competition could reduce the amount going to residential rental. In that state, it could mean a drop from $56.2 million in bonds paired with 4 percent credits in 2018.

If the drop were 20 percent, that would mean a decrease of $11.2 million in residential rental PABs issued for the state, which (based on the formula that each dollar of PABs for affordable residential rental brings in an additional 50 cents, including the 4 percent LIHTC) means the state would lose nearly $17 million in affordable housing funding.

That’s in a state that doesn’t prioritize residential rental in its PAB issuance.

Consider what that means in California or Maryland or New York, states that issue at least 85 percent of PABs to residential rental and where the cap carryover is rapidly diminishing.

The PAB residential rental issuance crunch is an issue worth following. If your state sees a declining PAB carryforward, there may be a time where the annual cap is all you have–and if there is more demand than supply, competition will arise.

It’s a supply-and-demand situation and the pinch will be felt in affordable housing development.