Tax-exempt private activity bonds (PABs) have long been a crucial aspect of the response to the nation’s affordable rental housing crisis, and will be even more important as the effects of the COVID-19 pandemic unfold. Of the nearly 3.5 million affordable rental homes financed by low-income housing tax credit (LIHTC) equity since 1987, more than one third—about 1.2 million affordable rental homes—generated LIHTCs through PAB debt financing, according to the National Council of State Housing Agencies’ (NCSHA) Annual Factbook. The annual share of rental homes constructed and preserved through the use of PABs has been rising notably since 2010, and dramatically since 2015.  In 2018, the most recent year for which NCSHA has published data on units placed in service and receiving their necessary Internal Revenue Service tax forms, PAB-financed affordable rental housing production and preservation surged to more than 53 percent of all LIHTC-financed rental homes. This increase in the placement in service of rental homes financed by PABs is consistent with the rising annual issuance of PABs, as detailed below. While it was initially unclear, it appears now that this surge in rental housing PAB issuance is sustainable over the longer term.

The PAB resource is subject to an annual state volume cap, and use for rental housing competes with many other purposes, including: homeownership, mass commuting facilities, student loans, redevelopment of designated blighted areas, water and sewage treatment facilities, and hazardous waste facilities.

In 2020, the volume cap for each state is the greater of $105 multiplied by the state population or $321,775,000. The formula recalculates annually for inflation and changes in population.

The vast majority of PAB use nationally is for housing: According to the most recent annual report on PAB use by the Council of Development Finance Agencies (CDFA), in 2018, $7.4 billion was issued to help low-income first-time homebuyers and $14.7 billion was issued to finance multifamily rental housing. More than $22 billion of the total $24.1 billion in PAB issuance, or 91.5 percent, went to housing.

Historical PAB Issuance for Rental Housing

The $14.7 billion of PAB usage in 2018 for multifamily housing reflects a substantial surge over the years before 2016. In 2010, rental housing PABs issued were $2.4 billion, a mere 16 percent of the amount issued in 2018. The years 2011, 2012 and 2013 fluctuated around $4.75 billion annually, about 33 percent of the 2018 level. PAB use for multifamily rental housing averaged $6.5 billion for 2014 and 2015, annually (though, 2015 is likely an undercount, because several states didn’t report their data to CDFA). The recent dramatic spike in PAB usage began in 2016, where usage rose to $14 billion. That pace continued, with $15.3 billion issued for multifamily in 2017 and $14.7 billion in 2018. The annual average for these three years of $14.7 billion was more than twice the average for 2014 to 2015.

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For different reasons, the spike in issuance in 2016, followed by a slightly higher 2017 issuance, and then a small drop off in 2018, was not necessarily the new normal.  At the end of 2016 equity pricing fell dramatically, as investors anticipated a lower corporate tax rate. Lower LIHTC equity pricing hits the financial feasibility of PAB financed rental properties particularly hard. Then, in spite of lower LIHTC equity financing 2017 saw a slightly higher increase, but the prospect of tax reform in 2017 artificially accelerated projects that planned issuances in 2018 into 2017, as up until the end of the year, it appeared that Congress might repeal PABs for 2018 and beyond.  The 2018 decrease was likely a result of the loss of planned 2018 issuances accelerated into 2017 as noted above.

Another reason why it was unclear that the spike in multifamily PAB issuance in 2016 to 2018 was sustainable, is that in many states annual PAB issuance was in excess of their annual PAB volume cap, and/or share of PAB cap allocated to multi-family rental housing. This was possible due to carryforward PAB allocation, which isn’t sustainable over the long term. For example, in 2016, nearly $4.7 billion of multifamily PABs were issued in California, which was nearly 120 percent of California’s 2016 annual PAB cap of $3.9 billion.  In 2016, more multifamily PABs than their respective PAB caps were also issued in New York and Washington, and more than 97 percent of District of Columbia’s 2016 PAB cap was issued for multifamily. In 2017, multifamily PAB issuance in Colorado, Illinois, New York and Washington was close to, or more than, their respective 2017 PAB caps. Similarly in 2018, multifamily PAB issuance in California, the District of Columbia and New York was close to or more than their respective 2018 PAB caps.

More than $15 billion Annual Issuance Appears Sustainable

With that as background, as Novogradac reported in December and addressed in a blog post in January, the surge in demand for multi-family housing PABs has continued. Preliminary, not yet public, estimates of 2019 PAB activity suggest the 2016-2018 surge continued into 2019. Anecdotal evidence for 2020, albeit pre-pandemic, suggested 2020 would be similar to or higher than 2019. Once the effects of the pandemic subsides, these levels now appear both sustainable, and likely to increase, as population and the national PAB volume increases annually.

There are several reasons for this. Some states that have depleted or are close to depleting their PAB carryforwards are projected to be able to sustain high levels of multifamily housing usage by directing a greater percentage of their annual cap to multifamily housing. In addition, an increasing number of other states are using a greater percentage of their PAB cap for multifamily housing. Also, many states are providing soft financing to make more PAB financed properties financially viable. For instance, California affordable housing advocates celebrated a big win when the state Legislature approved a boost of $500 million in state LIHTCs for properties that receive federal 4 percent LIHTCs, which are paired with PABs. Colorado, Massachusetts, Utah and Wisconsin enacted or expanded their state LIHTCs, which provide additional equity to make developments more financially feasible. Other states such as Arizona, Indiana, Kentucky, Maryland, Minnesota and Pennsylvania are all considering establishing their own state LIHTCs (the extent to which each might be available for PAB transactions is not yet established). Several states—California, Colorado, New York, Oregon and Washington—have substantially increased other affordable housing funding sources.

Annual Rental Homes Financed By PABs

The CDFA survey does not track the number of affordable rental homes financed by the PAB issuance captured in its survey, but NCSHA does include the number of homes in its annual Factbook. Combining the CDFA PAB issuance data projected forward with the NCSHA data on affordable rental homes produced and preserved, yields an estimate that about 144,000 affordable rental homes will be financed by PABs in 2021, about 42,000 new homes, and 102,000 homes renovated and preserved. 

With the additional information and evidence supporting a $15 billion annual multifamily PAB baseline, with annual increases for population and inflation, Novogradac estimates more than 1.42 million affordable rental homes will be financed by PABs over 2021-30.

Unfortunately, for obvious reasons, 2020 likely could be an off year for multifamily PAB issuance. That said, once the effects of the COVID-19 pandemic subside, the level of PAB-financed production and preservation should resume. Again, the need will be even greater.