Housing USA: Stretching the Private Activity Bond Cap

6 min read

When it comes to allocation of Low Income Housing Tax Credits and complementing Private Activity Bonds (PAB), there’s only so much to go around. The IRS distributes both forms of financing to states based on population; as noted by the Affordable Housing Finance website, the 2020 LIHTC allocation “will be the greater of $2.8125 multiplied by the state population, or the small state minimum of $3,217,500. For private-activity bonds, the amount used to calculate the volume cap will remain $105 multiplied by the state population. The state minimum will be $321,775,000.”

In many states, these sums will be far less than the demand that consumers have for affordable housing, the supply that developers wish to build, and the affordability goals that public agencies have set. So, state allocation agencies need to distribute the money wisely, finding diverse funding sources that can fill gaps in the capital stack.

Recently, I spoke with agencies in two states and one city to learn how they stretch this bond cap money. I heard some common nationwide themes, along with solutions that were unique by locality. Below is a summary of the conversations, starting from the West Coast and heading east.

The Washington State Housing Finance Commission (WSHFC) receives about $800 million annually in PAB cap, most of which is used to finance affordable housing. But still it’s not enough, says Lisa Vatske, director of multifamily housing and community facilities.

“We’ve got a lot more projects coming in than we do resources to fund them.”

One response is to make more efficient utilization of the cap, for example by recycling it. In a common scenario, PAB cap is used to kickstart a project that will soon get additional capital (such as a construction loan) once breaking ground. This means the PAB cap can be paid off, that money is banked and then reused shortly for other projects.

Another response is to find funding beyond just what is distributed by the IRS. A common theme with every state housing agency was that their PAB cap could be blended with other private, philanthropic or state and local programs to fill the gaps that traditionally exist with four percent LIHTC. For example, Microsoft just launched a $500 million affordable housing fund meant to spur production and slow displacement in metro Seattle. Vatske said WSHFC is looking to create a social impact fund that would pull together Microsoft’s investment money, credit union money and other sources to increase affordable housing construction.

Above all, Vatske says that WSHFC’s most important task is delineating which projects should get funding in a climate of scarcity. This is where a tension between different goals can surface; WSHFC must think about which markets are most expensive to build in; what type of housing units should be built (factoring for quality, size and overall unit number); and which demographics should be served. That said, most construction resulting from the PAB-four percent LIHTC blend happens in metro Seattle, including King and Snohomish counties.

The Colorado Housing and Finance Authority (CHFA) is one of several agencies that distribute PAB cap statewide, and has some of the same strategies as Washington. Steve Johnson, director of community development, says cap recycling is a common strategy, although current laws prevent the cap from remaining unutilized for too long between projects. There has been a push, he says, “For agencies nationally to try to create some additional flexibility on that recycling to help states create more cap.”

But there has been an effort within CHFA not to have the cap, which totaled $598 million last year, sit around too long anyway. The agency likes to deploy it on projects that are shovel-ready, rather than ones that might spend years struggling to gain financing or regulatory approval.

As for finding additional financing beyond PABs, affordable housing developers can look to the state’s LIHTC program.

“In many states, the four percent tax credit is underutilized – the finances don’t work out,” explains Johnson. “But [Colorado’s] ability to pair the state tax credit with the four percent tax credit, we can do more deals.”

Lastly, CHFA launched a Capital Magnet Fund in 2018. It leverages a $7.1 million U.S. Treasury Department grant to fund affordable housing in urban and rural communities. It provides up to $750,000 in subordinate financing, at a three percent fixed interest rate, to projects that were awarded Federal LIHTC.

Johnson said that while nine percent LIHTC deals happen statewide, the four percent deals—mixed with all this other capital—tend to happen in Colorado’s large metros.

New York City
One might think that local housing corporations have a different set of challenges than state ones – especially when the locality at hand is New York City. But Anthony Richardson, executive vice president of development for the city’s Housing Development Corporation (NYCHDC), assured me that wasn’t the case. He says that when attending housing conferences, he hears of the same problems from state officials that are felt in his city – high land and construction costs, federal PAB limits and high demand for affordable housing.

“In any given allocation cycle, we’re probably two to three times oversubscribed,” says Richardson.

Where New York City differs is that there is a major local commitment to supplement the PAB cap. Housing New York 2.0 is Mayor Bill de Blasio’s plan to build or preserve 300,000 affordable homes by 2026. The city’s Department of Housing Preservation & Development oversees the program. Richardson says that the department frequently deploys one percent loans for affordable housing projects, as does NYCHDC.

Then there’s the state agencies. Many parts of New York are declining and don’t have much demand for new construction. So, the PAB cap gets unused, returns to the state and is redistributed to New York City. Richardson estimates that the city gets around $750 million annually in cap—more than most states—to be used exclusively for housing.

There were some common themes, then, that I picked up from these interviews regarding PAB cap utilization. One is that housing agencies frequently recycle their cap, and there may be upcoming legal reforms, which make that easier. Another is that affordable housing projects—namely ones using four percent LIHTC—are more common in big metros. And a third takeaway is that, despite the limits of federal PAB cap, there are often other state and local funding sources available. This is good to know for developers looking to push their affordable housing projects past the finish line.

Story Contacts:
Anthony Richardson
Executive Vice President of Development,
New York City Housing Development Corporation
Contact: Stephanie Mavronicolas, smavronicolas@nychdc.com

Steve Johnson
CHFA Director of Community Development
Contact: Megan Herrara, mherrera@chfainfo.com

Lisa Vatske
Director, Multifamily Housing and Community Facilities,
Washington State Housing Finance Commission