The Impact of Private Activity Bonds

6 min read

You can’t ignore an essential building tool 

Private activity bonds are a huge part of affordable multifamily housing and their elimination—now or in any year—would blow a hole through the market.

Loss of these tax-exempt bonds that enable the four percent Low Income Housing Tax Credit sector would be “devastating” for affordable housing, according to the New York Housing Conference.

How big of an impact do PABs have? The Council of Development Finance Agencies says 2016’s volume cap, calculated by a per-state formula of the greater of $100 per capita or $303 million, came to a national total of $35 billion. In addition, states (which administer the program through units like Housing Finance Authorities) can use carryforwards from three previous years, which would add another $64 billion in authority.

While there are other uses for PABs (hospitals, higher education facilities and others), housing (both single- and multifamily) gets a large piece of the pie. And housing activity has bumped up, from $11 billion in 2015 to $18 billion in 2016, 91 percent of the total, according to CDFA.

Loss of the PABs could result in markedly fewer affordable rental homes built or preserved. In California, for instance, private activity bonds financed $314 million of multifamily housing in the years 2013-2015, totaling more than 1,000 apartments, according to the National Housing Conference. And there are other states that have produced more than that.

“Private activity bond authorization is critical for for-sale, as well as rental housing,” says Stockton Williams, executive vice president of the Urban Land Institute. “They’re so important for infrastructure and industrial development, as well as for housing.”

“It’s a big impact,” agrees Ted Fellman, senior vice president in Raymond James’ Nashville office. Fellman has an especially broad knowledge of the sector, since before he was on the banking side he was the executive director of the Tennessee Housing Development Agency.

Fellman looked at Tennessee as an example of the impact of PABs in one state. In 2017, 4,395 units were produced through the tax credit program. In the four percent program, there were 2,412 units, of which 1,200 units were new construction. “If private activity bonds go away in Tennessee, that’s 55 percent of affordable rental units not produced,” he says.

Fellman, who has been in affordable housing for his entire career and describes himself as a passionate advocate, worries about the impact on families if PABs go away. “A lot of families that need affordable housing are going to have to wait,” he says.

He also worries about the impact on jobs and economic development, especially in rural areas of the state.

“The program is a success, a public-private partnership that is helping families that need it,” Fellman feels.

Wary in Washington State
Another state that is up in arms about any possible elimination of the program is Washington state. And the Washington State Housing Finance Commission can point to the potential adverse effects on their state in great detail.

“Without tax-exempt private-activity bonds, 2,088 affordable apartments currently planned by developers across the state would not be built in the next two years,” according to the state group.

‘’We are gravely concerned because these developments would allow more than 4,000 people in Washington to move into decent, affordable housing that is so desperately needed in our state,’’ says Karen Miller, chair of the WSHFC.

The 2,088 apartments are a part of the applications received by the Housing Finance Commission for approximately $295 million in tax-exempt multifamily private activity bonds, the group reports. For-profit and nonprofit housing developers have applied to build 12 properties in Snohomish, King, Clark, Pierce, Whitman and Spokane counties, it says.

‘’Eliminating our ability to issue these tax-exempt private activity bonds would prevent 2,088 families earning less than 60 percent of median income in their area from renting housing they could afford,’’ reports Kim Herman, executive director of the Housing Finance Commission.

‘’This would include eliminating affordable housing for 190 large households, 1,014 elderly households and 307 persons with disabilities,” says Herman.

The proposed developments are planned for the communities of Everett, Arlington, Seatac, Snoqualmie, Seattle, Tukwila, Vancouver, Lakewood, Pullman and the City of Spokane Valley, according to the commission.

‘’Not only are these affordable apartments threatened, the jobs and economic investment that would have taken place in each of these cities may not happen,’’ says Herman.

Private activity bonds have supported the production of a total of more than 76,000 affordable apartments across the state – as well as more than 46,000 home loans for first-time homebuyers, according to the Commission. “This represents more than $7.7 billion invested in affordable housing since 1983,” it says.

The Financing Glue
A research note by ULI’s Williams, who is also the executive director of the group’s Terwilliger Center for Housing, indicates, “Over time, PABs have evolved—under tight statutory controls and an annually capped amount of funding authority—as the sometimes unseen but critical glue in the financing of countless catalytic developments.”  He cites several specific projects that have benefited from private activity bonds, including:

  • Denver Union Station used PAB financing for a 23-mile commuter line linking the transit hub to Denver’s largest suburb, Aurora and Denver International Airport, creating thousands of jobs and cutting traffic in the region.
  • The Hahne & Co. Building utilized PABs to transform a downtown Newark, NJ, department store which had been vacant for 30 years into a mixed-use anchor of revitalization containing housing, retail and cultural space.
  • One Workplace used PAB financing to reconfigure and update a former paper manufacturing plant in Santa Clara, CA, into the new corporate headquarters, showroom and warehouse facility for one of the largest commercial furniture suppliers in the state.

“PAB financing accounts for more than half of the new rentals created through the Low Income Housing Tax Credit program,” he writes. Citing a Novogradac report, he continues, “Eliminating them would result in 780,000 to 880,000 fewer affordable apartments being developed over the next decade, at a time when housing affordability needs for lower-income families have spiked almost everywhere.”

“PABs are an especially important source of capital for affordable rental apartments and first-time home purchases for working families, generating $18.5 billion of aggregate housing investment in 2016, according to the Council of Development Finance Agencies,” Williams notes.

Story Contacts:
Ted Fellman
Senior Vice President, National Housing Group of Raymond James Nashville, TN
ted.fellman @raymond

Stockton Williams
Executive Vice President, Urban Land Institute, Washington, DC
[email protected].

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.