New Developments: Growth and Growing Pains

While it is still a little too soon to say with certainty that the combined infrastructure and budget reconciliation package will be enacted, or for that matter what precisely will be in it, it is the quintessential pastime of policy watchers in Washington like me to speculate. Whether it ends up being $3.5 trillion or $1.9 trillion in scope, I continue to be optimistic that the legislation will be enacted and that it will have a transformative impact on our industry for years to come.

You are undoubtedly already aware of the major Low Income Housing Tax Credit provisions that are being considered by Congress, including the expansion of nine percent allocations, the reduction of the “50 percent test” to a “25 percent test,” as well as the expanded basis boost provisions for bond deals, rural and indigenous deals, extremely low-income and supportive housing deals. These would collectively expand access to private activity bond volume cap in many constrained states and expand tax credit resources to numerous projects across the country.

All change, even good change, creates disruptions and a period of adjustment. As you will read in our article on tax credit equity later in this issue, there will undoubtedly be some growing pains in the tax credit equity marketplace as a new equilibrium is established. We need only apply our lessons on supply and demand from high school economics to know that if the supply of credits increases there will be downward pressure on pricing. Demand may be increased somewhat with increased corporate tax rates, but it will take some time to materialize.

Likewise, developers that structure bond transactions to meet a new 25 percent test will trade off the availability of additional volume cap with some higher cost of capital as more of their financing stack will be taxable rather than tax-exempt debt.

Savvy developers are already stress testing their financial models to anticipate potential disruptions. We will need to be nimble once the legislation is enacted and communicate early, often and with candor with our state and federal agency partners. Most states have already finalized their Qualified Action Plans for 2022 and adjustments will likely need to be made on the fly, particularly to underwriting policies and credit rate expectations. That being said, I am confident that while this will be disruptive in the short-term, our industry will adjust in the medium-term and find balance.

While it had gotten a lot less press in affordable housing circles, I’m particularly excited about how climate change mitigation provisions may transform affordable housing finance and design. For example, the “Clean Green Accelerator” has the potential to revolutionize how we finance sustainable technology, utility retrofits and renewable energy in affordable housing. The accelerator is designed to scale up local green banks by creating and capitalizing a national green bank.

In essence, this would do for green finance what Fannie Mae and Freddie Mac did for mortgage securitization: facilitate, at scale, long-term, low-cost financing for sustainable development measures. It could also enhance existing green financing tools like commercial property assessed clean energy (C-PACE) products or on-bill finance.

No matter how the final bill language shakes out, flexibility and creativity will be the watchwords in affordable housing finance in 2022 as we adjust to a new equilibrium. To borrow and misquote from many, what great problems to hopefully have!