New Developments: “May You Live In Interesting Times”
By Thom Amdur
4 min read
The tax credit equity market was relatively stable in 2019, but there is change in the air for 2020. We came heartbreakingly close to a flat four percent Low Income Housing Tax Credit (LIHTC) for bond-financed projects in the year-end funding and tax extenders package, which gives us reason to be hopeful in 2020.
However, there are also storm clouds on the horizon. In late December, the Office of the Comptroller of the Currency (OCC) published its proposed rule to modernize the regulations for the Community Revitalization Act (CRA). While the draft proposal would require banks regulated by the OCC to devote two percent of their investments to community development, many advocates are concerned that both the broadening of the definition of “community development,” as well as the proposed re-weighting of CRA investments and lending tests could negatively impact affordable housing as a preferred CRA investment and lending vehicle.
NH&RA and our advocacy partners will be commenting on these regulations in the coming weeks and it remains to be seen how the final rules will be implemented and how affordable housing equity providers and lenders will ultimately adjust.
Additionally, the states in which private activity bond (PAB) volume cap is constrained continues to expand. In recent years, only Massachusetts, New York and Washington were consistently over-subscribed-for-bonds competitive. With the expanded gap resources now available in California, that state bond program is now officially competitive. We fully expect the initial allocation of multifamily bonds to be fully subscribed on the opening day of the Notice of Funding Availability (NOFA) in Tennessee and numerous additional states, including Florida, Minnesota, New Jersey, Oregon and Connecticut may be following quickly on its heels.
Should HR 3077/SB 1703 pass in the new year, the flat four percent LIHTC rate will likely expand the number of states around the country where multifamily bond development is financially viable. This will also likely expand the number of states that become volume cap constrained. The recycling provisions in HR 3077/SB 1703 will certainly help alleviate some of this pressure but even so, NH&RA’s Bond Developers Committee has begun to pivot our advocacy strategies to place greater emphasis on being more efficient with volume cap.
There are several steps that those states, which are cap-constrained, or at-risk of becoming cap-constrained, can take to be good stewards of volume cap. With the Federal Reserve seeming to indicate it will keep interest rates low in 2020, state housing finance agencies (HFAs) can take advantage of the low interest rate environment while stretching volume cap by implementing single-family programs that blend tax-exempt with taxable bonds.
HFAs can also size allocations to the 50 percent test (with some cushion) to stretch the cap further. HFAs can enhance this policy further by implementing a bond recycling program so that developers can have a tax-exempt or a taxable tail. Recycled bond cap can also be utilized for non-LIHTC multifamily bond financed projects. While uncommon today, if the spread between taxable and tax-exempt rates increases, this may be a desirable way to finance workforce housing or light subsidy preservation transactions.
Of course, there are many variables and questions in 2020 that could dramatically impact affordable housing. For example, how will the implementation of the U.S.-Mexico-Canada Agreement (USMCA) impact construction costs and materials? Will a sustained trade-war with China and other countries drive the economy into a recession? After nearly a decade of sustained economic growth, there are some economists who predict the next recession may already be upon us. I won’t even venture to guess how impeachment proceedings and the 2020 election will further shape our industry.
All I can reasonably guess is that 2020 is destined be interesting. Stay tuned.
