LOS ANGELES—In what appears to be a classic case of unintended consequences, Congressional Republicans may be on the verge of eliminating a key source of funding for affordable housing projects. The first draft of the House's tax-reform package calls for the elimination of private activity bonds, which are used in connection with 4% Low-Income Housing Tax Credits to build, buy and renovate affordable housing—and thereby make possible much of the affordable housing sector's activity.
“We don't think the Republicans are aware of the effect this would have,” says Scott Alter, co-founder and partner in national developer Standard Communities, which specializes in the affordable sector. “We're working with two coalitions to try to get the word out.”
Alter's Standard Communities partner, co-founder Jeffrey Jaeger, sums up what that effect would be as far as the affordable housing sector is concerned: ““Private activity bonds are the linchpin that allows you get the 4% tax credit,” he says. “With the elimination of the private activity bonds, unless there are other changes forthcoming, that would theoretically cut out about half of the affordable housing that's done each year.”
In fact, given that the elimination of the PAB program would also increase borrowing costs for affordable developers, “from what we can tell it would mean that none of the projects targeting workforce housing would get done across the country.”
The 4% credits—which require that 50% of any affordable transaction be paid for with the proceeds from a PAB—are one form of LIHTC. The other is a 9% credit, which does not entail the use of these bonds—and in fact, expressly prohibits their use.
“The 9% tax credits are a scarce resource, in that there's a certain dollar amount that's allocated at the federal level, and then allocated by population level to the different states,” Jaeger explains. By comparison, 4% LIHTCs are easier to obtain—but absent the PABs, which allow bondholders to increase their ROI via tax-free coupons, the 4% credits effectively have the rug pulled out from under them.
Lawmakers' proposal to eliminate the PABs comes “at the worst time,” Jaeger says. Not only is the Department of Housing and Urban Development “trying to curtail its budget and reduce its spending on an annual basis, which makes doing some of these projects harder to begin with, but any decrease in the tax rate decreases the benefit of the tax credits to investors in affordable housing deals. When you throw in the loss of the 4% tax credit on top of that, it's really kind of a snowball effect.”
Alter points out that the PAB program is key to “not just the development of new affordable housing, which obviously is vital to the country. It's also for the rehabilitation and preservation of existing affordable housing.”
He and Jaeger have used the PABs to buy existing affordable stock that's in danger of turning market-rate and preserving it as affordable for 30-plus years. “We've also used private activity bonds to take market-rate, existing housing and convert it to affordable, with long-term deed restrictions that really provide a positive impact for the community,” he says.
Jaeger notes that with their eyes firmly fixed on broad-based tax cuts, Congressional Republicans are “looking for any which way they can to raise revenue.“ Since PABs have been employed to finance the building of stadiums, “we think they may be going after private activity bonds based on their misuse in other areas.”
Two groups working to educate lawmakers on the value of PABs are the Housing Advisory Group and the Affordable Housing Tax Credit Coalition. “We're hopeful that the Republicans realize that private activity bonds are used not only in affordable housing, but also in the construction of schools, roads and other municipal infrastructure projects,” says Jaeger. “This would be a huge detriment to municipalities being able to finance their ongoing needs as well.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
