Vice-President Kamala
The ACHIA would reduce the portion of a low-income housing tax credit (LIHTC) project that must be financed using private activity bond volume cap from 50% to 30% (or in earlier versions, 25%). This simple change, making the "50% Test" a "30% Test," has been projected to produce approximately two million additional affordable rental housing units over a 10-year period.
Another way to stimulate affordable housing production, albeit to a lesser degree, would be to allow "recycling" of volume cap from multifamily issues into single-family issues.
The Housing and Economic Recovery Act of 2008 (HERA) provided for volume cap recycling within multifamily programs, meaning that volume cap applied to finance one qualified residential facility can later be used to finance a second affordable project. No new allocation of current year (or carryforward) volume cap is required. As envisioned by HERA, this would stretch the limited supply of volume cap and boost affordable housing production — the same goal as that of the AHCIA.
In practice, multifamily recycling has had limited impact outside of New York City and a few other dense, high-cost jurisdictions in which "80/20" (meaning 80% market rate and 20% very low income) projects are financially viable.
The primary issue with multifamily recycling is that only new volume cap counts toward the 50% Test. If $100 million of bonds are issued to finance a project (Project 1), and those bonds are paid down to $60 million after project completion — a common scenario — $40 million of volume cap is left to be applied to new private activity bonds to finance a new project (Project 2). The problem is that none of that $40 million counts toward the 50% Test, so no new tax credit equity is generated, which often makes Project 2 financially infeasible.
Instead of lowering the 50% Test, Congress could amend Section 146(i) of the Internal Revenue Code to allow volume cap to be recycled from multifamily bond issues into single-family (and possibly other) issues.
In the example above, the $40 million of volume cap made eligible for recycling by the redemption of bonds from Project 1 could be applied to one or more new-money issues of single-family mortgage revenue bonds. Single-family bonds do not make use of LIHTC so the 50% Test is irrelevant. This would allow the state to allocate $40 million less of new volume cap to single-family and allocate it instead to multifamily bonds, generating roughly an additional $20 million of tax credit equity and stimulating multifamily production.
Another problem with multifamily recycling is the timing of real estate closings.
Current law requires a loan to be made to Project 2 within six months of the paydown of debt for Project 1. A handful of issuers with "open" resolutions or indentures are able to delay bond redemptions to ensure compliance with this six-month rule. However, most multifamily affordable housing bonds are issued on a conduit basis, meaning that loan prepayments necessarily result immediately in bond redemptions.
Issuers do their best to match the timing of paydowns, which are real estate driven, with closings on new conduit issues, which are also real estate driven. Inevitably, some amount of recycled volume cap turns into a pumpkin.
Single-family bond programs work differently. Most if not all issuers have access to a warehouse lending facility that they use to buy first-time homebuyer mortgage loans when and as they are originated. Those individual loans are then pooled until the aggregate principal bond issue is large enough to be taken out with a bond issue.
Volume cap recycled from multifamily into single-family could be fed relatively seamlessly into an existing single-family lending program, avoiding the problems with the six-month rule and obviating clumsy multifamily warehousing programs.
Capitol insiders say that progress is being made on the AHCIA, and that it would be politically and legislatively unwise at this point to push for an alternative.
I hope they are right. If the AHCIA stumbles again, it may be worth looking at other options.
