Affordable Housing Finance

TAX-EXEMPT BONDS

States Expect Tough Bond Financing Environment

AFFORDABLE HOUSING FINANCE • December 2008

BY LIZ ENOCHS

Global warming has yet to hit the affordable housing tax-exempt bond market. Although market participants were reporting some thawing as of early November, the deal pipeline still remained mostly ice-clogged.

To help developers get deals moving, many housing finance agencies around the country are planning to allocate to multifamily projects some of the extra volume cap the federal government is doling out in the coming year.

The New York State Housing Finance Agency, like those in many other states, plans to use a portion of the $600 million in extra volume cap it will receive in 2009 to fund multifamily projects. California, which will receive more than 10 percent of the $11 billion in additional private-activity tax-exempt bond authority the federal government is awarding to states, expects to use 20 percent of its $1.144 billion share to fund rental housing.

Even as they consider how to divvy up the extra funding, however, many state agencies have expressed concern that credit market conditions will dampen demand well into 2009, especially as operating costs rise and equity prices continue to fall. “Economic conditions in the equity and bond markets have made it difficult for developers to submit financially feasible applications for 4 percent credits and private-activity bonds,” says Teresa Morales, multifamily bond administrator for the Texas Department of Housing and Community Affairs.

For that reason, states such as Utah and Indiana also were considering lifting per-project funding caps for 2009 in an effort to help developers make their deals pencil out. On the other side of the fence, some states are planning to tighten underwriting requirements to ensure developments that do receive tax-exempt bond financing will be able to close their other financing and remain economically viable after build-out or completion of the rehab.

Colorado, for instance, has said it plans to raise its required debt-service coverage ratio to 1.20x from 1.15x, Alabama raised its bar on project underwriting, and Missouri will be looking for the strongest developments in the strongest markets.

In states like Florida and California with elevated housing costs and correspondingly high demand for low-income housing tax credits (LIHTCs), officials expect demand for tax-exempt bonds to remain high in 2009, mainly because such deals come with 4 percent LIHTCs and therefore serve as a viable, noncompetitive alternative to the limited pool of 9 percent LIHTCs.

At the same time, because construction financing has been so difficult to obtain, state allocating agencies are expecting to see more demand from developers with acquisition-rehab projects as opposed to new construction deals. This trend should work to the advantage of developers with projects in states that make preservation of existing affordable housing a priority and in states where much of the affordable housing stock is older and projects are getting close to their affordability expiration dates or the end of their Sec. 8 contracts.

Overall, the picture for developers seeking tax-exempt bond financing in 2009 will be similar to the picture for LIHTC developers: Line up as much financing as possible, be extremely conservative in your pro forma assumptions, and make sure your (good) reputation precedes you.