Demand for tax-exempt bonds to finance multifamily projects is on the upswing, and will rise even further in 2008, according to industry observers.
State and local housing finance agencies across the United States have allocated more than $5 billion in tax-exempt multifamily bonds so far this year, an increase of 18 percent over last year’s $4.25 billion, according to data gathered by AFFORDABLE HOUSING FINANCE. Some of the nation’s largest issuers said they expect to see demand climb even further in 2008.
"This is a gathering storm," said Wade Norris, a partner with Eichner & Norris, PLLC, a Washington, D.C.-based law firm, and an expert on multifamily tax-exempt bond finance. He expects more states to start bumping up against their total volume cap of tax-exempt bonds, and to move to more competitive application processes as a result.
The New York City Housing Development Corp. (NYCHDC), for instance, which is one of the biggest issuers, had already allocated $320 million in multifamily tax-exempt bonds by June. At that point, the agency warned state officials that it would not be able to finance any further deals until January unless its supply of volume cap was replenished. Gov. Eliot Spitzer allocated another $100 million to the agency the following month, and as of late October, NYCHDC said it had allocated $415.6 million to 21 projects representing 2,844 units.
NYCHDC and the New York State Housing Finance Agency (NYSHFA) this fall were "talking about not allowing really big deals," said Norris at AHF Live: The Tax Credit Developers' Summit in October, as he recounted discussions with the agencies. "They’re under a lot of pressure because [the big deals] suck up so much volume so fast."
NYSHFA allocated $291 million in carryforward volume cap this year in addition to $322 million in 2007 volume cap, and said it expects demand to remain steep next year. "The demand is high because the need to preserve and create affordable housing in New York is great," the agency said.
The California Debt Limit Allocation Committee (CDLAC), the nation’s largest single allocator of tax-exempt bond authority, doled out $1.2 billion in taxexempt multifamily bonds to 104 projects this year, which will fund 10,204 units. That’s $100 million more than multifamily projects received in 2006.
CDLAC expects to see even more requests next year "due to both changes in interest rates and a decrease in acquisition costs," said the agency. "As requests for allocation increase, it will become necessary for every project to fully maximize each point category. As a result, we may see more projects with deeper rent affordability, more service amenities, site amenities, and so on."
Other states that allocate large amounts of tax-exempt bonds for multifamily projects will be more likely to move to competitive allocation processes over the next year or two, said Norris.
Ohio, which expects to set aside $174.4 million in tax-exempt bonds this year for multifamily projects, is already on track to make such a move. At present, the state’s volume cap is allocated by lottery. The Ohio Department of Development this fall said it was "establishing criteria that will empower the director of the Department of Development to prioritize projects based on merit, rather than being constrained by chance."
Factors the department is likely to take into consideration include: preservation of existing affordable housing, perunit costs for rehabilitation, affordability, energy efficiency, physical evaluation of the property by government agencies, time sensitivity of the project, and local government support.
"Going forward over the next year or two or three, if competing uses continue to grow the way they are now, and we have more demand for multifamily, prices for land and buildings are coming down a little bit, construction costs are attenuating, I think we'll be in a more competitive world," said Norris.