The NRP Group has employed tax-exempt bonds on many new developments throughout its 15-year history.

But like a lot of developers, it has rethought that approach over the last few turbulent years.

While the company has five taxexempt bond deals under construction— all of which needed property tax breaks to pencil out—the developer is not bullish regarding the swift return of the market.

“Bond deals worked when tax credit pricing was in the 90s, private placements were not loaded up with enhancement fees, and rates were under 6 percent,” says Dan Markson, a senior vice president at the Clevelandbased developer. “But the median incomes are not rising enough to make up for all of that.”

Indeed, the tax-exempt bond marketplace is in a strange place right now and continues to be overshadowed by the more powerful 9 percent tax credit. Since 9 percent deals have deeper rent skewing than 4 percent deals, they almost always get federal and state priority. For instance, while the tax credit exchange program has helped numerous 9 percent deals to break ground, the 4 percent world was left in the cold, unable to access the program.

What's more, the private-placement market remains severely limited. RBC has some appetite, as does Citi Community Capital and Bank of America, but it's a tepid market these days at best.

Fannie Mae remains out of the variable-rate market, but suddenly that doesn't seem like such a big deal. Freddie Mac's variable rate with a swap program was a popular execution over the last couple of years due to the low rates offered, but that execution is now being priced about the same as fixedrate deals, at around 5.65 percent, according to Phil Melton, who runs the affordable housing debt platform for Grandbridge Real Estate Capital.

“Fixed-rate bonds are slow to come back, but the rates seem to be holding,” says Sarah Garland, director of affordable housing for Washington, D.C.-based Fannie Mae. “A fixed-rate bond is actually inside of a Freddie swap, for instance. So we expect that as that market comes back, people will go to the fixed-rate bond market as opposed to the swap.”

New construction bond deals are having a very hard time finding a letter of credit provider, and most borrowers don't want to wait for the Federal Housing Administration (FHA) to get their deal done. A bigger problem is that there's very little interest rate difference between doing a tax-exempt and taxable deal these days.

All-in rates on tax-exempt credit enhancements through the FHA's 221(d)(4) program are around 5.5 percent, while taxable deals were pricing at 5.4 percent as of early June. The same dynamic applies at the governmentsponsored enterprises (GSEs), though their rates are slightly above the FHA.

But lenders are seeing more activity on the preservation side as the second quarter came to a close. “We are starting to see some more bond deals for acq-rehab, in-place rehabs potentially not needing the letter of credit but going straight to an enhancement with some reserve fundings,” says Melton. “That works best if you've got a HAP contract or something else associated with it where you're maintaining the revenue stream.”

Fannie Mae has noticed that uptick as well and says it will target rehab deals in the second half of the year.

“We want to be a little more aggressive in pursuing fixed-rate bond transactions, especially those that are mod-rehab and in-place deals, which is really our sweet spot in terms of execution,” says Bob Simpson, vice president of multifamily affordable lending within Fannie Mae's Housing and Community Development (HCD) division.

New Issue Bond Program

The federal government has stepped in to help the tax-exempt bond market, but the success of its New Issue Bond Program—a collaboration between the Treasury Department, the Department of Housing and Urban Development, and the GSEs—remains to be seen.

The program gave both state and local housing finance agencies (HFAs) the ability to provide low-rate debt on bond deals.

“The program used the 10-year Treasury as a rate for the program bonds,” says Carl Riedy, vice president of the public finance channel within Fannie Mae's HCD division. “The states could lock in a 10-year Treasury rate from the middle of November through the end of December last year.”

In general, the rates emanating from the program in the early stages are in the 3.75 to 4.5 percent range once factoring in the spread and fees charged by each individual HFA.

To date, about $2.9 billion has been issued on the multifamily side, divided among 31 state and local housing finance agencies. Nearly half of that amount went to state and local agencies in New York and California. In terms of actual credit enhancements, there's only been about $40 million done through the program, divided between Fannie, Freddie, and the FHA.

The program kicked into gear in the fourth quarter of last year, but it came together quickly, maybe a little too quickly. HFAs had about two months to determine how much volume they'd need. And it's a “use it or lose it” scenario—HFAs have until the end of this year to use that volume, or it will be eliminated.

Trade organizations like the National Council of State Housing Agencies are lobbying the Treasury Department to extend the deadline by six months and increase the amount of volume.

While the low rates are certainly welcomed by the affordable housing community, many feel that the program only got it half right. Though it addressed debt, it did nothing to make the 4 percent tax credits attractive.