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 tax-exempt 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,” said Dan Markson, a senior vice president at the Cleveland-based 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 to 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 at best these days.

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 its variable with a swap execution is now being priced about the same as fixed-rate 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,” said 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 applies at the government-sponsored enterprises, 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,” said 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 said 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,” said Bob Simpson, vice president of multifamily affordable lending within Fannie Mae’s Housing and Community Development division.