Federal housing systems fall into one of two categories: those that offer a direct subsidy to others to pay for their housing, and those that use financial instruments to facilitate the construction of housing. Among the financial systems, the most important is the low-income one. Housing Tax Credit (LIHTC). This creature of the tax code monetizes a tax break for investing in affordable housing. But in the anti-poverty systems reviewed by former Congressman Paul Ryan, there is also an attractive but complex tool: the Private Activity Bonus. or PAB. The PAB allows local governments to sell tax-exempt bonds on behalf of entities for construction projects that gain advantages for the public by adding housing. Combined with tax credits, PABs can be a difficult tool for developers looking to raise capital for housing projects. But the complexity and cost are high (if you need to have a window to LIHTC, here’s an article on how they work).
The Congressional Research Service has released a report on personal activity bonuses. Like tax credits, PABs are recorded in the tax code and come with two types of obligations: one for appropriations that serve government objectives; the other for those who serve personal ends, insofar as they make a profit for the public. If the personal activity bonds are for “qualified personal activities,” such as housing, bond clients do not pay any tax on the interest they earn. Congress restricts the amount of debt that can be issued for personal activities; $150 million and $50 per capita in 1986, peaking at $335 million or $110 per capita in 2022. There are also restrictions depending on the type of allocation to influence investments. Congress also intends to restrict tax expenditures (exemptions mean less tax revenue).
How those obligations can be combined with the LIHTC, i. e. , the 4% tax credits, is well addressed in a document from the Corporation for Supportive Ho (CSH), Financing Superive Ho with Tax-Exempt Bonds and 4% Low Income Ho Tax Credits. The following is a summary of the requirements for tax-exempt bonds with tax credits.
Only state and local governments and quasi-government agencies can factor bonds. This is the Housing Finance Agency (HFA), the state-owned company that receives the tax credits. But because the number of tax-exempt bonds that can be factored is subject to a volume limit (the limit discussed above), all of those government entities compete aggressively to have compatibility with the limit. In addition, allocations cannot access bond proceeds until an allotment receives approval from the state’s HFA, and that income is restricted to residential. prices and can’t be used for advertising space, for example.
There is one important limit worth noting with respect to combining tax credits and tax-exempt bonds. To receive the tax credit allocation, the project manager must cover at least 50% of construction costs (the “50% rule”) with bond proceeds; and of course, any housing built using these bonds and tax credits must be available to people who earn less than 60% of Area Median Income (AMI). Usually, 20% of the units must be affordable to people at 50% of AMI or less, or 40% of the units at 60% of AMI.
If it’s not obvious already, these sorts of projects are complicated. Add to this the fact that often these sorts of “deals” include additional funders. For example, the one housing project I worked on as a developer was a 4% project using tax exempt bonds. But we also had funds from the state’s housing trust fund as well as a construction loan. To be honest, I’ve had to wrack my brain and pore over old emails to recall exactly how the project came together. The CSH paper does a great job of showing through seven different case studies some of the distinctive ways this financing can come together. For example, one of the simplest case studies is from Michigan. Here’s a chart that shows the funding for the project.
MSHDA is the Michigan State Housing Development Authority. MSHDA sold the bonds, and debt service is provided through the tenants’ modest income, which comes in part from Section 8 bonds. Each of the project funders has other requirements, and in project funders, meeting one requirement may violate the other funder’s requirements.
In some cases, equity tax credits can be used to pay debt service. The CSH document uses a case study that used the bonds and then “completely removed them from an ongoing verbal exchange with other government loans, grants, and tax credits. “”This is tantamount to using equity tax credits to pay off bond debt. It’s compelling: Even though the 4% tax credits are a smaller percentage of an affordable project’s eligible base, being able to use the credits to pay off the bonds is a smart idea. The same applies to the mix of funding resources.
Ryan doesn’t spend a lot of time on PABs, unless he recommends that “few studies on the efficacy of personal activity bonuses . . . » Array. with respect to improving the upward mobility of tenants. This is true, and their research on program spending shows that the bonds have not been used as tax credits for social housing.
Spending on Private Activity Bonds from 2003 to 2012 According to former Congressman Paul Ryan’s critique. . . [ ] Housing programs.
And not much has been replaced in the decade since it was analyzed (data from the U. S. Treasury chart). U. S. Homeland
Private Activity Bond outlays from 2013 to 2022.
My view is that PABs deserve to be used in the same way as any debt: price capture. In the case of ho, I’ve recommended a price capture formula for homeless ho in which you quantify the prices of the encampments, for example, the bonds are sold to implement interventions to finish the encampments and then as savings are realized, those savings as debt service. The challenge of assembling what is known in the nonprofit world as a “capital pile” is the point of complexity that is challenging. For the following reasons:
● Time: Investment deals are time-consuming, and time is money. Maintenance costs until investments build up and align are a true addition to overall progression prices;
● Transactions – more funders mean more transactions costs, and these costs also add to total development costs;
● Lawyers and experts: at each and every level of the process, in order to avoid mistakes that could derail a project, it will be necessary to hire lawyers and experts; and
● Not very effective: With all the moving parts and additional costs, is it the most effective way to provide housing to others who need it now?
At the end of the day, I go back to the fundamental rule, any housing financing proposal should be as undeniable as possible, offering the mandatory budget or housing to other people who want it today. As intrigued as I am, and I enjoy the challenge. of solving a monetary puzzle, betting on those games doesn’t pay other people’s rent; We want to locate tactics to reposition BAPs with a greater objective than complex investment agreements for the structure of subsidized housing.