Proposed Legislation Expands Private Activity Bond Recycling

Research & Policy | July 9th 2019 | Mark Willis

Furman Center Logo over buildings


As the nation grapples with an affordable housing crisis, a recently proposed bipartisan bill aims to address the shortage of affordable housing by expanding and strengthening the Low Income Housing Tax Credit (LIHTC). The Affordable Housing Credit Improvement Act of 2019 will reportedly create 1.9 million additional affordable housing units over the next decade. The new proposal includes a simple tweak that the NYU Furman Center wrote about previously which has the potential to significantly expand financing for affordable housing in New York and across the country.


Building housing for low-income households, even those with steady employment and wage income, is a longstanding policy challenge. The rents these households can afford are typically not high enough to support the costs of developing and operating housing - a problem exacerbated when land, materials, and labor are expensive, as they are in the New York Metro Area. Therefore, government subsidy is needed to help cover some of these costs to make affordable housing financially feasible. 

One key source of financing for modern-day affordable housing development are tax-exempt bonds, or "Private Activity Bonds". The Federal Government authorizes states to issue Private Activity Bonds to investors and to use the revenue to make loans to private parties that can help finance affordable housing and other "Qualified Purposes". Since these bonds are tax-exempt, bond holders are willing to take a lower rate of return which allows housing projects to achieve economic viability at more affordable rents.

The availability of tax-exempt bonds is subject to an annual limit– known as “volume cap”— determined according to each state’s population size ($105 per person in 2019). States and localities can use the bond financing to support a number of purposes including economic development, homeownership, and rental housing. However, only bonds used for multifamily rental housing generate very valuable “as-of-right” four percent LIHTC - currently no other uses like the development of single family housing or other economic development projects are eligible for this “bonus”.

The key for using PABs more effectively is to expand the use of “recycling”, which allows for the reuse of tax-exempt bonds whose proceeds are needed only for a short time, well short of the potential number of years allowed for such bonds. Under current law, recycled bonds can only be used for qualified residential rental projects. Prior to a provision in the Housing and Economic Recovery Act of 2008 (HERA), no recycling was allowed and so short term bonds counted the same as longer maturity bonds against states’ annual volume caps. But HERA allowed for the reissue of PABs used for multifamily rental housing within a six-month window to finance other qualifying residential rental projects. This recycling provision financed nearly 70,000 affordable housing units in New York State alone between 2009 and mid-2017. 

Expanding Bond Recycling

The proposed bill will expand the ability to use recycled tax-exempt bonds for single family projects, which are currently not eligible for recycling, do not qualify for the 4% credit, and count against the current volume cap. In 2017, about 11% of New York State’s volume cap was allocated to SONYMA, which finances affordable single-family homes in New York. With the proposed expansion of bond recycling, bond financing that is not needed for the full financing-term would now be eligible to reissue for single-family mortgages. Funding single family financing through recycled bonds would allow states to devote a larger share of their initial annual volume cap to multifamily rental housing, therefore increasing the 4% LIHTC "bonus".

The new proposal would also make it easier to take advantage of recycling. It would expand the window for the use of recycling bonds from 6 months to 12 months which would mitigate the time constraints state agencies have to source projects. Nationwide, these provisions on the use of recycling are expected to generate 100,000 additional affordable housing units.  

Greater Bang for the Tax-Exempt Bond Buck

Allowing states to generate additional 4% LIHTC credits by expanding the scope of activities eligible for recycled bonds can also help state and local Housing Finance Agencies more deeply subsidize rents for lower-income households, or site subsidized developments in more expensive neighborhoods where acquisition costs are high. NYU Furman Center research suggests that LIHTC allocation plans must play an important role in increasing the share of affordable housing units in lower poverty neighborhoods, and New York City’s experience provides some on-the-ground examples. The development at 2495 Broadway on the Upper West Side is one of dozens financed through recycled PABs. The Upper West Side boasts a median household income of $126,257 and a much lower poverty rate (9.9%) compared to the City as a whole. The Upper West Side also has a much higher test scores when compared to Manhattan and the City overall and a lower serious crime rate. 


Given the magnitude of the affordability crisis, state and local governments need as many creative financing options as possible to meet the need for homes affordable to low- and moderate-income households. By tweaking the tax code to expand the recycling of Private Activity Bonds, Congress can help housing finance agencies generate the maximum possible leverage and impact from each year’s volume cap allocation, without undercutting other priorities like single-family housing. This provision of the proposed legislation is a clear step in the right direction. 

Mark Willis is the Senior Policy Fellow at the NYU Furman Center, conducting research, writing, and speaking on such urban-related policy issues as affordable housing, housing finance reform, community development lending and investment, and the Community Reinvestment Act. Before joining the NYU Furman Center, Mark was a Visiting Scholar at the Ford Foundation, working on research related to community development and the financial services sector. Prior to his time at Ford, he spent 19 years at JPMorgan Chase overseeing its community development program, serving as Executive Vice President and Founding President of the Chase Community Development Corporation. Mark has also held positions with the City of New York in economic development, tax policy, and housing, where he was the Deputy Commissioner for Development at the Department of Housing Preservation and Development. He also worked as an urban economist at the Federal Reserve Bank of New York. Mark has taught Housing and Community Development Policy at New York University’s Law and Wagner Schools. He co-chairs the Economic Development and Housing Committee of the Citizens Budget Commission, chairs the Program Planning Committee of the New York State Energy Research and Development Authority, and serves as a Board Member of the National Housing Conference, National Community Investment Fund, and a number of other boards involved with housing and community development. Mark has a B.A. in economics from Yale University, a J.D. from Harvard Law School, and a Ph.D. in urban economics and industrial organization from Yale University.

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