WASHINGTON - Developers may be increasing their use of multi-family housing bonds in conjunction with the low-income housing tax credit in order to avoid the volume cap on housing credits, industry officials said this week.

The apparent increase comes as rising demand for the housing credit has made it harder for developers to get enough credits to build their projects, officials said.

Up to now, developers largely avoided mixing bonds with the housing credit because the law forces them to take a reduced credit if they do so. But the law also permits developers to obtain credits without receiving an allocation under the housing credit volume cap if the project involves bond financing.

That ability to avoid the housing credit cap appears to be making developers in at least some cases turn to tax-exempt bonds, housing officials said.

Use of bonds with the credit "is starting to happen more and more," said Robin Salomon, a principal at DFC Group, a real estate consulting firm. As the supply of housing credits "gets tighter and tighter, people are going to have to turn to whatever sources of subsidy are available, or not develop projects, and that will naturally lead people toward bonds."

Other industry officials said they see no evidence yet of an upturn in the use of tax-exempt bonds in housing credit projects. But some agreed that demand for the housing credit is rising to the point where increased use of tax-exempt bonds is a possibility in the future.

The housing credit law allows rental housing developers a tax credit equal to 70% of the present value of the low-income portion of projects involving new construction or substantial rehabilitation. The law, however, includes a penalty for combining the credit with other federal subsidies, including tax-exempt bonds. In those cases, developers may take only a 30% credit.

Use of the credit is limited by a $1.25 per capita state volume cap. But if a project involves a substantial amount of tax-exempt financing, the law waives the need to obtain a volume cap allocation for the housing credits used. Under this scenario, the developer is still eligible for only the 30% credit.

When the housing credit law was first enacted as part of the Tax Reform Act of 1986, it was not fully used in many states. But in 1989, Congress passed legislation that made technical improvements to the credit, and demand started to rise. Use of the credit stalled in 1992, and 1993 because Congress had allowed it to expire on June 30, 1992, and did not renew it until August 1993. At that time, Congress made the credit permanent.

This year, "states are going to use everything they've got" in the way of housing credits, said John McEvoy, the executive director of the National Council of State Housing Agencies The council estimates at least 21 states will use up their entire housing credit allotments in 1993.

That trend is bound to continue because, now that the credit is permanent, more states will be comfortable with it and interested in using it, McEvoy said

"There seem to be a lot more players, and there are more projects being identified, and so the competition for quality projects has intensified ," he said.

Bond financing is becoming more appealing, according to some industry officials, because it is the only way a developer can obtain credits in states where the credit cap is used up.

According to the May 1994 edition of a newsletter called the Low-Income Housing Tax Credit Advisor, housing officials in at least four states - California, Florida, Michigan, and New Jersey - are encouraging developers to use tax-exempt financing "as a way to obtain credits."

Richard Goldstein, a housing lawyer in Washington, D.C., said he has "seen people trying to structure [housing credit] deals using tax-exempt bonds, because they may be in a smaller state or a very, very competitive state in terms of tax credits, and the only way to get the deals done is to do it that way."

Small states are at a bigger disadvantage with the housing credit cap than with the bond volume cap, Goldstein said. The bond cap law permits each state to allocate either $50 per capita or $150\ million, whichever is greater. That has resulted in a number of states at the $150 million level having more private-activity bond authority than they can begin to use. But the $1.25 housing credit cap is a straight per-capita amount, with no allowance for small states.

Thus, states with the smallest housing credit caps may be the best candidates for using tax-exempt bonds with the credit, because developers would have little difficulty obtaining a bond cap allocation in those states, Goldstein said.

"This is a bit of a wave of the future," Goldstein said.

Many states at the $150 million level for their bond cap are also states that the housing council has said will use their entire credit cap this year. They include Alaska, Hawaii, Idaho, New Mexico, Utah, and the District of Columbia.

Some housing market participants are not convinced that there is a trend toward using tax-exempt financing as a way of obtaining housing credits.

The value of the 70% credit "is so much greater than the value of the 75, 100, or 125 basis points that you save with tax-exempt financing that it's hard to imagine the same project being feasible under both sets of circumstances," said Anthony Freedman, a housing lawyer with Powell, Goldstein, Frazer & Murphy.

"I don't know that it's not true, but I haven't encountered it and the numbers don't seem right," Freedman said.

McEvoy said he also has not found developers trying to use bonds to obtain credits outside of the credit cap. "Historically we know very few bonds have been used with the credit because of the shallowness of the two subsidies combined. To make it work, somebody's going to have to figure out new economics, and I'd be surprised if they had," he said.

But Salomon said that in many cases developers are deciding that a lesser subsidy is still preferable to not moving forward with a project.

"To the extent developers have projects that have to be financed, they are a resilient group, and they will go where the subsidy is," Salomon said. "If the only available means to getting a subsidy [is to use bonds with the lower credit amount]. then that's what will be done."

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