The nationwide shortage of affordable housing continues to make headlines. For low-income individuals seeking affordable housing, waitlists are hundreds—in some cases, thousands—of names long. For developers looking to meet this demand, the process from groundbreaking to ribbon cutting continues to grow in complexity. As we continue to adjust to a post-COVID world, developers are still faced with supply chain issues, cost overruns and project delays that impact overall budgets. The Federal Reserve Board’s seven interest rate hikes since Q1 of 2022 have drastically increased the costs of project nancing, making the need for gap nancing a regular occurrence around the country. Those factors, coupled with the growing scarcity of private activity bond volume caps, have created an environment that requires a high level of creativity and collaboration to get to closing.
As an attorney in the affordable housing industry, nothing keeps me up at night as much as volume cap scarcity. Multifamily projects utilizing four percent Low Income Housing Tax Credits are required to nance their projects using a private activity bond volume cap. Compared to the ultra-competitive nine percent LIHTC, four percent LIHTCs were once considered a viable backup plan for projects that missed out on nine percent LIHTC funding. When using private activity bonds with the four percent LIHTC, at least 50 percent of the aggregate basis in the project must be nanced with bond proceeds. In recent years, more and more states have seen their allocation of volume cap become oversubscribed, making access to four percent LIHTCs and accompanying volume cap increasingly competitive. Across the country, states are grappling with this growing scarcity of resources in many ways. Some states are addressing this issue by limiting volume cap allocations to 51 to 55 percent of a project’s aggregate basis. In practice, this means that developers are highly motivated to value engineering and contain cost overruns, as a failure to meet the “50 percent test” will jeopardize the LIHTCs for the entire project. The District of Columbia, which will receive a bond volume cap allocation of around $358,000,000 in 2023, has determined that limiting project allocations to a total of $67 million will allow it to continue to nance the most signicant number of affordable housing projects possible as it continues to work towards the robust goal of delivering 12,000 new units of affordable housing by 2025. Once an award of volume cap occurs, a countdown clock begins, with the requirement that the project reach bond closing in a prescribed number of days. Failure to meet this goal, even if due to factors beyond a developer’s control, requires the volume cap to revert to the bond issuer. These practices, while somewhat harsh, allow bond issuers to prioritize shovel-ready projects that plan to deliver much-needed units in the shortest amount of time.