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HB854 Statewide Housing Study:
Current Efforts, Future Needs, New Strategies

29 Bond financing options

This chapter addresses HB854’s requirement to propose recommendations for “bond financing options for qualified affordable housing.”

Highlights

Major takeaways in this chapter include:

  • Nearly all of Virginia’s Private Activity Bond allocation is used to create both affordable rental and homeownership opportunities. The Governor’s Pool has increasingly been used to support multifamily rental housing bonds.
  • Virginia Housing and the Department of Housing and Community Development should continue and expand these efforts by monitoring allocation trends, increasing “gap” funding resources, and supporting beneficial changes to federal law currently being considered by Congress.
  • On the other hand, localities in Virginia rarely use their general obligation bonding capacity to support housing. The state can kindle more of this activity by sharing best practices, incentivizing local bond issuance (and similar local housing investments) within current programs, and exploring state funds to match and leverage any new local housing bonds.

29.1 Background

HB854 requests the SAG to:

“. . . consider the following proposals as well as other proposals it considers advisable during the course of its analysis and deliberations: . . . bond financing options for qualified affordable housing . . .”

Bond financing of affordable housing is a critical tool in Virginia. Much of Virginia’s production of affordable rental housing is financed through bonds issued by Virginia Housing. Public housing authorities also issue bonds to finance rental housing. Some of the bonds issued by Virginia Housing and PHAs carry with them tax credits that can be converted into equity that helps reduce rents.

Many types of bonds and bond financing strategies exist, but not all are in use in Virginia.

29.2 Findings

29.2.1 Private Activity Bonds

DHCD manages Virginia’s cap for tax-exempt Private Activity Bonds (PAB). The state annually receives a nearly $900 million allocation of bonding authority from the federal government for PABs.

PABs serve a variety of purposes in different states. The majority of PABs in Virginia are used for housing. Recent analysis from Novogradac shows that Virginia consistently has been among the top ten states for total PAB volume dedicated to multifamily housing.88

Multifamily four percent bonds

Virginia Housing and public housing authorities issue multifamily bonds with four percent Low-Income Housing Tax Credit (LIHTC) allocations. These bonds contribute to the total PAB cap.

Multifamily mixed income bonds

This is a variation of the bonds above. As PABs, they too come under the state bond cap. Under IRS rules, at least 20 percent of units must serve households at 50 percent AMI or 40 percent of units must serve households at 60 percent AMI; these bonds are commonly known as either “80/20” or “60/40.”

In the most common application of multifamily mixed income bonds, 100 percent of units serve households at 60 percent AMI in order to maximize the equity from the Low-Income Housing Tax Credits attached to the affordable units. Truly “mixed income” multifamily projects that include market rate and tax credit units in the same building are rare.

Single-family Mortgage Revenue Bonds and Mortgage Credit Certificates

Mortgage Revenue Bonds (MRBs) finance mortgages to low- and moderate-income households for the purchase of new or existing homes. They are included in the state bond cap. Following the foreclosure crisis, the IRS allowed the substitution of Mortgage Credit Certificates (MCCs) in place of MRBs due to disruptions in the bond market. Virginia Housing has used MCCs since 2015 and has not issued MRBs since that time.

501(c)(3) bonds

A nonprofit 501(c)(3) organization can issue 501(c)(3) bonds for an eligible purpose though generally they must be credit enhanced. The current spread between taxable financings and tax exempt bonds is not significant enough to incentivize the use of these bonds. Few if any have been issued in Virginia in recent years.

29.2.2 Taxable bonds

State-level taxable bonds are uncapped and primarily used by Virginia Housing for the construction and/or acquisition of affordable multifamily housing. Both nonprofit and for-profit developers may use this financing.

29.2.3 Local bond options

The primary use of housing bonds at the local government level has been the issuance of PABs by PHAs for affordable multifamily development. These bonds are included in the state bond cap. There are several PHAs in the state that regularly issue such bonds; some issue bonds only within their jurisdiction while others issue them for projects in any locality that invites them. Examples include Harrisonburg Redevelopment and Housing Authority and Suffolk Redevelopment and Housing Authority.

General obligation bonds

General obligation (GO) bonds are the second type of local bonding used for housing. Article VII, section 10 of the Constitution of Virginia provides the necessary authority—and limitations—for cities, counties, and towns to issue general obligation bonds. The Virginia Public Finance Act (Va Code Ann. § 15.2-2600 through 15.2-2663) provides further guidance.

Virginia localities have rarely used GO bonds for housing, though their use for housing is becoming more common in other states. Issuances have instead largely funded investments in public education, transportation, and infrastructure.

Some of the cases where Virginia localities issued bonds specifically related to housing include:

  1. In 1983, the City of Charlottesville issued bonds for housing improvements in the Vinegar Hill neighborhood. Although a lawsuit claimed the city did not have authority to use its bonding capacity for housing activities (which benefitted a private developer involved in the revitalization project), the Virginia Supreme Court ultimately upheld the issuance because the project served a public purpose. (See: Charlottesville v. De Haan, 228 Va. 578, 323 S.E.2d 131 (1984))
  2. In 2006, the City of Harrisonburg made a loan of $3.5 million in bond proceeds to the Harrisonburg Redevelopment and Housing Authority to renovate public housing units. In 2014, the city issued refunding bonds and entered into a memorandum of understanding with HRHA to facilitate repayment.
  3. In 2008, the City of Alexandria issued $12 million in bonds for the acquisition, construction, remodeling, and repairing of affordable housing, as well as the acquisition of necessary land and equipment; then issued $1.5 million in bonds in 2012 for public housing replacement used in conjunction with Low-Income Housing Tax Credits. The city issued another $4.4 million in 2017 to fund the redevelopment of one homeless shelter and the construction of another.

Local government authority to issue bonds in Virginia

Cities, counties, and towns in Virginia can only borrow money when the state constitution or state law explicitly confers that authority or implies it. The Public Finance Act and/or a locality’s charter outlines a locality’s power to borrow.

The Constitution of Virginia sets limits on local borrowing powers based on type of locality (i.e., cities, towns, and counties):

  • Article VII, section 10(a) of Constitution states that cities and towns may incur debt up to 10% of assessed value of real estate without referendum (some exceptions apply).
  • Article VII, section 10(b) of Constitution states that counties must approve most debt by referendum, but does not establish a total debt limit.89

29.2.5 Virginia Housing Mortgage Credit Certificates

Since 2015, Virginia Housing’s remaining bond cap supports Mortgage Credit Certificates (MCCs). These provide a dollar-for-dollar credit against the homeowner’s tax liability. The credit amount is ten percent of the homebuyer’s annual mortgage interest.

MCCs are used in conjunction with Virginia Housing mortgage loans as well as non-VH loans. MCCs are available only to income eligible households and the sales price must fall under the program limit.

The program targets first time homebuyers (or those who have not owned a home in the previous three years). In fiscal year 2020, 6,841 buyers received MCCs—up from 892 in fiscal year 2016.

Through MCC conversion, the Commonwealth uses its entire PAB allocation and prevents the recapture of the remaining bond cap by the Treasury Department. This can and does occur in other states when carry forward bond allocation is not used within three years.

FIGURE 29.2: Share of annual PAB allocation for housing uses

The current arrangement also means that the majority of Virginia’s PAB cap is used for affordable homeownership and rental initiatives. Most of the bond allocation between 2014 and 2016 consisted of MCCs; since 2017, expanded use of the Local Housing Authorities pool has increased the share of PABs used for affordable rental.

29.2.6 Role of local general obligation bonds for housing

GO bonds issued by localities have several advantages compared to other financial tools and resources:

  • GO bonds can be structured with greater flexibility than current tax exempt bond offerings. Localities may align bond uses with the greatest housing needs in the community.
  • Funds may be applied to a wide range of housing needs—not just affordable multifamily rental. This includes homeownership and homelessness services.
  • Localities may offer bond proceeds as grants, deferred loans, and other award mechanisms.
  • Flexibility allows GO bonds to fill specific financing gaps created by limited resources from other housing development programs, especially in high-cost markets or underserved communities.

Other states widely use local GO bonds for housing; in 2020, the City of Charlotte, North Carolina issued $50 million in housing bonds. Charlotte described their purpose:

“Housing bonds fund the city’s Housing Diversity Program to increase the supply of safe, quality and affordable housing for low- and moderate-income residents throughout Charlotte. The Housing Diversity Program not only addresses the need for new construction, it also helps preserve existing housing through rehabilitation of both single- and multifamily housing units. This funding leverages other public, private and nonprofit dollars to increase the supply and accessibility of housing in the community.”90

In 2021, the City of Raleigh, North Carolina issued an $80 million housing bond. They described their program:

“City Council directed the housing staff to look at two affordable housing bond options for the November 2020 ballot. The City formed an Affordable Housing Bond Advisory Committee on January 21, 2020 to identify options and gather public input for a Fall 2020 bond referendum.

Raleigh residents gave overwhelming support, with 72 percent of those voting in favor of the bond.

Bond Priorities

  • Provide generally equal geographic distribution with project investments,
  • Provide a range of housing types and income levels in coordination with Wake County,
  • Include new units and rehabilitated units where financially viable,
  • Seek innovative development partnerships, and
  • Pursue projects and acquisition opportunities near planned transit routes like Bus Rapid Transit.”91

29.3 Recommendations

In early 2021, the HB854 bond financing options subgroup met four times to discuss how the state can expand its efforts to use bonds to support the creation and preservation of affordable housing. Based on discussions with experts from across the state and input from the subgroup’s members, the subgroup makes the following recommendations.

Recommendation 1

Support the expansion of PABs for affordable rental housing using the four percent LIHTC bonds. Virginia Housing and public housing authorities issue these bonds.

Strategy 1.1

Continue to monitor allocation trends within the state PAB allocation.

At this time, there is no competition for allocation between housing and non-housing uses; nearly all of the allocation is used for housing, but circumstances could change. For example, a widening of the gap between taxable and tax-exempt interest rates could fuel more use of PAB allocation for non-housing uses. Such a shift would necessitate an analysis to fully understand the relative economic and other benefits to the state of each use and to guide any changes to the allocation formula.

The Industrial Development allocation has received little use in the past five years. A ten percent allocation to Industrial Development would have covered the demand every year for the past decade. The use of PABs for housing concurrently grew at a rapid pace. The four percent housing bonds—because of their attached housing credit—bring additional private investment to the state that other PAB uses do not automatically generate. The Governor’s allocation is available for any eligible use and has been regularly tapped for multifamily bonds.

Action items:

Task 1.1.1: Explore possible uses of the allocation for Industrial Development to better understand the benefits as compared to housing bonds. Engage in discussion and information exchange with Industrial Development practitioners.

  • Who: DHCD, Virginia Housing

Task 1.1.2.: Develop information about the equity generated from investors that use the four percent LIHTC. Educate policymakers and legislators about this benefit.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 1.1.3: Assess what macro-economic changes would potentially shift demand within the PAB allocation to Industrial Development.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 1.1.4: Research legislative and rulemaking requirements related to any future shifts in allocation.

  • Who: DHCD, Virginia Housing, and other stakeholders

Strategy 1.2

Increase use of affordable housing resources as gap funding to support the increased production of four percent LIHTC bond projects (i.e., expanded geography, types and sizes of projects, etc.).

As resources continue to increase, both Virginia Housing and DHCD should enhance their scoring and selection processes to facilitate the development of more four percent LIHTC bond projects throughout the state. While programs are currently meeting the demand for PABs for rental housing, the provision of new sources of soft debt, low interest funding, and other subsidy types will expand the demand for bonds. In particular, the new Virginia Housing Opportunity Credit should be considered as a way to expand use of the four percent LIHTC bonds by pairing the state credit with these transactions.

Action items:

Task 1.2.1: Identify programs where scoring shifts might be beneficial to incentivizing and increasing the feasibility of four percent bond projects, especially in regions where they have not been used.

  • Who: DHCD, Virginia Housing

Task 1.2.2: Identify local barriers to increased use of four percent LIHTC bonds for rental housing development. Conduct deeper analysis of energy burden by income and housing stock to identify greatest needs across Virginia.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 1.2.3: Meet with local housing authorities that are active four percent LIHTC bond conduits to determine any additional recommendations for removing barriers and improving project feasibility.

  • Who: DHCD, Virginia Housing

Task 1.2.4: Monitor the development of the Virginia Housing Opportunity Credit program during the legislative follow-up that will be required in the 2022 General Assembly session to clear up legislative ambiguities. Suggest strategies whereby the new state housing credit can support the production of more four percent bond projects.

  • Who: DHCD, Virginia Housing, advocates, and other stakeholders

Strategy 1.3

Support beneficial changes to federal laws, particularly the Affordable Housing Credit Improvement Act of 2021 (AHCIA) that expands the LIHTC program and reduces the “50 percent test.”

Action items:

Task 1.3.1: Prepare a summary of how the changes in the AHCIA will benefit Virginia.

  • Who: Virginia Housing Alliance, advocates, and other stakeholders

Task 1.2.2: Determine the level of support for this legislation from the administration and its priority level.

  • Who: Virginia Housing Alliance, advocates, and other stakeholders

Task 1.2.3: Prepare a recommendation encouraging support of the AHCIA by the administration, elected officials, local governments, and associations.

  • Who: Virginia Housing Alliance, advocates, and other stakeholders

Additional considerations for Recommendation 1

The state’s allocation of PABs to permitted uses was last adjusted in 2008. A further change in 2012 allows unused bond cap to flow to Virginia Housing in the second half of each year. As a result, Virginia’s volume cap has always been fully expended. Virginia Housing is able to carry forward any unused cap to the next year and uses conversion to MCCs each year as a way to ensure that the full cap is used and none is returned to the federal government.

Virginia Housing has not issued Mortgage Revenue Bonds since 2012 and has used MCCs since 2015 to assist low- and-moderate income homebuyers. The bond allocation process is managed by DHCD in accordance with regulations promulgated by the department.

There has been little demand for the use of PABs for the Industrial Development pool and four percent housing bonds have the added benefit of federal tax credits that generate equity for affordable rental housing development—something that non-housing bonds do not do.

While use of PABs for multifamily has been growing recently, experts predict that demand for the expansion of PABs for affordable rental housing using four percent LIHTC bonds is about to increase for several reasons:

  • A recent change in federal law fixes the companion tax credit at four percent, when it had previously floated at a much lower rate. This means the credit will generate more equity to the project. More equity means that projects will have to support less debt, improving the feasibility of proposals especially in markets where rents are lower or there is a shortage of gap financing.
  • Another prospective change at the federal level would adjust the 50 percent test to 25 percent. Congress is currently considering the bipartisan AHCIA, which includes a change that will make it possible to use bonds for projects that previously could not meet the 50 percent test or would need to use the bonds only for short term—so called “bond burning.” If this shift occurs, it will expand the number of projects that benefit from four percent LIHTC bond financing and increase the amount of equity that can be generated for affordable rental housing. AHCIA would also increase the nine percent LIHTC volume by 50 percent.
  • Gap financing to help with project feasibility is increasing substantially; the Virginia Housing Trust Fund, HOME funding, National Housing Trust Fund, local trust funds, energy efficiency funds, and many more sources are rising.
  • The new Virginia Housing Opportunity Credit can provide new equity, improve feasibility, and fund more projects.

All of these new resources will make it possible to develop four percent LIHTC projects in lower rent markets across the state. They also will support smaller projects and other types of targeted projects that have been difficult or infeasible under current restrictions.

During the first Special Session of 2021, the General Assembly passed the Virginia Opportunity Tax Credit; the Governor subsequently signed the legislation, and it took effect July 1, 2021. This credit is a significant new housing resource for Virginia. The program’s design—still under development—will provide issuance of $15 million in credits annually, similar to the federal LIHTC. The program begins in 2021 and has a five year sunset that will require re-enactment. The intent of the legislation is twofold: to support the development of more income and rent-restricted apartments in Virginia, and to support some apartments with rents that will serve Virginia families with very-low incomes.

Four percent LIHTC bond projects tend to be in urban areas with stronger markets and higher rents because they offer a lower subsidy than the nine percent LIHTC program. Serving very low-income households is difficult without significant gap funding such as grants and low interest or deferred loans. The subgroup considered whether the new state credit could expand the use of four percent LIHTC bonds and what program design features could accomplish this goal.

Recommendation 2

Increase understanding of the use of local general obligation bonds for affordable housing at both the state and local level.

GO bonds, unlike PABs, are backed by the full faith and credit of the locality—not from the revenue generated by the project. The proceeds from a GO bond for housing could be used in a variety of ways to support affordable housing in a community.

Virginia localities have not embraced this strategy though other states frequently use local bonds for housing. Schools, public buildings, infrastructure, and other uses have been higher priorities for local debt. As housing challenges continue to increase and as affordable housing becomes a higher priority issue within communities, localities may reevaluate this approach.

Strategy 2.1

Disseminate to localities best practice information and examples from other states on the use of local general obligation bonds for affordable housing.

The Virginia Resources Authority (VRA) is currently the lead on working with localities on debt financed projects. Additional research is needed to see what impediments exist to allowing this assistance.

Action items:

Task 2.1.1: Identify and explore existing resources and capacities at the state level that could provide this type of technical support. Review other examples in other states that might present a model.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 2.1.2: Discuss the recommendation with departments and offices that might be candidates for this service to determine interest, capacity, and additional resources needed.

  • Who: DHCD, Virginia Housing, and other stakeholders

Strategy 2.2

Consider how state housing programs could support localities that generate resources for affordable housing through the issuance of bonds or from local budgets.

Potential incentives should not be exclusively tied to GO bonds alone and should reflect similar efforts to support housing through local housing trust funds and other locally-generated investments.

Action items:

Task 2.2.1: Review existing state funding programs to identify those that might be used in conjunction with local housing resources.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 2.2.2: Discuss possible incentives with the appropriate agencies or funders, including the VRA and Department of Taxation, on impediments to GO utilization by localities.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 2.2.3: Identify and meet with localities that might consider GO bonds for housing (and similar efforts) to determine the types of incentives from the state that would be helpful.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 2.2.4: Suggest several specific state incentives to encourage and facilitate local initiatives via bonds and general funds.

  • Who: DHCD, Virginia Housing, and other stakeholders

Strategy 2.3

Consider the development of state housing resources that would match local bonds for housing, enabling localities to leverage their programs and bring more resources to the community.

Action items:

Task 2.3.1: Identify existing and new potential sources for matching or leveraged funding to pair with local housing bond funded initiatives.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 2.3.2: Discuss options with appropriate state agencies or funders to determine feasibility.

  • Who: DHCD, Virginia Housing, and other stakeholders

Additional considerations for Recommendation 2

Virginia localities have rarely used GO bonds for housing though other states commonly do. The Virginia Supreme Court has upheld the legality of GO bonds for housing.

The state constitution caps the amount of GO bonds that a city can have outstanding as a percentage of their taxable base. Counties are not cap-restricted but generally must have bond issues approved by referendum.

As a result, most localities have preferred to issue bonds for issues such as infrastructure, schools, parks or other public/community uses. Localities also carefully monitor their debt to achieve and preserve a high bond rating that allows for ready access to capital markets at low interest cost.

Recommendation 3

Encourage localities to provide property tax incentives for the development of affordable housing including property tax abatement programs and housing tax increment financing (TIF) zones.

Localities can establish these zones for a variety of purposes including preservation of “naturally occurring affordable housing” (NOAH), development of new affordable rental or ownership housing, development of mixed income housing, and preservation of existing assisted housing. The state should encourage these local initiatives through the following strategies:

Strategy 3.1

Disseminate to localities best practice information and examples from other states on the use of property tax abatements and TIF districts with a housing focus.

Action items:

Task 3.1.1: Identify and explore existing resources and capacities at the state level that could provide this type of technical support. Review other examples in other states that might present a model.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 3.1.2: Discuss the recommendation with departments, offices that might be candidates for this service to determine interest, capacity and additional resources needed.

  • Who: DHCD, Virginia Housing, and other stakeholders

Strategy 3.2

Provide bonus points or other scoring preferences within the LIHTC QAP and other state housing programs for applicants within qualified housing TIFs.

Action items:

Task 3.2.1: Review existing state funding programs to identify those that might be used in conjunction with local housing TIF districts.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 3.2.2: Discuss options for preferences or priorities with the appropriate agencies or funders.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 3.2.3: Identify and meet with localities that might consider housing TIF districts to determine the types of incentives from the state that would be helpful.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 3.2.4: Suggest several specific state incentives to encourage and facilitate local housing TIFs.

  • Who: DHCD, Virginia Housing, and other stakeholders

Strategy 3.3

Consider how state housing programs could support localities that generate resources for affordable housing through the use of property tax incentives and qualified housing TIFs.

Action items:

Task 3.3.1: Identify existing and new potential sources for matching or leveraged funding to pair with local tax abatements and housing TIFs.

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 3.3.2: Discuss options with appropriate state agencies or funders to determine feasibility.

  • Who: DHCD, Virginia Housing, and other stakeholders

Strategy 3.4

Establish the standards that the TIF district must meet in order to qualify for state incentives.

Action items:

Task 3.4.1: Review housing TIFs in other states to determine best practices. Propose minimum standards for TIF eligibility for state incentives (e.g., retention of all tax increases and level of housing affordability).

  • Who: DHCD, Virginia Housing, and other stakeholders

Task 3.4.2: Discuss options with appropriate state agencies or funders to determine methods for competition or other distribution of resources.

  • Who: DHCD, Virginia Housing, and other stakeholders

Additional considerations for Recommendation 3

Housing TIFs can address a variety of goals, including: the construction of new affordable housing, the preservation of at-risk rental housing, and the preservation of affordable homeownership in neighborhoods that are rapidly gentrifying.

The National Housing Conference has a summary of housing TIF best practices at their website.