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January 13, 2016

Originally published in Tax Credit Advisor by Tim R. Leonhard

“It is no secret that there is a shortage of the creation and preservation of affordable housing units throughout the country, which is an issue that needs to be addressed in every state” – Tim R. Leonhard

When most people think of states that struggle with very high housing costs and subsequent shortages of affordable housing, Tennessee is not the first state that comes to mind.

That said, Tennessee, especially the Nashville MSA, has experienced an economic renaissance over the past few years. The Nashville skyline is changing, as cranes build new luxury apartments. Market rents are steadily ticking upwards there is a growing shortage of affordable housing units in many markets across the state. Furthermore, like every state, it has an aging multifamily housing stock at risk of losing its long-term affordability.

Many assets each year that are coming out of their initial 15-year LIHTC compliance period that are now eligible to be re-syndicated with new LIHTC or otherwise would risk being lost as affordable housing stock at the end of the 15-year extended use period. In every state, awards of 9% LIHTC are highly sought after and rarely if ever go unused. However, in many states, the private activity tax exempt bond volume cap goes unused and is ultimately returned to the federal government and the 4% LIHTC associated with multifamily bond financed properties are never realized as a tool for housing creation or preservation.

Just a few short years ago, the Tennessee Housing Development Agency (“THDA”) turned back much of its bond volume cap. In 2010, only one TEB transaction closed statewide and over the past few years as the financial markets recovered, THDA increased its production between $20 million and $33 million annually in bond transactions. Then THDA’s Executive Director Ralph Perrey
decided to take steps to more aggressively promote the use of private activity bonds and is starting to reap the fruits of its labor. Perrey noted, “We made some smart adjustments to our program that helped enhance the program and were more aggressive in our outreach opportunities. I am also really proud of our back, which is able to turn these transactions around efficiently.”

To date in 2015, THDA is on pace to issue nearly $200 million in bonds, primarily for preservation transactions. Perrey noted it will be a record year for the Agency (nearly double its most active year) despite the fact that Tennessee, like all states, is experiencing an increase in construction costs and a rising interest rate environment. How has THDA accomplished this?

  • An enhanced developer fee structure that allows developers to raise more tax credit equity
  • Rapid turnaround times. THDA issues a preliminary approval and award of 4% LIHTC within 30 days of receipt of a complete application. Applications are received and processed on a first come first served basis so developers do not have to wait to apply for bond allocations
  • Flexibility. THDA allows a variety of tax exempt bond executions, such as direct purchase or non-rated bond loans, which allow for lower interest rates and lower costs of issuance

Robert S. King, Managing Director, Highmark Holdings, LLC and one of the more active bond developers in Tennessee observes, “Since Tennessee lacks state affordable housing tax credits or soft-financing for bond deals, THDA took steps to create regulatory efficiencies to address its backlog of transactions impacted by rising construction costs. This was important in helping us close a few transactions that were in danger of becoming unfeasible because of labor shortages. As interest rates begin to rise, it may become harder to replicate these results in Tennessee, but I think these changes will be even more impactful in other states that are able to bring other soft resources to the table. For example, the recent change in how Ohio calculates its Developer Fee on tax-exempt bond transactions supplements soft resources and have made certain transactions feasible that otherwise would not have been.”

Carr Hagan, President of LHP Development (formerly Lawlor Wood Housing) concurs, “THDA’s enhancements definitely helped a number of our deals that were on the bubble get done that wouldn’t have quite worked under the old policies.” He cautioned however, “bond deals aren’t for the faint of heart, there is significant predevelopment cost exposure that require developers to have significant liquidity and wherewithal to execute and with the Fed tightening monetary policy there are headwinds on the horizon.”

What benefits are created for Tennessee as a result of THDA’s efforts?

  • Use of the 4% LIHTC allows preservation of aging housing stock, whether the units were originally in the LIHTC program or were conventionally financed
  • The ability to create financing for the preservation of rural housing stock
  • Jobs creation and sales tax creation for the state that would otherwise not exist if the bonds and 4% LIHTC were never issued or allocated

As many states struggle with a shrinking pool of financial resources, THDA has accomplished this increase in bond allocation activity without the existence of incentives that other states offer, such as tax abatements, large amount of subsidy financing, State LIHTC, etc.

 

Tim R. Leonhard

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