Recycled Bonds and Bifurcated Structures as Tools for Multifamily Housing

AuthorAlysse Hollis - Richard M. Froehlich
Pages39-55
Richard M. Froehlich1
This chapter is an addition to the more detailed description of tax-
exempt bonds for affordable housing and some of the challenges
relating to limitations on volume cap.
2
During a calendar year this
limit is established by an annual allocation provided in Section 146
of the Code.3 This limited amount of authority is called “volume
cap” as it reects the cap on the amount of exempt bonds that
may be issued for such private activities.4 Enormous demand for
volume cap in New York has led to various initiatives to extendthe
1. Richard M. Froehlich is the Chief Operating Ofcer, Executive Vice President
and General Counsel of the New York City Housing Development Corporation
(HDC). Mr. Froehlich would like to acknowledge the assistance of Glenn S. Miller,
a partner at Katten Muchin Rosenman LLP in Washington, D.C. and Joseph P.
Rogers, Jr., of counsel at Hawkins, Delaeld & Wood LLP in New York City, who
assisted in preparing a portion of this chapter. Prior to joining HDC, Richard was
a Counsel at the law ofces of O’Melveny & Meyers LLP where he was involved in
numerous multifamily housing transactions representing equity investors, lenders,
credit enhancers, and issuers in bond-nanced transactions. Richard is an adjunct
assistant professor at Columbia University Graduate School of Architecture, Plan-
ning and Preservation. He is a 1988 graduate of Columbia University School of
Law and a 1985 graduate of Columbia University’s Columbia College. Some of
the material referenced below was prepared by the author at HDC and citations
have been provided to allow for public access of such materials.
2. Please see Chapter 3 for a more detailed description of volume cap.
3. I.R.C. §146.
4. The private activity bond volume cap for 2016 is set at a per capita rate
of $100 multiplied by the state’s population or a minimum of $302,875,000 in
Rev. Proc. 2015-53.
39
Recycled Bonds and Bifurcated
Structures as Tools for
Multifamily Housing 5
Len55424_05_c05_p039-056.indd 39 4/20/16 12:17 PM
Beginner’s Guide to Tax-Exempt Bonds40
use oftax-exempt bonds for more affordable housing production and
preservation. The following is a discussion of several efforts to nance
more affordable housing and stretch resources to accomplish such goals.
The descriptions of eligible projects and applicable tax rules presented in
Chapters 1, 3, and 4 are applicable for this chapter as well.
An issuing authority, pursuant to Code Section 146(f), may choose to
carry any unused volume cap authorized in a calendar year forward for
three years. This selection can be made for the qualied private activity
bond purposes subject to the volume cap limitation except for the purpose
of issuing qualied small issue bonds.5 The carry forward concept allows
a state several years to utilize its volume cap over a rolling period of time
so that it will not be penalized during a down economic cycle when it is
challenging to issue bonds. From the perspective of the Federal government
this smoothing exercise balances the needs of states with Federal scal
concerns. Cap that is unused after the rolling three-year period is considered
burned off and is no longer usable for tax-exempt nance.
The concept of multifamily housing recycling was proposed at a time
of enormous demand for tax-exempt nance and specically for housing
bonds. The New York City Housing Development Corporation (“HDC”),
working in conjunction with the New York State Housing Finance Agency,
had sought legislative action in 2007 to increase the nancial tools available
for affordable housing nance.6 In 2006 and 2007 the use of volume cap
nationally was approximately the same as the amount of volume cap being
authorized.7 Annual volume cap in 2006 was $26.5 billion and usage was
$25.5 billion. In 2007 annual volume cap was $28.2 billion and usage
5. I.R.C. §146(f).
6. Ted Phillips, “N.Y.C. Eyes Housing Help,” The Bond Buyer, June 1, 2007, available
at: http://www.bondbuyer.com/news/-272091-1.html. See also testimony of Shaun Donovan,
Commissioner of the New York City Department of Housing Preservation and Development
at the Hearing before the Subcommittee on Select Revenue Measures of the House Com-
mittee on Ways and Means on May 27, 2007, available at: http://www.gpo.gov/fdsys/pkg/
CHRG-110hhrg47758/html/CHRG-110hhrg47758.htm.
7. For the purposes of the following discussion regarding volume cap usage and statis-
tics the author has relied on data compiled by the Council of Development Finance Agencies
(“CDFA”) and available on its website at http://www.cdfa.net/cdfa/volumecap.nsf/search.html
and also by performing searches on its searchable database at such site.
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