Higher interest rates and a changing landscape in the affordable housing sector are spurring strong interest in tax-exempt munis.
"The benefit of a tax-exempt bond versus a taxable bond is increasingly powerful," said Sam Adams, group head and managing director of affordable housing and public housing authorities at KeyBanc Capital Markets.
"In practical terms, on a $50 million bond issue, the difference between a 5% taxable rate and a 3.75% tax-exempt rate is $625,000 per year in debt service savings."
High-quality tax-exempt municipal bonds generally offer nominal yields ranging from 3.5% to 4.5% depending on the maturity length and credit rating.
The comments came during an online discussion with Joshua Gold, a real estate attorney working in Nixon Peabody's Washington D.C. office.
The One Big Beautiful Bill Act loosened the regulations governing low-income housing tax credits by lowering the amount of private activity bonds needed to qualify for 4% low-income housing tax credits issued by the Internal Revenue Service.
The amount of private activity bonds is capped each year, which is leading to creative solutions.
"Many developers are also looking for recycled bonds," said Adams. "There's value in having tax exempt debt on your projects relative to financing it with taxable debt."
Recycled bonds are previously-issued PABs that have been paid off and reissued. They don't count against the 25% bond financing requirement needed to tap the 4% credits.
Adams is also seeing an uptick in government issued munis and 501c3 bonds that aren't subject to the PABS cap.
The new rules and higher interest rates are pushing state and local housing authorities to issue tax-exempt munis.
"Housing authorities have started recognizing that they can actually be issuing these bonds and that it can be a source of financing and diversity for them as they look to pivot away from reliance on HUD funds," said Gold.
The credits function similar to revenue bonds by relying on rent payments to service the debt. The same financial strategy is being deployed by developers building workforce or middle-income housing.
"Middle-income has not really been addressed at scale in this country," said Adams. "Particularly in high-cost cities, it's a huge problem, and housing authorities have realized they're in a position to attack this problem at scale in a way that the private market is it isn't quite built for, at least as it stands right now."
"These housing authorities were already sort of guaranteeing a lot of these properties de facto," said Gold. "Now they're able to leverage private markets to get a better price on financing for it."
The amount of tax-exempt debt flowing into housing is likely to increase as long as interest rates remain elevated, but there are downsides.
"There's almost always increased transactional costs to tax-exempt debt, more so in the capital markets than with banks," said Adams.
"New construction projects are where there's immense value in the muni space, but we are seeing a number of nonprofits and housing authorities who are simply buying properties with tax-exempt debt because the cost of capital relative to the purchase price is very attractive."
