Support Housing Bond Issues
State and local governments may use the proceeds of bond issues to support affordable housing. Housing revenue bonds are payable exclusively through project revenues and so do not impose a risk on local or state government issuers. If at least 40% of the units are reserved for households at or below 60% of area median income (AMI) or 20% at 50% of AMI, the bonds can be tax exempt. Current rent and income limits can be found at the Minnesota Housing website. While not significant with the current low market interest rates, the tax exemption will become more significant as interest rates to finance projects increase. More important, these bonds also generally come with 4% low-income housing tax credits which can be sold to investors to raise project equity.
What problems does this policy solve?
General obligation (G.O.) bonds are bonds that state or local governments issue to raise funds for an activity the jurisdiction wishes to support. The government issuing the bonds guarantees their repayment. Often, the funds raised are contributed as direct subsidy to affordable housing projects and the bonds are repaid through tax levies or appropriations by the legislature. But G.O. bonds can also be issued with the expectation that they be repaid with project revenues. The issuer is still obligated to use its own resources to repay the bonds. Therefore, if project revenues should prove insufficient to pay back the G.O. bonds issued by the jurisdiction there is some risk that additional funds may be needed. The G.O. pledge results in very low interest rates, and the risk can be minimized by careful underwriting.
Where is this policy most applicable?
Bonds can be particularly effective when used as gap funds to leverage federal funding streams, such as 4 percent tax credits. In Minnesota, G.O. bonds repaid in this way have been issued by the state to support Minnesota Housing Finance Agency affordable housing programs.
Dakota County has provided a G.O. pledge to support Dakota County CDA housing development bond issues, and Scott County and the City of Savage made G.O. pledges on the housing revenue bonds issued by the County CDA for the Glendale Place senior housing project in Savage (See solution in action).