Agency is working to preserve and extend volume cap in Massachusetts by reusing it in multi-family financing where loans have been prepaid
Demand for Private Activity Volume Cap has increased dramatically in recent years and managing and determining appropriate volume cap use has become an important issue in Massachusetts and in a number of other states across the country.
But MassHousing is working to preserve and extend this scarce financing resource.
Private Activity Volume Cap is the federal bonding authorization that allows private borrowers to access tax-exempt interest rates and so-called 4% tax credits for rental housing financing through governmental issuing authorities. It is made available annually and is calculated at $100 per citizen in each state, or almost $700 million annually in Massachusetts.
In Massachusetts volume cap has generally been split between housing, student loans and economic development.
Since the economic downturn in 2008, and until just recently, there has been for the most part enough volume cap to satisfy demand, particularly where unused volume cap – or "carryforward volume cap" – was passed over from one year to another. But with the economic recovery a surge in Private Activity Cap bond issuance occurred depleting available volume cap.
In order to help preserve and extend volume cap, MassHousing has entered into a line of credit agreement with J.P. Morgan to allow the volume cap previously used by a multi-family project where the loan has been prepaid to be used again for future multi-family financing.
In July, MassHousing used $8.1 million in recycled volume cap for the first time when it closed $56.7 million in financing for the 209-unit Genesis House for senior citizens in Brighton. MassHousing joins New York and Washington as the only other states to successfully recycle Private Activity Cap for Rental loans and the Agency is hoping to use more recycled volume cap by the end of the calendar year.
This line of credit provides a useful and flexible way to preserve volume cap and allows MassHousing to do the following:
- Receive a prepayment from multi-family bonds or notes from one project.
- Refund the bonds or notes used to fund that project by borrowing under this new short-term tax-exempt revolving line of credit.
- Use the cash from the prepayment as security for the line of credit.
- Use those funds when ready to finance a new project on a tax-exempt basis and repay that portion of the line of credit as part of the new tax-exempt financing.
This ability to recycle volume cap was created by a special exemption under federal tax law. The 2008 Housing and Economic Recovery Act contained a provision that enabled this use to help stretch the volume cap through recycling previously issued bonds. Before the 2008 Housing Act, if volume cap bonds were paid off quickly and subsequently reissued, the reissuing of the bonds “counted” as new bonds against the state’s volume cap limit.
However, the recycled volume cap comes with certain specific restrictions:
- It cannot be used to meet the minimum amount of tax-exempt bonds needed to qualify for federal 4% low income housing tax credits.
- It must be reissued within six months after the original bond was refunded.
- The reissuance must be within four years of the original issuance.
- The reissued bond must mature within 34 years of the original issuance.
MassHousing is in a unique position with its strong balance sheet to enable volume cap recycling at no cost to the Commonwealth and to help extend this important resource.