July 21, 2022

Financing Affordable Housing with Qualified 501(c)(3) Bonds in Washington State


In an increasing number of states, demand for private activity bonds to finance affordable housing projects is skyrocketing. The maximum amount of private activity bonds that may be issued within a state is governed by Section 146 of the Internal Revenue Code of 1986, as amended (the “Code”) and is often referred to as “volume cap” or the “state ceiling.” In 2022, the Internal Revenue Service (“IRS”) has capped this amount at the greater of $110 per capita or $335,115,000. In Washington State, volume cap allocation “rounds” are often four and five times oversubscribed, and each year many worthy projects fail to secure an allocation of this scarce federal resource. Ironically, this funding logjam is worsening at the same time that local governments in Washington are accessing new funding sources for affordable housing, including the 1/10th of 1% sales and use tax authorized in 2019 and made councilmanic in 2020 and the lodging tax. These new sources, coupled with the well-established Washington State Housing Trust Fund and many local housing levies, are providing strong levels of available “gap” financing from the public sector. In addition, private sector philanthropic participation has surged, with significant commitments from Microsoft, Amazon and the newly launched Evergreen Impact Housing Fund, managed by The Seattle Foundation. As demand for volume cap increases, the development community has begun to look for alternative ways to finance affordable multifamily housing projects.

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