Using Qualified 501(c)(3) Private Activity Bonds to Finance Affordable Housing Projects in the District of Columbia

3 minute read | August.02.2023

Key Takeaway

Certain 501(c)(3) organizations may finance affordable rental housing projects in the District of Columbia (the “District”) using tax-exempt “qualified 501(c)(3) bonds” without volume cap (“PABs”) issued through the District’s Revenue Bond Program administered by the Office of the Deputy Mayor for Planning and Economic Development (“DMPED”). The PABs may be combined with subordinate Housing Production Trust Fund (“HPTF”) gap loan funding from the District’s Department of Housing and Community Development (“DHCD”) and housing assistance payments from the District of Columbia Housing Authority (“DCHA”) under the Local Rent Supplement Program (“LRSP”). Projects financed with PABs may also qualify for real property tax exemption in the District.

A Quick Link to the General Requirements for the PABs

A link to a one-page summary of the general legal requirements for using PABs to finance Affordable Housing projects in the District is available here: “One-page Summary for Download

A Changing Landscape

The Mayor of the District has established a target production of 36,000 net new residential units by 2025, with at least 12,000 units of such production allocated to low-income households (generally recognized as 80% of the adjusted median income (“AMI”) for the Washington Metropolitan Statistical Area) (“Affordable Housing”).

Historically, issuing exempt facility bonds for “qualified residential rental projects” subject to volume cap (“Volume Cap”) under the Internal Revenue Code (the “Code”), coupled with automatic federal low-income housing tax credits (“Tax Credits”), has been the primary tool to finance Affordable Housing in the District. However, as of 2023, the demand for Volume Cap for Affordable Housing projects in the District exceeds the supply - and the imbalance is expected to persist over the next several calendar years. As a result, market participants must now consider alternative methods of financing projects for Affordable Housing.

Alternative Method of Financing Affordable Housing with Qualified 501(c)(3) Private Activity Bonds

A 501(c)(3) organization (or disregarded entity) (an “Organization”) with a charitable purpose the Internal Revenue Service (“IRS”) recognizes as providing low-income housing may finance Affordable Housing (and certain mixed-use) projects with tax-exempt “qualified 501(c)(3) bonds” (“PABs”) under certain circumstances. Generally, an Organization must comply with the applicable IRS safe harbor guidelines (the “Safe Harbor”). The Safe Harbor generally provides that for each project (a) at least 75% of the units are occupied by tenants with household incomes at or below 80% of AMI and (b) either at least 20% of the units are occupied by tenants with household incomes at or below 50% of AMI or at least 40% of the units are occupied by tenants with household incomes at or below 60% of AMI (with the remaining 25% of the units eligible for occupants at market rates).[1] Affordable Housing Projects financed with PABs are not subject to Volume Cap.

Opportunities to finance Affordable Housing projects with PABs outside of the Safe Harbor may exist on a facts-and-circumstances basis. However, compliance with the Safe Harbor, coupled with the appropriate unit set-asides and rent restrictions, may concurrently qualify the project for the following (subject to the satisfaction of all applicable District law requirements):

  • below-market subordinate HPTF gap loan funding from DHCD;
  • post-construction LRSP housing assistance payments from DCHA; and
  • a real property tax exemption.

Contacts at Orrick

Please contact Darrin L. Glymph and Joshua R. Bonney for additional information about using PABs to finance Affordable Housing projects in the District.

[1] The Organization and the project are subject to various additional requirements under the Code and must comply with all provisions of the Code applicable to qualified private activity bonds for interest on the PABs to be excluded from gross income of the owners thereof for federal income tax purposes. Financing an Affordable Housing project with PABs will not qualify the project for Tax Credits.