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Housing Bonds: The Basics

Housing bonds are government bonds dedicated to funding the capital requirements for building affordable housing, including new construction and rehabilitation of existing stock. State and local governments issue bonds to raise funds for an activity the jurisdiction wishes to support. The bonds are repaid through tax levies or appropriations by the state legislature. In many jurisdictions, a special vote of the electorate is needed to authorize the issuance of bonds. In some cases, a ballot measure for the issuance of bonds also will authorize a specific tax to pay for the bonds. While they can be politically challenging to secure, bonds can provide an indispensable form of flexible funding for the development of affordable homes.

Because bonds are repaid out of general revenue or a dedicated tax, the funds raised by the bonds function as equity for housing development projects. This reduces the gap between project costs and the public and private sources of financing available for a project. These bonds can bridge the gap between the costs of affordable housing projects and the financing they can support through expected rents or home sales. Housing bonds can be particularly effective when used as gap funds to leverage federal funding streams, such as 4 percent tax credits. Housing bond funds also can be used to support state or local housing programs that do not qualify for federal funds.

Any state or locality can issue bonds to fund affordable housing projects. Since the need for voter approval can be an obstacle to issuing bonds, the ability to do so will vary according to public opinion, the jurisdiction’s legal and political environment and its fiscal condition. In some states and municipalities, the ability to issue general obligation bonds is restricted by a legal debt limit that determines the maximum allowable bond debt the jurisdiction can have outstanding at any time.

For example, the Texas state constitution limits general obligation bond debt to a maximum of five percent of the average revenue from taxes over the past three years. The amount the state can borrow against the general revenue is thus tied to the amount of general revenue the state collects. Many states use the same general approach, though the percentages of revenue used to determine the debt limit vary. Hawaii, for instance, limits general obligation bond debt to 18.5 percent of the general revenue averaged over the past three years.

Types of Bonds Used for Housing

General obligation bonds are just one type of government bond used to fund affordable housing and other public works projects. The principal benefit of using general obligation bonds for housing is that the projects they fund are not expected to generate the revenue necessary to repay the debt. Therefore, general obligation bonds can be used as equity to support a project that cannot be financed adequately with available funds or pay for itself.

General obligation bonds can be issued by states, counties, towns, cities and other municipal authorities and may be repaid out of the general revenue or through increases in existing taxes. Property taxes are the most common source of bond financing, but jurisdictions may also levy additional sales, income and other taxes for this purpose. Because general obligation bonds are secured by tax dollars, they must go on the market through a competitive bidding process in which the broker dealer offering the lowest interest cost wins the bonds. This process assures taxpayers that the municipality is borrowing at the lowest possible rate.

Investors are willing to accept a low interest rate because, in most cases, municipal bond interest is exempt from federal tax and can be exempt from state tax if the investor resides in the state issuing the bond.

While general obligation bond issues are politically difficult to secure, they offer a critical source of financing because the funds can be awarded as an outright grant to a developer of affordable housing, if the municipality or state so chooses. The fact that they are exempt from federal tax and state tax in some cases as well allows them to be issued with relatively low interest rates, providing the issuer with access to capital at below-market rates.

Private activity bonds are another kind of government bond that finances private activities that serve public purposes. Private activity bonds must be repaid, and thus are limited to providing low-cost loans, not grants, for affordable housing. The issuing jurisdiction needs to determine whether a particular private development serves a public purpose. If so, private activity bonds can be designated as what are often called “qualified” private activity bonds, which are tax-exempt. When private activity bonds are used for affordable rental housing, they also leverage the 4 percent Low-Income Housing Tax Credit.

Mortgage revenue bonds are a type of private activity bond issued by state or local housing finance agencies to help fund low-interest mortgages for first-time homebuyers. Unlike general obligation bonds, mortgage revenue bonds are not backed by municipal taxing power. Instead, they are repaid through a specified revenue source generated by the project they are used to fund—in this case, the individual borrower.

To qualify for a mortgage supported by bonds, the buyer must earn no more than the area median income (or 115 percent of AMI for large families) and must purchase a home for no more than 90 percent of the area’s average home price. According to the National Council of State Housing Agencies, each year mortgage revenue bonds make homeownership affordable for approximately 100,000 families earning, on average, half the income of the average conventional homebuyer.

Multifamily housing bonds are another type of private activity bond issued by state and local housing finance agencies to finance the construction of multifamily housing developments in which a certain percentage of the units is set aside for low-income families at a rent they can afford. According to IRS regulations, bond-financed projects must designate either 40 percent of units for families making less than 60 percent of area median income, or 20 percent of units for families making less than 50 percent of area median income. These units must remain affordable at these income levels for a minimum of 15 years.

Qualifying rental housing projects financed by multifamily housing bonds automatically qualify for federal 4 percent Low-Income Housing Tax Credits, leveraging the value of the bonds significantly. These 4 percent tax credits are not subject to the per capita ceiling of a given state. The National Council of State Housing Agencies reports that approximately 30,000 multifamily units are financed each year with multifamily housing bonds.

501(c)(3) bonds (administered by the IRS) are issued by state and local governments on behalf of 501(c)(3) nonprofit organizations to support construction projects with a public purpose. Nonprofit community development groups that acquire, build or rehabilitate housing developments may qualify for 501(c)(3) bond financing, which reduces financing costs because the interest paid to bond holders is tax exempt, resulting in low interest rates.

Unlike mortgage revenue bonds and multifamily housing bonds, 501(c)(3) bonds are not subject to the state private activity bond cap, which limits the private activity bonds each state can issue in 2016 to the greater of $100 multiplied by the state’s population or $302,875,000 total. However, 501(c)(3) bond financing cannot be combined with low-income housing tax credits.

Key Resources


Homes 4 California, a joint project of the California Housing Consortium and Housing California, was formed in January of 2006 to campaign for the passage of Proposition 1C, a $2.85 billion general obligation bond issue used to fund a broad range of housing programs. Its website provides links to programs funded by Prop 1C and information on the current effort to create a permanent, dedicated funding source to address the state’s housing needs.

Housing Illinois is a coalition organized in 2001 to develop a communications campaign to increase public support for expanding the supply of affordable housing in the state of Illinois, with a particular focus on the Chicago area. The public awareness campaign’s key tool is television advertising, but it has also employed radio ads, print ads, posters and brochures. The website includes a message guide, based on a public-opinion survey, that helps advocates present their message in a way that will generate widespread support.

HousingMinnesota was a public education and awareness campaign run from 1998 to 2003 and led by the Minnesota Housing Partnership. Its goal was to increase the state’s supply of affordable housing by building public acceptance and support. Paid advertising was the key to its success. The website includes a history of the campaign and examples of campaign ads.

LINC Housing Corporation’s “Notes from the Housing Studio” Podcast series includes discussions on a variety of affordable housing issues. In particular, Episode 13 from Oct. 12, 2006, entitled “Re-Framing the Message,” describes how advocates can communicate more effectively to build support for affordable housing.

The North Carolina Housing Coalition has a messaging and strategy site that contains an overview of effective communications strategies for affordable housing advocates in the state, including a communications manual. The Coalition leads a public education and advocacy campaign with the goal of increasing investment in the state’s Housing Trust Fund.


Making the Bay Area a More Affordable Place to Live: Progress Report on Proposition 1C, the Housing and Emergency Shelter Trust Fund Act of 2006.
2009. San Francisco, CA: The Non-Profit Housing Association of Northern California.

Changing Minds, Building Communities: Advancing Affordable Housing through Communications Campaigns.
Proceedings from May 5, 2004, Symposium in Minneapolis, MN, Co-Hosted by the Neighborhood Reinvestment Corporation and the Campaign for Affordable Housing. Published in the NeighborWorks Journal.

Communications as a Strategic Tool for Affordable Housing Campaigns.
2004. By Venus Velazquez. The NeighborWorks Symposium on Multifamily Excellence.

The Campaign for Affordable Housing is a national nonprofit organization that works to eliminate the stigma associated with affordable housing and support grassroots efforts to promote affordable housing. The website includes a publications section with resources on building public support for affordable housing initiatives. Selected resources include:

Housing Advocacy Catalog  describing successful state and local housing advocacy campaigns and the communications strategies they used.

What We Know About Public Attitudes on Affordable Housing: A Review of Existing Public Opinion Research. 2004. By Belden, Russonello & Stewart. The Campaign for Affordable Housing.

A Media Training Guide for Affordable Housing Advocates, which describes how advocates can communicate effectively with the media to promote affordable housing.

The National Council of State Housing Agencies’ website includes a housing bonds fact sheet that provides a brief overview of Mortgage Revenue Bonds and Multifamily Bonds.

The National Low-Income Housing Coalition’s Advocates’ Guide provides a description of housing bonds, including history, program intent, beneficiaries, structure and funding.

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