Tennessee Gov. Bill Lee Tuesday signed a bill allowing local governments to issue bonds via industrial development corporations to work alongside the private sector to bolster affordable housing.
The law will allow IDCs affiliated with cities and towns to sell bonds to raise the money needed to assure multi-family housing remains affordable. All municipal governments using the law will have to be rated at least Aa2 by Moody’s or AA by another rating agency. The municipalities will be allowed to pledge any revenue except for property taxes to pay off the bonds.
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The law requires the state comptroller to review bond proposals.
Tennessee’s biggest city by population, Nashville, will be able to use the law, said Caleb Hemmer, a Democratic representative of Nashville in the state’s House of Representatives and the bill’s House sponsor. Nashville has about 700,000 residents.
Nashville’s supply of affordable housing dropped rapidly from 2017 to 2021. Nashville is rated Aa2 by Moody’s and
The new Tennessee law was modeled after a North Carolina law and its use in Charlotte, said Matt Wiltshire, president of Pathway Affordable Housing Corporation, which works to develop affordable rental housing in Nashville.
The goal is for the municipal bond proceeds to work alongside other financing gained by private partners to allow the preservation of low-income housing.
Specifically, the cities’ industrial development boards will sell the bonds with the cities’ guarantees. After the sale, the bonds will pay interest only until maturity, when the principal will be paid, with the cities subsidizing interest repayment, Wiltshire said.
Bond proceeds will be used to offer more affordable loans to potential real estate developers than would otherwise be available on the condition they agree to continue to maintain affordable rents for a prolonged period of time. The money could be used for the developers to purchase and renovate the buildings.
The preservation of affordable rental housing will be financed partly through this sort of bond, partly through Freddie Mac or Fannie Mae mortgages, and partly through social impact equity investments, Wiltshire said.
The total cost of the debt to the developer will be low, Wiltshire said. At the end of the bond’s term, the developer will pay back the bond principal from the rents he or she has received over the term of the bond.
The resulting money could then be reused to preserve other affordable housing, Wiltshire said.
Developers will only be able to participate in the program if they commit to maintaining low- or moderate-income rental housing. It is also possible the money will be used to creating new affordable housing but Wiltshire said he thought this was less likely.
Tennessee cities already have the right to sell bonds to create affordable housing. The new law gives some of them the right, working with their industrial development corporations, to work with private developers to maintain affordable housing.
The bill passed 27 to 3 in the Tennessee Senate and 68 to 20 with five abstentions in the House.
Tennessee’s law comes as