17 th ANNUAL WESTERN HUD LENDERS CONFERENCE September 7 th 9 th , - - PowerPoint PPT Presentation

17th ANNUAL WESTERN HUD LENDERS’ CONFERENCE

September 7th – 9th, 2016 Parc 55 A Hilton Hotel, Cyril Magnin Ballroom San Francisco, California

Combining Tax-Exempt, Short-Term Bonds with Taxable GNMA SALE for Affordable Apartment Financings

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Presented by:

• R. WADE NORRIS, ESQ.

wnorris@ennbonds.com (202) 973-0100

EICHNER NORRIS & NEUMANN PLLC 1225 19th Street, N.W., Suite 750 Washington, D.C. 20036 Fax: (202) 296-6990 Website: www.ennbonds.com

Apartment Construction in the United States Historic and Projected Multifamily Housing Starts (Thousands) (For Rent) 1986 – 2015

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*2014 & 2015 Historical Data from The State of the Nation's Housing, 2014 & 2015, Joint Center for Housing Studies of Harvard University. According to Harvard Studies, 2000-2008 yearly multifamily rental housing starts averaged 230,000 units per year.

Harvard Source: JCHS tabulations of US Census Bureau, Surveys of Construction.

Very Favorable Past Year and Future Prospects for Rental Housing

• Demographics and other factors continue to support strong continued growth in

rental housing – Projected growth in household formations: $4.0 million in ten years, starting about six years ago.

• Post WWII “Baby Boom Echo”, or “Millennial” generation entering workforce and seeking

housing, 4 or 5 years yet to run.

• Continued net immigration (immigrants rent for 10 years before buying).
• Continuing Decline in Single Family Home Ownership – Dramatic tightening in lending

standards for single family home loans post-2008 and less borrower equity for down payments – U.S. homeownership down from 69% at peak in 2007 to 63.7% today. Urban Institute projects just over 61% in 2030.

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5 *Data from The State of the Nation's Housing, 2015, Joint Center for Housing Studies of Harvard University

Harvard Source: JCHS tabulations of US Census Bureau, Surveys of Construction.

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Harvard Source: JCHS tabulations of US Census Bureau, Surveys of Construction. *2014 & 2015 Historical Data from The State of the Nation's Housing, 2014 & 2015, Joint Center for Housing Studies of Harvard University According to Harvard Studies, 2000-2008 yearly multifamily rental housing starts averaged 230,000 units per year. Harvard Studies estimate that “pent up demand,” if satisfied, would drive total multifamily rental housing demand as high as 400,000 to 470,000 units per year for the next decade.

Historic and Projected Multifamily Housing Starts (Thousands) (For Rent) 1986 – 2025

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The Harvard projections for multifamily rental starts may look optimistic, until one looks at all U.S. housing starts – single family and multifamily – for the years 2004- 2006 – at close to 2.0 million, versus 800,000 to 1.0 million in recent years.

Affordable Versus Market Rate U.S. Rental Housing

• Last year (2015), the United States had approximately 400,000 new apartment starts,

up from a low of 90,000 in 2009 (the “nuclear winter” of real estate finance).

• Of the total multifamily rental apartment starts each year, roughly one-third, or

130,000, are affordable, i.e., 100% of the units rented to tenants with income ≤ 100% at 60% of AMI (for a family of 4, adjusted for family size).*

• These units come from the two major Low Income Housing Tax Credit (“LIHTC”)

programs:

– 9% LIHTC. Roughly 70,000 units. Very powerful subsidy – Borrower can syndicate to cover ≈ 70%

• f Total Development Costs (“TDC”); Borrower gets a small bank loan, and that’s it. 9% LIHTC

accounts for roughly one half of all affordable units. Over subscribed 4 or 5:1.

– 4% LIHTC. Roughly 60,000 units. Borrower can syndicate to cover approximately 25-45% of

• TDC. Larger loan → more attractive to FHA lenders.

– 50% Rule: 4% LIHTC requires at least 50% of eligible basis in the buildings and

land to be funded with tax exempt private activity bonds. Private activity volume

still widely available (outside of NY and a small number of other states).

________________________________ *Tax exempt bonds may also be used on projects where 20% of the rents are set aside for persons at 50% of AMI; usually large urban projects which often use different debt financing structures.

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Affordable Versus Market Rate U.S. Rental Housing

• Development of affordable rental housing under these two programs is very different

from development of market rate apartments.

– Developer gets substantial up-front development fee (5-10% or more); plus construction contract if Developer has a related contractor, plus annual management fees, assuming Developer has related management company. – Developer gives up a lot of the “ups” – gain on sale or refi after stabilized occupancy in 3-5 years – Project must remain an affordable rental project, generally for 30-55 years. – Restricted rents plus low income occupancy reduces NOI, but tax credits fund 25-45% of total development cost. – Major Industry – perhaps 50,000 units per year presently for 4% LIHTC plus tax-exempt bonds.

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REMEMBER! The 50% Rule → No Tax-Exempt Private Activity Bonds = No 4% LIHTC = No Deal!

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Long-Term Tax-Exempt Municipal Bonds – How we Financed Affordable Multifamily Housing in the Pre-2008 “Right-Side Up” Interest Rate World

• Before the financial crisis in 2008, it was axiomatic that funding the debt side of

these deals with long-term tax-exempt bonds produced lower interest rates (by 50-100 basis points or more) than taxable financings backed by the same credit (e.g., FHA/GNMA).

• Why? Because the buyers of tax-exempt muni bonds don’t pay federal (and often

state) income tax on municipal bonds, and thus they will accept lower coupons.

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Pre-Financial Crisis Long-Term Tax-Exempt and Taxable Rates

Bond Buyer 20-Bond GO Index vs. 30-Year U.S. Treasury

4 6 8 10 12 14 16

Sep-83 Sep-85 Sep-87 Sep-89 Sep-91 Sep-93 Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07

20-Bond GO Index 30-Year Tresury Bond Yield

30-Yr. Treasury 9/13/07 (4.75%) 20 Bond GO 9/13/07 (4.46%) 12

• The preceding chart shows that over the 25-year period prior to the 2008 financial

crisis, long-term tax-exempt rates were consistently lower than long-term taxable rates.

• Typical pre-2008 long-term interest rates:
• In these “normal” interest rate markets, this reduction in rates through financing

with low-rate long-term fixed rate tax-exempt bonds often increased loan proceeds by 4% to 8% over those achievable on a taxable fixed rate loan backed by the same credit, including GNMAs.

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AAA Rated Taxable Bond – 6.0% AAA Rated Tax-Exempt bond – 5.0% (∼85% of taxable)

Savings – 1.0% or 100 basis points!!!

Borrower GNMA

FHA Loan Draw Request

GNMA Guarantee Request Cash Paper / Securities

Issuer

Underwriter/ Bond Purchaser

Project Fund

35 or 42-Yr Bonds

Bond Purchase Price

Bonds paid-off

• ver 35 or 42

years from payments on the GNMAs

GNMA Issued

(Amount equal to FHA Loan advance) FHA Lender Funds FHA Loan advance from warehouse credit-line draw 3 6

Delivery of GNMAs to Bond Trustee as collateral for the Bonds

9 1 2

Bond Fund

5 7

FHA Lender

4 Trustee pays purchase price of GNMA which reimburses FHA Lender’s warehouse credit-line draw 8

TRADITIONAL LONG-TERM TAX-EXEMPT MUNI BONDS BACKED BY GNMAs – How We Structured

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Trustee

Long-term Tax-Exempt Muni Bonds – Major Benefits and Disadvantages

• Two Major Benefits:

–

• 1. Qualified for 4% LIHTC;

–

• 2. Before 2008, Lower Mortgage Rate (50-100 basis points) than taxable GNMA.
• Two Major Disadvantages:

–

• 1. Large (4 – 8%) negative arbitrage deposit for new construction/sub rehab (e.g., §221(d)(4))

deals; –

• 2. Ongoing issuer, trustee, and rebate fees (8 – 10 to 40 or 50 basis points!) for 35 or 42 years.
• This structure using long-term municipal bonds backed by GNMAs wrapping FHA

insured loans was used to provide financing for hundreds if not thousands of projects for almost three decades through 2008.

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This relationship between tax-exempt and taxable rates lasted for decades:

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‘60s ‘70s ‘80s ‘90s ‘50s Early ‘00s

It’s just the way it was, until…

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It wasn’t!!! 2008 – The Extinction Event

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The Post-2008 World of Upside Down Rates

• In the fall of 2008, numerous AAA-rated debt securities became worthless or

worth only pennies on the dollar – almost unprecedented destruction of trust in the long-term debt markets.

• Result: Long-term debt investors all over the world fled to the safety of U.S.

Treasury bonds versus any other long-term credit in the debt markets.

• At the same time, yields on tax exempt municipals soared to new heights as

concerns about credit quality and liquidity mounted.

• The following charts plot an amazing development – long-term rates
• n federally taxable U.S. Treasury Bonds fell to levels substantially below

those on all other credits, including rates on long-term tax exempt

municipal bonds.

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Long-Term Rate Comparison: 30-Year MMD (Tax-Exempt) Versus 10-Year Constant Maturity Treasury (Taxable)

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Early 2008 – Taxable US Government Securities Rates Fall Below Tax Exempt Municipal Rates

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00% Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 30-Year MMD 10-Year UST

Long-Term Rate Comparison: 30-Year MMD (Tax-Exempt) Versus 10-Year Constant Maturity Treasury (Taxable) January 1, 2008 - Present

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400 BPS

89 BPS

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 30-Year MMD 10-Year UST

Combining Taxable FHA Loan Sales with Short-Term Cash Backed Tax-Exempt Bonds and 4% LIHTC

• We still live in that upside down world today, as continuing economic and

financial uncertainty cause U.S. Treasury Bonds and GNMA securities (and, more recently, Freddie Mac and Fannie Mae backed loans and securities) to trade at yields substantially below all other long-term credits, including long-term municipal bonds backed by those same credits.

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Combining Taxable FHA Loan Sales with Short-Term Cash Backed Tax-Exempt Bonds and 4% LIHTC

• In this upside down interest rate world, why not just borrow in the taxable

markets through the sale of Taxable GNMA securities wrapping each FHA insured loan advance? Why use tax-exempt bonds at all?

• Remember Slide 5: The 50% Rule! The Borrower is required to finance 50% of the

project’s eligible basis in the buildings plus land with tax exempt bonds, and keep these tax exempt bonds outstanding until Project’s placed-in-service date to prime the vital 4% LIHTC.

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• Issue Short-Term Cash Backed Tax-Exempt Bonds; Sell GNMAs (wrapping the FHA

Loan); pay off TE Bonds on placed-in-service date.

• Structure originally developed on HOPE VI Financings, where there is no

permanent debt, but short term tax-exempt bonds were issued to get full value for critically important 4% LIHTC.

Solution: Buy Short-Term Bonds!

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Cash Collateralized Tax-Exempt Bond Structure

• Issue short-term tax-exempt bonds equal to 50% of project’s eligible basis in the

buildings plus land* with a maturity comfortably beyond the targeted placed-in- service date (to provide for construction delays).

• Two funds established under Bond Trust Indenture and invested in same AA+ rated

investment vehicle:

– a “Project Fund” in which all the tax-exempt bond proceeds are deposited, and – a “Collateral Fund” in which FHA Lender** funds or GNMA are deposited

• Financings structured so that as each dollar of tax-exempt bond proceeds is

disbursed from the Project Fund to pay project costs, an equal amount of “replacement proceeds” must be simultaneously deposited into the Collateral

• Fund. The principal of the Bond issue thus remains 100% cash collateralized.

25 ________________________________ *Note: This may be greater than or lower than the taxable loan amount. Most developers aim for 52-55% of such aggregate basis to provide a

• cushion. The short-term cashed backed bond structure often produces a lower bond amount, which lowers bond financing costs.

**The structure also works well with rural development loans or loan pools where the RD lender funds a taxable loan to the borrower and ultimately issues a GNMA security with respect to the stabilized Section 538 loan which is sold in the taxable GNMA market place.

Cash Collateralized Tax-Exempt Bond Structure

• In addition, at Bond closing, the interest which will accrue on the Bonds through the

stated maturity date (eg., 1.0% x 2 years or 2.0% of the tax-exempt Bond amount) is deposited (in bankruptcy remote funds) into a capitalized interest account of the Bond Fund, securing the full payment of the maximum amount of interest which can accrue

• n the Bonds through maturity. This interest expense can often be reduced by half or

more through the investment of some or all Indenture funds in U.S. Treasuries or SLGS.

• This cash collateralization of principal plus interest enables the financing to obtain an

AA+ rating on the short-term Bonds from Standard & Poor’s, based on the rating of the underlying investments, without other credit enhancement.

• When the project loan has been fully funded, rehabilitation or construction has been

completed and the project has been placed in service the tax-exempt bonds are redeemed.

• Any excess prefunded capitalized interest is returned to the Borrower, and the

Project’s only remaining debt (except for certain subordinate loans often used for affordable housing projects) is the taxable FHA insured mortgage loan.

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Borrower GNMA

GNMA Purchaser

FHA Loan Draw Request GNMA Guarantee Request Cash Paper / Securities

Issuer

Bond Purchaser

Project Fund 2-Yr Bonds Bond Proceeds Bond Payoff

(after Project is placed in service)

GNMA Issued

(Amt equal to FHA Loan advance) FHA Lender Funds (in amount equal to FHA Loan advance) 3 7

Delivery of GNMAs to GNMA Purchaser

10 1 2

Collateral Fund

6 8

FHA Lender

4 5

Bond Proceeds

(in amount equal to FHA Loan advance) Purchase Price of GNMA reimburses FHA Lender 9

Taxable GNMA Sale with Tax-Exempt Short-Term Cash Backed Bonds and 4% LIHTC

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Trustee

• Note: under this structure, there is no need for any type of lien or other claim on

the real estate – repayment of the Bonds is 100% assured by the deposit at closing

• f bankruptcy remote cash.
• In order to give a clean Bond Counsel opinion on any tax-exempt bond structure

under Section 103 of the Code, Bond Counsel will include in the Bond Documents a “Bond Note,” under which the Borrower recites a completely unsecured

• bligation to repay the loan of Bond proceeds from the Issuer.
• However, the Borrower will never actually make a payment on this Bond Note –

cash which will enable the Trustee to make all of those payments on behalf of the Borrower has been deposited at closing with the Bond Trustee.

• In rare instances, state laws relating to the Issuer may require that the Issuer’s

bonds be secured by a “mortgage” on the Project. Where this is the case, even if a totally subordinate mortgage in favor of the Bonds is required, no payments should ever be needed on the “Bond Note” which that mortgage secures for the reasons set forth above.

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Results of Structure

Assume Project with $21,000,000 Total Development Costs FHA Loan = $15,000,000

Traditional Long-Term Tax Exempt GNMA Backed Bonds Short-Term Cash Back Bonds with Taxable GNMA Sale

Tax-Exempt Bond Size

$15,000,000 $11,000,000¹

Note $4.0 Mil Lower Bond Size

Tax Exempt Bond Term

223(f) 221(d)(4) 223(f) 221(d)(4) 35 Years 42 Years 2 Years 2 Years

Mortgage Loan Interest Rate

Bonds 3.85% 3.85% GNMA

3.00% 3.50%

3rd Party Fees 0.15% 0.15% 3rd Party Fees N/A N/A Servicing + GNMA Fee 0.25% 0.25% Servicing + GNMA Fee 0.25% 0.25% Total ML Rate 4.25% 4.25% Total ML Rate

3.25% 3.75%

Add: MIP 0.25% 0.25% Add: MIP 0.25% 0.25%

Total All-in Borrowing Cost

4.50% 4.50% Total All-in

Borrowing Cost

3.50% 4.00%

Interest Rate Savings: 223f: 100 Basis Points; 221(d)(4) 50 Basis Points!!!!

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Traditional Long-Term Bonds Short-Term Cash-Backed Bonds

Negative Arbitrage

(Deposit): 4.0% x $15,000,000 x 2 years = $1,200,000 (8.0% of ML) 0.5% x $11,000,000 x 2 years* = $110,000 (1.0% of ML) Negative Arbitrage

(Actual):

$600,000 (4.0% of ML) $55,000 (0.50% of ML)

________________________________ *If Project placed in service in month 12; assumes 1.0% Bond coupon partially offset by 0.5% reinvestment rate.

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PLUS Much Lower Negative Arbitrage

with Short-Term Cash-Backed Bonds

Major Advantages: 1. Qualifies for 4% LIHTC.

• 2. Lowers Mortgage Rate 50 to 100 basis points.
• 3. Avoids huge (4-8%) negative arbitrage deposit
• n new

construction/sub rehab (§221(d)(4)) deals.

• 4. Eliminates on-going issuer/administrative fees after 1-3 years;

huge benefit where issuers charge major (25-50 basis points) ongoing fees as long as bonds are outstanding. Major Disadvantages:

• 0. None (ok, a small cap i deposit).

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Results of Structure - Borrower

Results of Structure – U.S. Treasury

• $11.0 mil. of TE Bond proceeds used to fund Qualified Project Costs – often a

significantly lower TE Bond amount (by $4.0 million in example) than if $15.0 million FHA loan had been funded with long-term tax exempt bond issue.

• No arbitrage “artifice or device” - all TE Bond Proceeds (and replacement

proceeds) invested at far below TE Bond yield.

• Much lower all-in bond rate (∼1.00% v. ∼4.00%) and much shorter maturities –

means dramatically lower revenue drain on the federal Treasury –

• ne to two years versus eighteen to forty-two years – less than 2% of that

associated with much longer-term higher-rate tax-exempt municipal bonds.

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Three Sample Transactions

• 1. FHA 223(f) Pilot Program Acq./Rehab Deal or Fannie Mae or Freddie Mac

“Moderate Rehabilitation” Loan – 18 Month Bonds

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Expected Placed-In Service Date/ First Optional Bond Redemption Date 12 Months Stated Bond Maturity 18 Months Sale Private Placement to CRA Motivated Bank (Urban CRA Driven Market) or Public Offering

• f AA+ S&P Rated Bonds

Estimated Rate¹ 18-Month MMD or LIBOR + Spread = 1.00%

Interest Deposit for Negative Arbitrage at Closing

18/12 x 1.00-0.50% = 0.75% of Bonds

(after assumed investment yield = ½ bond yield)

Expected Actual Negative Arbitrage

12/12 x 0.50% = 0.50% of Bonds 1ACTUAL RATES MAY VARY GREATLY based on deal size, project location, type of loan, market

conditions and many other factors.

Three Sample Transactions

• 2. FHA 221(d)(4) New Construction – 3-Year Bonds (No Mandatory Tender)

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Expected Placed-In Service Date 20 Months Stated Bond Maturity 36 Months Bond Sale Public offering or private placement of S&P AA+ rated Bonds Interest Rate 1.30% Interest Earnings from Eligible Investments (e.g., U.S. Treasuries, SLGS)1 0.80% Net Negative Arbitrage 0.40%

Upfront Interest Deposit – Maximum Negative Arbitrage

0.40% x 3 years = 1.20% of TE Bonds

Expected Negative Arbitrage (if completed in 20 months) 20/12 x 0.40% = 0.67% of Bonds

1 Permitted reinvestments may vary depending upon views of Bond Counsel.

Three Sample Transactions

• 3. FHA 221(d)(4) New Construction – 3-Year Bonds, with 12-Month

Mandatory Tender

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Expected Placed-In Service Date 20 Months Stated Bond Maturity 36 Months Initial Mandatory Tender Date/First Optional Call Date 12 months1 Bond Sale Public offering (only) of S&P A-1/AA+ rated Bonds Initial Interest Rate2 0.80% (or lower) Interest Earnings from Eligible Investments2 0.50% Net Negative Arbitrage2 0.30%

Upfront Interest Deposit – Negative Arbitrage2 0.30% of Bonds

Expected Negative Arbitrage (if

completed in 20 months) & rates unchanged 20/12 x 0.30% = 0.50% of Bonds plus time, effort and expense ($25,000 - $75,000)

• f at least one remarketing.

1 Makes Paper Tax-Exempt Money Market Fund Eligible; dramatically lowers coupon. Borrower and 4% LIHTC investor must

get comfortable with remarketing risk and expense; but risk very low.

2 Amounts shown for 1st 12 months; Bond coupon and reinvestment rates reset for at least 1 additional remarketing period. 3 Additional deposit of capitalized interest in bankruptcy remote funds required on each mandatory tender date.

UPDATE: COMBINING SHORT-TERM CASH BACKED TAX-EXEMPT BONDS WITH FHA INSURED LOANS

• Two Major Recent Developments relating to FHA Loans:
• 1. 10-year U.S. Treasury Yields back below 2.0%.
• 2. HUD has reduced MIP on affordable housing FHA loans from 45

to 25 basis points.

• Result:

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All-in Borrowing Rates 223(f) Pilot (Mod Rehab < $40k/door) ≈ 3.50%! 221(d)(4) (New Cons/Sub Rehab) ≈ 4.00%!

• FHA loan processing times have also improved dramatically as HUD

has given increased priority in processing and other terms to FHA insured loans for affordable housing in recent years.

• The following chart from HUD shows that FHA’s affordable loan volume

almost quadrupled from 2012 to 2015!

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• 223(f) Pilot mod rehab loans can generally be closed in the 90 – 120

days promised by HUD following a full loan application and often less time. We

also now see 221(d)(4) loans closed in 3 to 5 months in many cases versus as long as 8 months to a year if one turns the calendar back 4 or 5 years ago.

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RECENT PROCESSING TIMES – TWO REGIONS Southwest Region – FY15 Average Processing Days to Firm Commitment: 223(f)

54 49 49 36

5 10 15 20 25 30 35 40 45 50 55 60 FY15 - Qtr 1 FY15 - Qtr 2 FY15 - Qtr 3 FY15 - Qtr 4 Average Processing Days Pre-MFT 223(f) Allowable Processing Days

Average 47 days

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RECENT PROCESSING TIMES – TWO REGIONS Southwest Region – FY15 Average Processing Days to Firm Commitment: NC/SR 221(d)(4)

Average 61 days

65 70 52 55

10 20 30 40 50 60 70 80 FY15 - Qtr 1 FY15 - Qtr 2 FY15 - Qtr 3 FY15 - Qtr 4 Average Processing Days Pre-MFT NC/SR Allowable Processing Days

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RECENT PROCESSING TIMES – TWO REGIONS Midwest Region – FY15 Average Processing Days to Firm Commitment: 223(f)

Average 68 days

51 68 88 63

10 20 30 40 50 60 70 80 90 100 FY15 - Qtr 1 FY15 - Qtr 2 FY15 - Qtr 3 FY15 - Qtr 4 Average Processing Days Pre-MFT 223(f) Allowable Processing Days

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RECENT PROCESSING TIMES – TWO REGIONS Midwest Region – FY15 Average Processing Days to Firm Commitment: NC/SR 221(d)(4)

Average 67 days

62 63 77 67

10 20 30 40 50 60 70 80 90 FY15 - Qtr 1 FY15 - Qtr 2 FY15 - Qtr 3 FY15 - Qtr 4 Average Processing Days Pre-MFT NC/SR Allowable Processing Days

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Conclusion: For certain projects, FHA can be a low rate, viable execution!

Increased Volume of Section 221(d)(4) New Construction/Sub Rehab Loans

• Section 221(d)(4) loans now make up a much larger percentage of FHA

loans we see.

• Have longer expected placed-in-service dates, e.g., 1.5 – 2 years.
• Thus longer, e.g., 2-3 year bond maturities.
• Thus higher bond coupons, e.g., 1.00 – 1.30% (v. 0.50 – 0.80% for

§223(f)).

• Thus much greater negative arbitrage – potentially 3-4% of

Bonds (v. 0.5 – 1.0% for §223(f)).

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Increased Volume of Section 221(d)(4) New Construction/Sub Rehab Loans

• Managing reinvestment becomes critically important.
• With properly structured investments, may be able to reduce negative

arbitrage by half or two-thirds or more.

BUT

• Bond counsel firms may vary on what type of investment vehicles they will

permit and on whether they will permit long-term investments with this structure.

• If the Borrower has a choice of Issuers and Bond Counsel, it should discuss

alternatives carefully with the bank or investment bank and/or the

registered municipal financial advisor structuring the tax-exempt debt and with the bond purchaser’s counsel at the outset of the financing. In these cases differences in Bond Counsel firm positions on reinvestment may critically impact the results which can be achieved.

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Use of Cash-Backed Tax-Exempt Short-Term Bonds with Broader Range of Taxable Loans

• Short-term cash-backed tax-exempt bonds are now being used in any scenario

where Borrower can achieve lower borrowing rates and/or lower negative arbitrage than through a taxable loan as compared to a long-

term tax-exempt municipal debt structure.

• Also now used with:
• Fannie Mae and Freddie Mac Mod Rehab Loans
• Rural Development Loans (financed with taxable GNMA

sales);

• Seller “Take-Back” Loans;
• Other Subordinate Loans (e.g. HOME, CBDG);
• 50/50 Risk Share Mod Rehab Loans under new Federal

Financing Bank loan purchase program; and

• Other Taxable Loans.

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Comparison of Short-Term Cash-Backed Bonds + FHA to Private Placements and Other Executions

• FHA insured loan is the only available credit enhancement which is non-

recourse during pre-Conversion phase – all others (Private Placement, Fannie Mae,

Freddie Mac) require deep pocket General Partner guarantees during this phase.*

• On an FHA 221(d)(4) sub rehab/new construction loan, there is a cost certification at

final endorsement, but no new loan underwriting; differs from sub rehab/new construction private placement deals and sub rehab/new construction Fannie/Freddie deals where there is a new loan underwriting and possible loan downsizing based on DSC or LTV at “Conversion.”

• FHA loans offer a 35 year (§223(f) or a 40 year (§221(d)(4) level payment loan

amortization with no balloon; versus a 16 to 18 year balloon on a private

placement, Fannie or Freddie deal.

• FHA offers greater prepayment flexibility – closed for 2 years to 108%

decreasing 1% per year thereafter to par v. yield maintenance of 12% or higher declining over a longer period (e.g., 15 years) for all others (Private Placements, Fannie Mae, Freddie Mac).

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________________________________ *Note: Some guaranties will be required in connection with the 4% LIHTC on these financings.

Comparison of Short-Term Cash-Backed Bonds + FHA to Private Placements and Other Executions

• On the other hand, especially in high cost markets, many projects require a

construction loan that is much larger than the supportable permanent debt. A portion of the larger construction loan often provides critical “bridge” financing to later tax credit equity installments and subordinate loan pay-ins.

• Private placement sponsors and bank construction lenders on Fannie/Freddie sub

rehab or new construction financings will readily provide such a larger construction loan since the entire construction loan is secured by a first deed of trust; with FHA,

• n the other hand, no lien on real estate is permitted to secure a tax credit or other

bridge loan.

• Instead, on FHA loans the bridge loan (either taxable or in the form of subordinate

tax exempt bonds if needed to satisfy the 50% rule) must be secured by a pledge of tax credit equity installments, deep pocket general partner guarantees of completion and payment and/or possibly a pledge of general and/or limited partnership interests. Such debt may be more difficult to place.

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Comparison of Short-Term Cash-Backed Bonds + FHA to Private Placements and Other Executions

• While private placement perm rates are often 25-75 basis points higher than FHA,

private placements do offer very low perm rates that are locked at closing (e.g., 4.15% to 4.35% including third party fees on fully funded mod rehab loans or 4.40% to 4.55% for a draw down construction/perm loan); and the structure readily accommodates a loan pay-down at Conversion from other funding sources.

• Private placements and Fannie and Freddie deals avoid Davis Bacon wages required

for sub rehab (very generally > $40,000 per unit)/new construction FHA Section 221(d)(4) loans, and may offer more flexible/quicker loan underwriting.

• Private placements may also be available from non-bank financial institution

sponsors and may be especially attractive in non-CRA driven markets.

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Conclusion

• Hundreds of financings combining short term cash backed tax exempt bonds with

taxable loan sales have closed in the eight years since 2008.

• Almost all of the country’s major bond counsel firms have now issued unqualified

approving opinions. Documents and rating agency criteria also now very well developed.

• In today’s “upside down” interest rate world this is now THE WAY (and THE ONLY

sensible WAY) to finance affordable housing projects backed by FHA insured or

• ther GNMA eligible mortgage loans, including certain Section 538 Rural

development loans. For these AFFORDABLE FHA AND RD loans, YOU WILL USE SHORT-TERM BONDS – CALL US AT THE OUTSET!!!

• The structure can also now be used to substantially lower the all-in interest rate

for Fannie Mae and Freddie Mac enhanced “moderate rehabilitation” and certain

• ther taxable loans.
• We believe it is unlikely market conditions will change in next 3-5 years to favor

traditional long-term tax exempt bond structure; we think the “upside down” interest rate world, at least with respect to these types of credits, is here for a full generation following 2008.

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