CONSIDERING A BOND DEAL?... HAVE YOU ASKED YOURSELF WHY?...

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1 Bond Basics 101

2 CONSIDERING A BOND DEAL?... 9% LIHTCs TEBs 4% LIHTCs Eligible Basis - Rehab $10,000,000 $10,000,000 % Affordable % % % Syndicated 99.99% 99.99% LIHTC % 9.00% 3.31% LIHTC Allocation $899,910 $330,967 LIHTC Pricing $0.90 $0.90 Equity Raise $8,099,190 $2,978,702 REDUCTION IN SUBSIDY! -$5,120, % HAVE YOU ASKED YOURSELF WHY?...

3 MAYBE NOTE THE BEST ANSWERS TO THE QUESTION: I DON T HAVE ENOUGH TIME TO GO THROUGH A 9% APPLICATION ROUND MY PROJECT WON T BE COMPETITIVE ENOUGH FOR 9% CREDITS I CAN DO LESS REHAB! MORE FLEXIBLE UNDERWRITING STANDARDS BETTER DEVELOPER FEE FORMULA!

4 BETTER ANSWERS TO THE QUESTION: THE PROJECT HAS ACCESS TO (A LOT OF) OTHER SOURCES OF SUBSIDY THE PROPERTY HAS A PB SECTION 8 CONTRACT, WITH STRONG MARKET RATE RENTS THERE S SCALE ( GOOD OPERATING MARGINS) THE ACTUAL REHAB NEEDS AT THE PORPERTY ARE MODEST IT S A MIXED INCOME DEAL IN VERY GOOD RENTAL MARKET ( DEALS) COMBINING BONDS WITH A 9% LIHTC ALLOCATION

5 EXAMPLE: FENWAY MANOR APARTMENTS UNIVERSITY CIRCLE CLEVELAND, OHIO

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7 EXAMPLE: FENWAY MANOR APARTMENTS UNIVERSITY CIRCLE CLEVELAND, OHIO THE PROJECT HAS ACCESS TO (A LOT OF) OTHER SOURCES OF SUBSIDY FEDERAL HISTORIC REHABILITATION TAX CREDITS SELLER NOTE HOME FUNDS OHFA EQUITY BRIDGE THE PROPERTY HAS A PB SECTION 8 CONTRACT, WITH STRONG MARKET RATE RENTS 143 UNITS, 100% PB SECTION 8 UNIVERSITY CIRCLE.SURROUNDED BY NEW CONSTRUCTION HIGH END RENTAL PROPERTIES COMMERCIAL SPACE WITH CLASS A TENANT AND STRONG RENTAL INCOME THERE S SCALE ( GOOD OPERATING MARGINS) EFFICIENCY OF SINGLE BUILDING ASSET IN URBAN LOCATION

8 EXAMPLE: FENWAY MANOR APARTMENTS UNIVERSITY CIRCLE CLEVELAND, OHIO THE ACTUAL REHAB NEEDS AT THE PORPERTY ARE MODEST IT S A MIXED INCOME DEAL IN VERY GOOD RENTAL MARKET ( DEALS) COMBINING A BOND DEAL INTO A 9% LIHTC ALLOCATION

9 I. Steps to a closing of a TEB Issue 60 days start to finish Process while Mortgage Loan is processing Issuer Considerations o Cost o Sophistication for issuance o Meeting schedules/timelines o Political ramifications o Application process

10 II Historical TEB Perspective & Current TEB Structure Long-term TEBs were 1.50%-2% lower in yield than long-term taxable debt o Negative Arbitrage on undisbursed TEB proceeds 5-7% deposit, about ½ spent

11 II Historical TEB Perspective & Current TEB Structure 7+ years ago long-term taxable yields now 1%+ lower than long-term TEB yields o 2008 used Short-term Cash-collateralized TEBs on HUD 202 project o 2011 TSC structured & sold 1 st rated Short-Term Cash Collateralized TEBs for a taxable long term FHA 221(d)(4) loan. o Short-term Cash-Collateralized TEBs 50% Test specific tracking for LIHTC under Section 42 TEBs outstanding until property placed in service Structure discussion-flowchart

12 III Direct Purchase vs. Publically Offered Rated Short-Term Cash-Collateralized TEBs Short-Term Issues Long-Term alternatives

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14 COMPARISON OF DIRECT TAX-EXEMPT BOND PURCHASE TO SHORT TERM PUBLICALLY MARKETED TAX-EXEMPT BONDS ASSUMED $5,000,000 TAX-EXEMPT BONDS October 23, 2018

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17 COMPARISON OF DIRECT LONG TERM UNRATED TAX-EXEMPT BOND PURCHASE TO TAXABLE LONG TERM FHA/GNMA COUPLED WITH SHORT TERM PUBLICALLY MARKETED TAX-EXEMPT BONDS ASSUMED $5,000,000 TAX-EXEMPT BONDS

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20 Alternative Tax Exempt Multifamily Housing Bond Executions in the Current Market NOVEMBER 2018 Kent Neumann, Esq. Washington, DC Direct: (202) Cell: (703)

21 CURRENT TAX EXEMPT MULTIFAMILY HOUSING BONDS STRUCTURES Short Term Cash Backed Bonds: FHA/GNMA Fannie Mae M-TEM / M-TEB Freddie Mac TEL Long Term Cash Backed Forward Bonds Tax-Exempt Seller take back Bonds R2R FHA Affordable Program Kent Neumann kent@tiberhudson.com 21

22 Long Term Yield Curves (as of 10/18/18) year UST versus 30-year MMD 6.00 Historical Average = 4.11% 10/17/2018 = 3.40% Historical Average = 3.52% 10/17/2018 = 3.16% YR UST 10-YR UST Average 30-YR MMD 30-YR MMD Average Source: Bloomberg. Thomson Reuters Reflects market conditions as of October 18, 2018 Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds 2

23 Short Term Yield Curve (as of 10/18/18) year UST versus 2-year MMD (+ credit spread) Pricing Indications 2-year MMD + credit spread 2.45 Less: 2-year UST (2.87) Net 2-year Bond Rate (0.42) YR UST 2-YR MMD + credit spread Source: Bloomberg. Thomson Reuters Reflects market conditions as of October 18, 2018 Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds 3

24 Historically Flat Yield Curve (as of 10/18/18) year UST = 2.65% 30-year UST = 3.33% year MMD = 3.40% year MMD = 1.90% 1-YR vs 30-YR Spread UST 0.68 MMD Source: Bloomberg. Thomson Reuters Reflects market conditions as of October 18, 2018 Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds 4

25 FHA/GNMA MAP LOANS 35/40-year amortization and term. Integrated construction & permanent financing Non-recourse No new underwriting at conversion to permanent. New construction/sub rehab requires Davis Bacon wages Months for closing 4.25%-4.75% mortgage rates (plus 0.25% MIP for affordable deals) Combined with short term bonds to qualify for 4% tax credits Kent Neumann

26 Taxable FHA Loans vs Long Term Tax Exempt Bonds Taxable FHA/GNMA Market continues to deliver favorable all in mortgage rates. vs. Tax-Exempt Long-Term Bonds Backed by GNMAs are still a more costly execution. Advantages of Taxable Execution: Lower mortgage rate: resulting in additional loan proceeds and/or increased ongoing project cashflow. Reduced Costs: Lower negative arbitrage cost. Kent Neumann kent@tiberhudson.com 26

27 4% Low Income Housing Tax Credits: The 50% Test With todays low taxable loan rates, why not just borrow funds in the taxable market? Reason: Need Bonds to qualify for 4% Low Income Housing Tax Credits (at least 50% of aggregate basis of the building and land must be financed with tax exempt bond proceeds). Benefits of 4% Tax Credits: Provides a significant (~30% or higher) additional source of funds for affordable housing transactions. Kent Neumann kent@tiberhudson.com 27

28 SHORT TERM CASH BACKED BONDS Borrower Bond proceeds LP Investor Debt service payments Trustee Bond proceeds Cash collateral Lender funds FHA Loan > 50% Bonds Bond Holders FHA Lender Kent Neumann

29 SHORT TERM CASH BACKED BONDS Bond Amount to meet 50% test < Taxable FHA Loan Amount (see prior slide): No additional collateral needed! Bond Amount to meet 50% test > Taxable FHA Loan Amount: Need other collateral sources of funds Kent Neumann

30 Example Sources and Uses Short-Term Cash-Collateralized Bonds with Taxable GNMA Sale Sources FHA Loan Funds Bond Proceeds (1) $9.0 M 7.0 M 4% Tax Credit Equity 3.5 M Deferred Developer Fee Subordinate Financing Total Sources 0.0 M 0.5 M 20.0 M Uses Redemption of Bonds Acquisition Rehabilitation Developer Fee Financing Costs + Soft Costs + Reserves Total Uses $7.0 M 8.0 M 3.0 M 1.0 M 1.0 M 20.0 M (1) $7 million sized on 50% test ($13 million total costs) Kent Neumann kent@tiberhudson.com 30

31 OTHER COST SAVING FEATURES/OPTIONS Methods to reduce transaction costs: Pooled financings No long term bond related fees Reduced or no net interest cost on bonds Kent Neumann

32 Short Term Yield Curve (as of 10/18/18) year UST versus 2-year MMD (+ credit spread) Pricing Indications 2-year MMD + credit spread 2.45 Less: 2-year UST (2.87) Net 2-year Bond Rate (0.42) YR UST 2-YR MMD + credit spread Source: Bloomberg. Thomson Reuters Reflects market conditions as of October 18, 2018 Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds 3

33 NEGATIVE/POSITIVE ARBITRAGE Trustee Treasury Investment Cash collateral can be invested in treasury while held with the Trustee 2.90% 2.30% Bond Holders Bondholders are receiving (tax exempt) interest while bonds are outstanding 60 BPS Positive Arbitrage (Needs to go back to IRS) Avg Investment Yield Bond Rate Kent Neumann

34 Costs of the Short Term Bond Deal Issuer Fees*: 0.10% % Bond Counsel*: $35,000 - $100,000 Underwriter s Fee: 0.50% % Underwriter s Counsel: $30,000 $300, $50,000 $500,000 Miscellaneous: $10,000 - $20,000 Negative Arbitrage*: ZERO Kent Neumann kent@tiberhudson.com 34

35 Timing of the Short Term Bond Deal Bond Application/Volume Cap/Initial Approval As soon as possible Document Preparations and Review Around Submission of FHA Loan App Bond Pricing ~2 weeks before Closing Pre-close/Close Simultaneous with FHA Loan closing Kent Neumann

36 FANNIE MAE MTEB IMMEDIATE MBS DELIVERY - Bond secured by MBS and structured to mirror MBS. Aaa or AA+ Rated - Single-term and monthly pay structure DSCR/90% LTV - Pricing is driven by FNMA taxable MBS market vs. MMD (Tax-Exempt Index) - 35 to 65 basis point savings over traditional Tax-Exempt Structure - Supplemental taxable or tax exempt loan available post rehab at initial closing DSCR, LTV, and G/S Fees - Up to 3 years of Interest Only available Kent Neumann kent@tiberhudson.com 36

37 FANNIE MAE MTEB IMMEDIATE MBS DELIVERY STEP 1 The Fannie Mae DUS lender originates loan with Sponsor and Underwriter sells the Bonds LENDER CERTIFICATE PROCEEDS ACCOUNT M-TEBS Proceeds TRUSTEE M-TEBS Proceeds Originate Mortgage Loan Lender warehouse funds UNDERWRITER SPONSOR Qualified project costs PROJECT M-TEBS INVESTOR M-TEBS Proceeds STEP 2 Fannie Mae securitizes the loan with MBS which is purchased by the trustee with M-TEBS proceeds LENDER M-TEBS proceeds used to pay for the purchase of the MBS Transfer of MBS TRUSTEE M-TEBS Proceeds Mortgage Loan and Note Delivery of MBS CERTIFICATE PROCEEDS ACCOUNT FANNIE MAE Kent Neumann kent@tiberhudson.com 37

38 FANNIE MAE MTEB FORWARD MBS DELIVERY - Fannie Mae Lender provides forward commitment - Construction Lender needed before conversion - Bond initially secured by cash collateral and construction loan funds and replaced at conversion with MBS - Aaa or AA+ Rated - Negative Arbitrage prior to conversion (~0.75% per year with investments) - ~4.75% Mortgage Rate: Often results in additional loan proceeds 3-4 X upfront costs due to low all in mortgage rate Kent Neumann kent@tiberhudson.com 38

39 FANNIE MAE MTEB FORWARD MBS DELIVERY STEP 1 The Fannie Mae DUS Provides a Forward Commitment and Underwriter prices the Bonds BOND PROCEEDS ACCOUNT* Bond Proceeds TRUSTEE Bond Proceeds BOND INTEREST ACCOUNT UNDERWRITER EQUITY Bonds Bonds Proceeds *Invested during construction to reduce negative arbitrage BOND INVESTOR STEP 2 Construction Lender Match Funds Collateral for Bondholders during the Construction Period INDENTURE COLLATERAL ACCOUNT BOND PROCEEDS ACCOUNT BOND INTEREST ACCOUNT CONSTRUCTION LENDER PROJECT Kent Neumann kent@tiberhudson.com 39

40 FANNIE MAE MTEB FORWARD MBS DELIVERY STEP 3a Upon Conversion, the Fannie Mae DUS Lender Funds the Mortgage Loan which is used to repay the Construction Lender Mortgage CONSTRUCTION LENDER DUS LENDER Mortgage Loan Proceeds STEP 3b About 30 days after Conversion, DUS Lender delivers the MBS to Trustee in exchange for cash in Collateral Account INDENTURE COLLATERAL ACCOUNT FANNIE MBS DUS LENDER Kent Neumann

41 FREDDIE MAC TAX EXEMPT LOAN Construction Bank (the Initial Funding Lender), funds the loan on a drawn down basis and takes the real estate risk Pre-Conversion. At Conversion, the loan is sold to the Freddie Mac Seller/Servicer, who then sells it to Freddie Mac several weeks thereafter. Freddie Mac, typically will securitizes pools of such loans in an M Class securitization. Allows Borrower to work with Bank during the Pre-Conversion phase. Slightly higher costs than bank private placements due to multiple Lenders/counsels. Important to have an experienced tax-exempt attorney and/or participant due to complex tax exempt rules. Funding Lender Tax Exempt Gov t Lender Note Borrower Note & Mortgage Governmental Lender $ Funding Loan to Gov t Lender $ Loan to Borrower Est. Construction/Perm Interest Rate Stack Bond Rate Construction (VR): LIBOR % Bond Rate Permanent (FR): 10-year Treasury % Borrower/ Project Owner Kent Neumann kent@tiberhudson.com 41

42 CASH BACKED FORWARD (CBF) STEP 1 Perm Lender/Issuer provides a Forward Commitment and Underwriter prices and sells Bonds 18+ year bonds with mandatory tender date upon Conversion. Est. Bond Rate: 2.50% Est. Investment Rate: 3.00% Est. Positive Earnings: 0.50% BOND PROCEEDS ACCOUNT* Bond Proceeds TRUSTEE Bond Proceeds UNDERWRITER Bonds Bonds Proceeds Works with: (1)Freddie Mac TEL (2)Bank Private Placements (3)Barings Forward (4)Other Forward Programs *Invested during construction to eliminate negative arbitrage BOND INVESTOR STEP 2 Upon Borrower requisition, Construction Lender match funds Collateral for Bondholders during the Construction Period INDENTURE COLLATERAL ACCOUNT BOND PROCEEDS ACCOUNT BORROWER CONSTRUCTION LENDER PROJECT Kent Neumann kent@tiberhudson.com 42

43 CASH BACKED FORWARD (CBF) STEP 3 Upon Conversion: (1) Bonds are tended and remarketed to the Perm Lender at pre-determined fixed rate in exchange for funds in Collateral Account and (2) Mortgage is assigned to Perm Lender in exchange for Perm Loan proceeds used to pay off the Construction Lender INDENTURE COLLATERAL ACCOUNT INITIAL BOND HOLDER Bonds Perm Loan Proceeds* CONSTRUCTION LENDER PERM LENDER Mortgage *Equity or other funds can also be used to repay Construction Lender if Construction Loan > Perm Loan Kent Neumann kent@tiberhudson.com 43

44 CASH BACKED FORWARD (CBF) POST CONVERSION FLOW OF FUNDS PRE CONVERSION FLOW OF FUNDS SPONSOR Mortgage Payment PERM LENDER (SERVICER) INVESTMENT EARNINGS Bond Rate BOND INTEREST ACCOUNT TRUSTEE TRUSTEE Principal & Interest Bond Interest Rate BOND INVESTOR BOND INVESTOR Kent Neumann

45 Tax-Exempt Seller Take Back Note & Bonds Many 4% preservation deals include seller financing in the form of a subordinate take-back note (common in RAD transactions) Due to the LIHTC 50% test, tax-exempt bonds in excess of the permanent financing are often required in these deals Several ways to address this issue with various bond structures Kent Neumann kent@tiberhudson.com 45

46 FHA Refinancing to Re-syndication (R2R) GOAL: Lock in today s rates for future tax credit deals.. Kent Neumann kent@tiberhudson.com 46

47 FHA Refinancing to Re-syndication (R2R) NEW LOAN: FHA 223(f) loan to refinance existing debt or purchase project. Keep rehab to a minimum Highlights of 223(f) loan Exempt from LIHTC 10-year rule (Section 42(d)(6)) 35+ year full amortization and term 80-90% LTV / 1.11 DSCR ~4.25% all-in rate including 25bps MIP for affordable deals Exemption from Davis-Bacon wages; Non-recourse 47

48 FHA Refinancing to Re-syndication (R2R) WHEN READY TO INTEGRATE TAX CREDITS (Upon Year 15 or otherwise): Owner would simultaneously take 3 steps Kent Neumann kent@tiberhudson.com 48

49 FHA Refinancing to Re-syndication (R2R) Step 1: TPA (transfer of physical asset) process. Highlights of TPA Take days Remaining term of FHA loan would be 30+ years No prepayment fees or substantial transfer fees Cost is 5bp to HUD and any charge the lender wants to impose for any help they give 49

50 FHA Refinancing to Re-syndication (R2R) Step 2: Supplemental FHA 241(a) loan. Highlights of 241(a) Second position fha loan sized to the lower of (a) 90% of rehabilitation and related construction costs or (b) 1.11 DSCR for total FHA debt Is a construction loan program (clc/plc) and not limited to 223(f) pilot rehab limits Loan term/amortization can be up to 40 years although default is for it to match the remaining term on the senior FHA loan Possible exemption of Davis-Bacon wage requirements 50

51 FHA Refinancing to Re-syndication (R2R) Step 3: Use tax exempt bonds to qualify for 4% tax credits. Highlights of Bonds/4% Credits Need to pass 50% test to qualify for 4% low income housing tax credits 95% Bonds need to be spent on good costs of project Flexibility structured into original 223(f) loan to account for potential sizing issues Kent Neumann

52 CONTACT INFORMATION Kent Neumann, Esq. Direct: (202) Cell: (703) Allison King, Esq. Direct: (202) Lauren Marcus, Esq. Direct: (202) Alex Zeltser, Esq. Direct: (202)

53 I don t like slides! Bob Labes Says: