Managing the LIHTC/Bond Process

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2 Managing the LIHTC/Bond Process MODERATOR John Sabatier Stifel, Nicolaus & Company, Incorporated PANELISTS Ray Landry DPMC Steven Clark SE Clark & Associates Inc. Alysse Hollis Coats Rose

3 Combining Tax-exempt Bonds with FHA-insured Financing Milestone Timing Submit Concept Package, have a Concept Meeting, and receive move-forward letter Receive 70% complete Plans and Specs Obtain Appraisal, Market Study, Environmental Report, & Plan and Cost Review Finalize underwriting and application submission HUD Processing and Issuance of a Firm Commitment Rate lock and Initial Closing Two weeks Developer Six weeks Three weeks Eight weeks Four weeks

4 Combining Tax-exempt Bonds with FHA-insured Financing Fannie 10-year 10-year 6% 6% Forward 10-year Plus 320 Plus year 35-year 221(d)4 5.85% Plus % 6% Floor 5.75% Floor Amort Amort Interest Rate 4.50% 5.85% 5.54% 6.50% 6.00% 5.75% 6.00% 6.00% MIP 0.25% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Amortization Term Debt Coverage Loan Constant % % % % % % % %

5 Combining Tax-exempt Bonds with FHA-insured Financing Fannie 10-year 10-year 6% 6% Forward 10-year Plus 320 Plus year 35-year 221(d)4 5.85% Plus % 6% Floor 5.75% Floor Amort Amort Net Income $567,200 $567,200 $567,200 $567,200 $567,200 $567,200 $567,200 $567,200 Debt Coverage 1.15:1 1.15:1 1.15:1 1.15:1 1.15:1 1.20:1 1.15:1 1.20:1 Cash Available for Debt Service $493,464 $493,464 $493,464 $493,464 $472,478 $472,478 $493,464 $472,478 Loan Constant % % % % % % % % Mortgage Amount $8,741,900 $7,341,200 $7,620,200 $6,806,500 $6,905,200 $7,113,400 $6,858,800 $6,905,200 Additional 221(d)4 Mortgage Proceeds $1,400,700 $1,121,700 $1,935,400 $1,836,700 $1,628,500 $1,883,100 $1,836,700 16% 13% 22% 21% 19% 22% 21%

6 Combining Tax-exempt Bonds with FHA-insured Financing Fannie 10-year 10-year 6% 6% Forward 10-year Plus 320 Plus year 35-year 221(d)4 5.85% Plus % 6% Floor 5.75% Floor Amort Amort Mortgage Amount $6,855,000 $6,855,000 $6,855,000 $6,855,000 $6,855,000 $6,855,000 $6,855,000 $6,855,000 Loan Constant % % % % % % % % Annual Debt Service $386,948 $460,781 $443,908 $496,977 $469,038 $455,310 $493,190 $469,038 Annual Savings $73,833 $56,960 $110,029 $82,090 $68,362 $106,242 $82,090 Total Savings Over the 15-Year Compliance Period $1,107,499 $854,397 $1,650,442 $1,231,352 $1,025,427 $1,593,636 $1,231,352

7 Two Primary Structures: Long-Term Bonds Remain in place at least for the full tax credit period (i.e. 18-year maturity or tender with 35-year amortization) NOI must cover the debt service Often require some sort of credit enhancement (i.e. Fannie Mae, HUD guaranty) or A number of banks now will do privately placed long term debt or Freddie Mac and Fannie Mae also have a long term product 7

8 Structure Long-term Tax-exempt Multifamily Housing Bonds BOND HOLDERS OR PURCHASER Bonds [INDENTURE TRUSTEE] Purchase Price ($$) Sells Bonds ($$) UNDERWRITER CONSTRUCTION FUND Note Assigned AUTHORITY ($$) Loan Agreement & Note Upfront Issuance Fee TAX CREDIT INVESTOR $$ Limited Partnership Interest DEVELOPER/BORROWER Tax Credits Revenues $$ PROJECT RESTRICTIVE COVENANTS FILED AT CLOSING 8

9 Two Primary Structures: Short Bonds Bonds are outstanding only during construction Bonds and HUD 221(d)(4)/223(f)/Fannie Mae loan are outstanding simultaneously Construction draws on HUD or Fannie Mae loan deposited to a cash collateral account; corresponding amount of bonds used to pay actual costs Result is >50% of basis is constructed with bond proceeds Bondholders have no interest in the Project but are 100% cash secured; result is lower rate for short-term debt Bondholders have cash collateral; almost no risk 9

10 Structure Short-term Tax-exempt Multifamily Housing Bonds CASH COLLATERAL At end of construction, cash pays off bonds BOND HOLDERS OR PURCHASER Bonds Purchase Price ($$) Sells Bonds UNDERWRITER FUND Advance Funds INDENTURE TRUSTEE OR ESCROW AGENT BOND PROCEEDS CONSTRUCTION FUND MORTGAGE SERVICER FOR HUD/FANNIE MAE Note Assigned AUTHORITY Release corresponding amount of bond proceeds Loan Agreement & Note Upfront Issuance Fee TAX CREDIT INVESTOR $$ Limited Partnership Interest DEVELOPER/BORROWER Tax Credits Revenues $$ PROJECT RESTRICTIVE COVENANTS FILED AT CLOSING 10

11 Who Are The Players In A Bond Deal? Issuer governmental unit that issues bonds Very important to identify issuer early in the process In NC the local housing authority is the first choice; cities and counties can also act as housing authorities Purchaser institution that purchases bonds Underwriter for publicly offered bonds, the investment banking firm that structures the deal and finds buyers Trustee bonds are issued under a trust indenture; the trustee holds proceeds pending disbursement for construction and collects payments for bondholders Credit Enhancer provides financial guarantee for bonds/project; makes bonds ratable/marketable 11

12 Who Are The Players In A Bond Deal? (Cont d) Bond Counsel oversees entire process and issues opinion that bonds are tax-exempt Underwriter s Counsel/Purchaser s Counsel structures debt, drafts security documents, may prepare disclosure document to sell bonds to the market place Official Statement Borrower s Counsel looks out for Borrower s interest; generally does real estate, tax credits, and opinion (sometimes roles split between >1 firm) Issuer s Counsel represents the bond issuer Rating Agency will issue ratings for the bonds based on credit enhancement; makes bonds more marketable 12

13 Combining Tax-Exempt Bonds with FHA Insured Financing Firm Commitment issued Any amendments? Special conditions? Rate Lock Closing Package to HUD Other financing? Opinions Real estate matters

14 Combining Tax-Exempt Bonds with FHA Insured Financing Receive Closing Date From HUD Which HUD Office? Which Closing Attorney? Weird requirements? Map Out Closing Schedule All parties should know about and agree on schedule Subordinate Lenders Print POS May be internal/due diligence requirements

15 Combining Tax-Exempt Bonds with FHA Insured Financing Price Bonds Have to have firm closing date Pre-Closing Standard is three days but sometimes you need more Timing of wires Coordination with title Closing Typically via phone

16 Closing Checklists: Your Tool A beneficial guide Model checklists will vary Internal checklists vs. external checklists Shortlists closer to closing (e.g. rate lock) 16

17 Due Diligence: Things To Watch For Make sure lender(s) and investor are on same page Prioritize third party deliverables (title, survey, appraisals, environmental, construction docs) 17

18 Managing the LIHTC/Bond Process MODERATOR John Sabatier Stifel, Nicolaus & Company, Incorporated PANELISTS Ray Landry DPMC Steven Clark SE Clark & Associates Inc. Alysse Hollis Coats Rose