Recent Developments on Short- Term Cash Backed Tax- Exempt Bonds and Fannie Mae Tax- Exempt Monthly MBS Pass- Through Bonds

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1 Recent Developments on Short- Term Cash Backed Tax- Exempt Bonds and Fannie Mae Tax- Exempt Monthly MBS Pass- Through Bonds R. Wade Norris, Esq. Eichner Norris & Neumann PLLC th Street, N.W., 7th Floor Washington, D.C Phone: (202) Fax: (202) website: Ethan Ostrow, Esq. Eichner Norris & Neumann PLLC th Street, N.W., 7th Floor Washington, D.C Phone: (202) Fax: (202) website: * Copyright by R. Wade Norris, Esq. February 12, 2016 All rights reserved. This document may not be reproduced without the prior written permission of the author.

2 SHORT-TERM CASH BACKED TAX-EXEMPT BONDS Two Major RecentDevelopmentson use with FHAInsured Loans: 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: All-in Borrowing Rates 223(f) Pilot (Mod Rehab < $40k/door) 3.50%! 221(d)(4) 4.00%! R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

3 FHA loan processing times have also improved dramatically as HUD has given increased priority in processing and other terms tofha insuredloans foraffordable housing inrecent years. The following chart from HUD shows that FHA s affordable loan volume almost quadrupled from 2012 to 2015! 223(f) Pilot mod rehab loans can generally be closed in the 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. Conclusion: FHA canbe a viable execution! R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

4 Short-Term Cash Backed Tax-Exempt Bonds Other Developments Over Past Year Emergence of Longer Maturities and Heightened Importance of Maximizing Reinvestment Over the past year, we have seen a substantial increase in the use of short-term cash-backed taxexempt bonds with FHA Section 221(d)(4) sub-rehab/new construction loans v FHA Section 223(f), Fannie Mae, or Freddie Mac mod rehab loans. In 2015, Section 221(d)(4) FHA insured loans account for perhaps one half or more of all loans we see v only 20-30% in past years. The longer expected placed in service dates on such loans à e.g. 18, 20 or 22 months - requires the use of longer bond maturities (eg. 30 or 36 months) v 12 to 18 month tax exempt bond maturities for most mod rehab loans. These longer 30 or 36 month bond maturities carry higher long-term rates than the coupon applicable to shorter 12 to 18 month maturities, (eg., 1.3 to 1.4% v. 50 or 60 basis points. R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

5 In addition, the past year has also seen a slight increase in short-term rates (tax exempt and taxable), especially in maturities longer than 12 months, in anticipation of Fed tightening in the nearfuture. 12 Mo. Maturity 18 Mo. Maturity 24 Mo. Maturity 36 Mo. Maturity BPS BPS BPS BPS 2014 & prior BPS BPS BPS BPS R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

6 When most deals were very short term (e.g month maturity with 11 month expected average life) and rates were lower, negative arbitrage/ reinvestment not critical. 0.35% Coupon x 11/12 months = 0.32% Expected Neg. Arb./ Cap. I. 0.35% Coupon x 18/12 months = 0.525% Max. Neg. Arb./ Cap. I. In this scenario, one can invest Indenture Funds in Taxable ortax-exempt Money Market Mutual Funds at 0.01% - no real earnings and no one cares! R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

7 With more deals having longer maturities in an era of higher interest rates, reinvestment has becomecritically important. Assume a 36-month maturity with a 24-month optional call on short term bonds with an FHA 221(d)(4) loan having a 22-month construction period. 1.40% Coupon x 24/36 = 2.80% Expected Neg. Arb./ Cap. I. 1.40% Coupon x 36/36 = 4.20% Max. Neg. Arb./ Cap. I. Over 4.0 Points v. ½ Point of Max Neg. Arb. Required Deposit OUCH! THAT HURTS! Maximizingreinvestment returns is critically important underthis scenario. R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

8 Let s assume we can invest Indenture Funds in 2-year U.S. Treasury Securities or SLGs at 0.85%: 0.85% Coupon x 24/ % This reduces the Expected Neg. Arb./ Cap. I. and the Max Neg. Arb./ Cap. I. in the above example as follows: Net Expected Neg. Arb./ Cap. I. 2.80% % = 1.10% Net Max Neg. Arb./ Cap. I. 4.20% % = 2.50% -OR- We can market bonds subject to 12 or 13-month mandatory tender & at least one expectedremarketing, with the following results: 0.50% Tax-Exempt Bond Coupon versus 0.55% yield on 12-month U.S. Treasury Security = No Neg. Arb./ Net Cap. I. expense for 1st 12 Months! R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

9 Remember under this scenario, we will have at least one 12 or 13-month mandatory tender and remarketing on a 20-month construction period. If tax exempt and taxable rates at 12 or 13 months or the spread between those rates at 12 or 13 months is the same, the total neg. arb./ net cap. i. could be 0.25% to 0.50% for the second 12 months -v- 1.10% expected and 2.50% Max. neg. arb./cap. i. under the longer term marketing scenario. BUT the short-term marketing approach remarketing entails additional time and effort (new verified cash flows, rating confirmation, new remarketing circular and supporting due diligence) in effect a mini second closing at month 12 or 13, etc. It also involves some rate risk, though short-term 12 or 13-month AA+ tax-exempt rates do not change much over time. Transaction costs may run 0.25% to 0.50% of the Bonds depending on deal size and other factors. After factoring in these costs the expected net difference in overall cost from using the shortterm marketing alternative may be 0.5% to 1.0% or less than the long-term marketing scenario. Question: Is the slight interest rate risk and time and effort worth the projected savings? R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

10 We have also developed more advanced structures which can reduce these differentials even further or even make the expected long-term marketing structure even more attractive than the short-term structure under certain scenarios. 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, especially on bond issues associated with Section 221(d)(4) loans. If the Borrower has a choice of Issuer and Bond Counsel, it should discuss alternatives carefully with the bank or investment bank and/or the registered municipal financial advisor structuring the taxexempt debt and with the bond purchaser s counsel at the outset of the financing. In these cases having the right Bond Counsel firm may be critically important to the result which can be achieved, but the borrower may not be able to control this choice. R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

11 USE OF SHORT-TERM CASH-BACKED TAX-EXEMPT 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. Not just FHA 223(f) or 221(d)(4), or Fannie/ Freddie Mod Rehab loans Also now used with 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 purchaseprogram and other taxable loans. R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

12 NEW FANNIE MAE TAX-EXEMPT MONTHLY MBS PASS- THROUGH BONDS Over the past few years, over $3.0 billion of agency backed (Ginnie Mae, Freddie Mac, Fannie Mae) tax exempt single family mortgage revenue monthly pass-through bonds have been sold, lowering coupons by basis points versus traditional semi-annual pay long-term tax exempt bonds. Buyers want the security of an immediate, monthly agency pass-through. Now two Fannie Mae tax exempt multifamily monthly MBS pass-through bond issues have closed. In January Fannie Mae closed a $21.75 million, 16-year fixed rate tax exempt multifamily Fannie Mae MBS pass-through issue of the Illinois Housing Development Authority for Fullerton Apartments, a mod rehab project. A second $23,150,000 issue by the Texas Department of Housing and Community Affairs for the Williamsburg Apartments closed in December of These Bonds were Aaa rated by Moody s and were publicly offered by RBC Capital Markets, as the underwriter. Under this structure, the Trustee on these monthly-pay fixed-rate bonds simply passes through the monthly Fannie Mae MBS payment to the Bondholder on next business day on a tax exempt basis. R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

13 COMPARISON OF FANNIE MAE TAX-EXEMPT MONTHLY MBS PASS-THROUGH STRUCTURE TO OTHER FANNIE MAE ENHANCED EXECUTIONS Date of Official Statement $ Amount of Bonds/Loan 10-Year U.S. Treasury Taxable Fannie Mae MBS Estd. Semi-Annual 16-yr TE Fannie Mae Enhanced Bonds TE Bond Yield 16-yr Fannie Mae Monthly MBS Pass-Through Servicing and Guarantee Fee ML Rate IHDA Fullerton Ct. 01/21/15 $21,750, % 3.05% 3.25% 3.00% Savings v. Taxable MBS 5 basis points Savings v. TE Semi- Annual long-term Bond 25 basis points 0.97% 3.97% TDHCA Williamsburg 12/02/15 $23,150, % 3.45% 3.50% 3.34%* Savings v. Taxable MBS 11 basis points Savings v. TE Semi- Annual long-term Bond 16 basis points 1.01% 4.46% *Bonds had a bond coupon equal to the MBS Pass-Through rate of 3.45% and were sold at a price of 101%. R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

14 NEW FANNIE MAE TAX-EXEMPT MONTHLY MBS PASS-THROUGH BONDS Coupon is expected to decline even further as more cross over MBS buyers come in on future deals and if tax exempt rates continue to slowly recover versus taxable rates as the distrust of municipal bonds and other non-u.s. government debt securities created by the 2008 financial crisis continues tosubside. One would expect this execution to become more and more competitive. Most likely to be used in markets where tax exempt bond volume is available through issuers who charge very low (e.g., 5-10 basis points per year) or no ongoing fees. In such markets, the monthly MBS pass-through structure almost eliminated (reduces to about 45 days) the net negative arbitrage associated with the Borrowers, paying two sets of interest under the short-term cash-backed bonds plus taxable Fannie Mae MBS sale structure. For sophisticated developers, this structure allows potentially more flexible prepayment options;; yield maintenance through 10 years to par call versus absolute 10-year lock-out associated with traditional municipal bonds. On the other hand, short-term cash backed bonds plus taxable Fannie Mae MBS sale may continue to be a better option where ongoing Issuer fees are very high (eg., basis points). R. Wade Norris Ethan Ostrow Eichner Norris & Neumann PLLC

15 SUMMARY OF MAJOR TAX EXEMPT DEBT EXECUTIONS 1. Short-Term Cash Backed Tax Exempt Bonds with Taxable Loan Sale Estd. Actual All-In Borrowing and Underwriting Rate FHA/ GNMA 223f (Mod Rehab) 3.50% FHA/ GNMA 221(d)(4) (Sub Rehab / New Cons) 4.00% Fannie Mae or Freddie Mac Mod Rehab (Freddie deemphasizing see TEL Structure Below) 2. Private Placement 4.50% -Mod Rehab 4.15% to 4.35% -Sub Rehab/New Cons Cons Period 2.30% to 2.55% Floating Perm Period 4.45% to 4.75% 3. New Freddie Mac TEL Program (Mod Rehab, Sub Rehab, New Cons) Year Maturity FR Freddie/Fannie Publicly Offered Bonds (Sub Rehab/New Cons or Forward Loan) 5. New 16-Year FR Fannie R. Wade Mae Norris Tax Exempt Eichner Monthly Norris & Neumann PLLC Pass-Through Publicly Offered Bond Structure (Mod Rehab) February 12, 2016 (Cons Period;; SIFMA or LIBOR ) Perm 4.20% to 4.85% (lower end for mod rehab) 5.00% to 5.20% 4.00% to 4.50%

16 Major Tax-Exempt Bond and Loan Executions for Affordable Housing Projects February 12, 2016 Presented by: R. WADE NORRIS, ESQ. (202) EICHNER NORRIS & NEUMANN PLLC th Street, N.W., Suite 750 Washington, D.C Fax: (202) Website: * Copyright by R. Wade Norris, Esq. February 12, 2016 All rights reserved. This document may not be reproduced without the prior written permission of the author.

17 MAJOR TAX-EXEMPT BOND AND LOAN EXECUTIONS YOU!!! are an affordable housing (100% at 60% of AMI) developer.* You are mad (see picture) because you applied for 9% LIHTC and they were oversubscribed. How do you structure the tax exempt bonds required to prime the 4% LIHTC you now must have in order to finance your deal? *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. R. Wade Norris Eichner Norris & Neumann PLLC

18 ALTERNATIVE TAX-EXEMPT BOND EXECUTIONS Since the 2008 financial crisis, in some government or quasi-governmental debt markets, taxable rates are lower than tax-exempt muni rates. For example, rates on taxable GNMA securities are lower by basis points ( bps ) than rates on long-term municipal bonds rated AA+ or Aaa backed by the same GNMAs. That s Crazy!!! you say. You pay federal and state income tax on the interest on Ginnies (40+% of your return if you are a high bracket tax payer), which, you keep if you instead purchase the long-term municipal bond backed by the Ginnie. How can the rates on the taxable Ginnies be lower? We live in a crazy world. Since 2008, the world trusts U.S. Treasury Bonds, GNMAs, and to a degree, Fannie Mae and Freddie Mac long-term debt securities, and not much else (relatively), including even AA+ and Aaa-rated municipal bonds. The world still thinks that the reliability of rating agencies is quite questionable; if they were that reliable they would have never rated hundreds of billions of paper AA and Aaa prior to 2008, which became worth 10 or 15 or nothing. So if I can do a simple taxable conventional FHA loan at a lower rate, why would I use muni bonds? R. Wade Norris Eichner Norris & Neumann PLLC

19 LONG-TERM RATE COMPARISON: 30-YEAR MMD (TAX-EXEMPT) VERSUS 10-YEAR CONSTANT MATURITY TREASURY (TAXABLE) 9.00% 8.00% Early 2008 Taxable US Government Securities Rates Fall Below Tax Exempt Municipal Rates 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 30 Year MMD 10 Year UST 0.00% Jan 92 Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 R. Wade Norris Eichner Norris & Neumann PLLC

20 7.00% LONG-TERM RATE COMPARISON: 30-YEAR MMD (TAX-EXEMPT) VERSUS 10-YEAR CONSTANT MATURITY TREASURY (TAXABLE) JANUARY 1, PRESENT 6.00% 5.00% 4.00% 400 BPS 3.00% 109 BPS 2.00% 1.00% 0.00% Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan Year MMD 10 Year UST R. Wade Norris Eichner Norris & Neumann PLLC

21 ALTERNATIVE TAX-EXEMPT BOND EXECUTIONS To be sure your project is worthy of the subsidy inherent in 4% LIHTC, Congress piggy-backed on the states private activity bond volume allocation systems. If your project is good enough to get an allocation of private activity bond volume then it will qualify for 4% LIHTC (almost automatically, but you do have to fill out the forms). Thus, the 50% Rule: To be eligible for 4% LIHTC, you have to finance at least 50% of aggregate basis of the building(s) plus land with volume limited tax-exempt private activity bonds under Section 142(d) of the Code and keep them outstanding until the project s placed-in-service date (roughly, completion of rehab for a mod-rehab project or certificate of occupancy for a new construction/sub-rehab project). So, if your project is affordable, you will be using at least some tax-exempt private activity bonds! (Remember: No tax exempt bonds = No 4% LIHTC = No affordable housing project.) R. Wade Norris Eichner Norris & Neumann PLLC

22 1. SHORT-TERM CASH-BACKED TAX-EXEMPT BONDS HOW IT WORKS Issue short-term tax exempt bonds equal to 50% of the project s aggregate basis of the building(s) plus land* with a maturity roughly twice 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** advances or GNMA or Fannie Mae MBS proceeds or Freddie Mac loan proceeds are deposited. Financings are 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. *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. R. Wade Norris Eichner Norris & Neumann PLLC

23 SHORT-TERM CASH-BACKED TAX-EXEMPT BONDS HOW IT WORKS (CONT D) In addition, at Bond closing, the interest which will accrue on the Bonds through the stated maturity date (e.g., 1.00% 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 on the Bonds through maturity. The interest expense and upfront deposit can often be reduced by half or more through investing some or all Indenture funds in U.S. Treasury securities 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 (often a highly rated money market fund and/or U.S. government securities), 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, orthe taxable Fannie Mae or Freddie Mac or rural development affordable housing loan. R. Wade Norris Eichner Norris & Neumann PLLC

24 FHA Insured SUMMARY OF RELATIVE ALL-IN BORROWING RATES Short-Term Cash Backed Tax-Exempt Bonds + Taxable Loan Sale Long-term (18, 35 or 40-year) Tax-Exempt Bonds Backed by FHA/GNMA, Freddie Mac or Fannie Mae Estimated Approximate Savings in All-in Rate Section 223(f) (Acq/ Mod Rehab) 3.50%* v. 4.35%* 0.85% Section 221(d)(4) (New Cons/ Sub Rehab) 4.00%* v. 4.45%* 0.45% Plus: On Section 221(d)(4), dramatic Reduction in Construction Period Negative Arbitrage; 1%-1.5% v. 8-10% for Long-Term Bonds. Fannie Mae Moderate Rehab Loans About 4.50% v. 5.15% 0.65% * FHA recently lowered the annual Mortgage Insurance Premium ( MIP ) on affordable housing loans from 45 basis points to 25 basis points, making the FHA execution even more competitive versus other tax exempt debt products.. R. Wade Norris Eichner Norris & Neumann PLLC

25 SHORT-TERM CASH-BACKED TAX-EXEMPT BONDS OTHER ADVANTAGES Borrowers who are willing to price to a 12-month mandatory tender in public offerings, can drive the bond coupondownto40 50bps(thelowestwehaveseenis28bps), and limit the capitalized interest deposit required at closing to 12 months. This involves some potential remarketing expense, if required, and some interest rate risk upon the remarketing. However, there is almost no history of 12-month remarketing rates on AA+ rated tax exempt paper ever exceeding 1.0% over the past two decades. Total issuance costs are lower on short-term cash backed bonds than on long-term municipal bond financings using these FHA and Fannie Mae platforms. Another potential major advantage of short-term cash backed tax exempt bonds is elimination of ongoing administrative issuer fees after Bonds are redeemed. Where ongoing issuer fees are high (e.g. issuer fees of 25 to 40 or 50 basis points per year), this can be a major advantage. These issues involve an average of or 20 months of ongoing fees or slightly more versus 15 years of ongoing fees for a long-term bond execution. R. Wade Norris Eichner Norris & Neumann PLLC

26 THE MAIN COMPETITION 2. TAX-EXEMPT BOND OR TAX-EXEMPT LOAN PRIVATE PLACEMENT CRA Impact on Affordable Housing Finance. Especially if the developer has a project in a major urban market (e.g., Boston, New York, Washington D.C., Miami, Chicago, San Francisco, Los Angeles), there may be another competitive execution. Large banks are required under the Community Reinvestment Act ( CRA ) to do a certain dollar volume of public benefit lending activities and a certain dollar volume of investment activities in the markets where they have a presence, or they risk severe limitations on their future activities (e.g., new products, mergers, etc.). Thus, large banks are huge buyers of both tax exempt bonds and tax exempt loans (and 9% and 4% LIHTC) in markets where they have a presence. This substantially lowers tax credit yields and tax exempt all-in borrowing rates in CRA driven markets. Starting in the late 1990 s, to satisfy CRA goals, banks began to buy non credit enhanced bonds, backed only by a first deed of trust and certain pre- Conversion General Partner guaranties (e.g., completion, payment). They buy the tax exempt bonds or fund the tax exempt loan (the nomenclature depends on the type of CRA credit and accounting and regulatory treatment sought) on a draw down basis, as loan advances are made. This eliminates negative arbitrage on a sub rehab or new construction loan (similar to forward delivery funding on an FHA 221(d)(4) loan). Moreover, for sub rehab/new construction loans, the Banks offer very low all-in construction period borrowing rates (e.g., SIFMA (.03%) or 1-month LIBOR (0.33%) plus %) before the loan reaches Conversion or stabilized occupancy (e.g., 1.15 DSC for 90 consecutive days; 90% LTV). R. Wade Norris Eichner Norris & Neumann PLLC

27 TAX-EXEMPT DRAW DOWN PRIVATE PLACEMENT BOND OR TAX-EXEMPT LOAN FINANCING STRUCTURE MOD REHAB, SUB REHAB OR NEW CONS Mod Rehab Interest Rates Sub Rehab/New Cons Upfront Fees (est.) Bond Rate Construction: SIFMA N/A 0.05% Plus: Spread 2.25% to 2.50% = Bond/Loan Interest Rate 2.30% to 2.55% Floating* Bond Rate Permanent: 16 to 18-year LIBOR Swap 2.00% 2.00% Plus: Spread 2.00% to 2.20% 2.30% to 2.60% = Bond/Loan Interest Rate 4.00% to 4.20% 4.30% to 4.60% Credit Enhancement N/A N/A Servicing Fees Remarketing Agent N/A N/A Issuer Trustee Total Fee Stack Total Permanent Mortgage Rate (Underwriting Rate and Actual Permanent Borrowing Rate) 4.15% to 4.35% 4.45% to 4.75%** Origination % App Bond Costs of Issuance % *Add 15 basis point fee stack below for all-in construction period borrowing rate. ** Most bond private placements funded on draw down basis, which eliminates construction period negative arbitrage. Estimated Rates as of 02/10/2016; 35-year loan amort.; DSCR; 80-90% LTV. If the Project is not in a part of a Bank s CRA footprint, this type of product may only be available at somewhat higher rates and somewhat tighter underwriting terms from the Bank or perhaps from a non-bank provider. R. Wade Norris Eichner Norris & Neumann PLLC

28 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) acquisition/mod rehab) or a 40 year ( 221(d)(4) sub rehab/new construction) 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). R. Wade Norris Eichner Norris & Neumann PLLC

29 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, on 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. R. Wade Norris Eichner Norris & Neumann PLLC

30 COMPARISON OF SHORT-TERM CASH-BACKED BONDS + FHA TO PRIVATE PLACEMENTS AND OTHER EXECUTIONS While private placement perm rates are often 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 4.45% to 4.75% 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. R. Wade Norris Eichner Norris & Neumann PLLC

31 3. FREDDIE MAC FIXED-RATE PRIVATE PLACEMENT TAX-EXEMPT LOAN TEL STRUCTURE In 2014, Freddie Mac introduced its Tax Exempt Loan or TEL structure with many of the same features and terms as bank private placements. Potentially even lower perm rates and potentially available in all markets, not just CRA. Loan terms are 16 years (mod rehab) up to 18 years (new cons/sub rehab), a 35-year loan amortization, 1.15 debt service coverage and a 90% maximum LTV. Freddie Mac anticipates that for many transactions, a rate lock can be achieved within three months of commencement of loan processing, and the closing can be achieved within 30 to 45 days thereafter. Program was expanded in 2015 to include sub rehab/new construction with a bank taking the risk during the pre-conversion phase, and a forward commitment from a Freddie Mac Targeted Affordable Lender and Freddie Mac to acquire the permanent phase component of the tax-exempt loan at an agreed upon fixed rate at Conversion. Does require separate bank (probably with separate counsel) pre-conversion versus most other private placements. R. Wade Norris Eichner Norris & Neumann PLLC

32 4. FREDDIE MAC/FANNIE MAE 18-YEAR FIXED-RATE PUBLICLY OFFERED BOND FINANCING STRUCTURE May be the best alternative for a sub rehab/new construction deal where private placement alternatives are unavailable or unattractive and Borrower does not want to pursue FHA. Requires a separate Fannie or Freddie approved bank to take pre-conversion risk. Fixed rate loan throughout. Rated, publicly offered bonds, credit enhanced by Freddie Mac or Fannie Mae. Upfront Fees (est.) Underwriting 18-year Bond Maturity 18-Year Bond Interest Rate 3.50%* Credit Enhancement Servicing 0.12 Liquidity Fee 0.0 Remarketing Agent 0.0 Issuer Trustee DUS Lender Origination 1.0% Construction Lender Origination 1.5 Bond Costs of Issuance % - 4.5% *Estimated 18-Year Fixed Rates as of 02/10/16; Freddie Mac: 1.15 DSCR, 80-90% LTV, 35-year loan amortization; Fannie Mae: DSCR, 80-90% LTV, 35-year loan amortization Total Fee Stack 1.47% % Total Mortgage Rate (Underwriting Rate and *Credit Enhancement may be as low as basis points for very low loan-tovalue, high debt service coverage loan with major developer in strong market, Actual Borrowing Rate) 4.97% % producing end loan rate in mid-4.0% to 5.0% range. R. Wade Norris Eichner Norris & Neumann PLLC

33 5. NEW FANNIE MAE 16-YEAR FIXED-RATE TAX-EXEMPT MONTHLY MBS PASS-THROUGH PUBLICLY OFFERED BOND FINANCING STRUCTURE (MOD REHAB) Over the past few years, over $3.0 billion of agency backed (Ginnie Mae, Freddie Mac, Fannie Mae) tax exempt monthly pass-through bonds have been sold in the single family mortgage revenue bond market, lowering coupons by basis points versus traditional semi-annual pay long-term tax exempt bonds. Buyers want the security of an immediate, monthly agency pass-through. In January, Fannie Mae closed a $21.75 million, 16-year fixed rate tax exempt multifamily Fannie Mae MBS pass-through issue of the Illinois Housing Development Authority for Fullerton Apartments, a mod rehab project. A second $23,150,000 issue by the Texas Department of Housing and Community Affairs for the Williamsburg Apartments closed in December of These Bonds were Aaa rated by Moody s and were publicly offered by RBC Capital Markets, as the underwriter. Under this structure, the Trustee on these monthly-pay fixed-rate bonds simply passes through the monthly Fannie Mae MBS payment to the Bondholder on next business day on a tax exempt basis. R. Wade Norris Eichner Norris & Neumann PLLC

34 COMPARISON OF FANNIE MAE TAX-EXEMPT MONTHLY MBS PASS-THROUGH STRUCTURE TO OTHER FANNIE MAE ENHANCED EXECUTIONS Date of Official Statement $ Amount of Bonds/Loan 10-Year U.S. Treasury Taxable Fannie Mae MBS Estd. Semi- Annual 16-yr TE Fannie Mae Enhanced Bonds TE Bond Yield 16-yr Fannie Mae Monthly MBS Pass-Through Servicing and Guarantee Fee ML Rate IHDA Fullerton Ct. 01/21/15 $21,750, % 3.05% 3.25% 3.00% Savings v. Taxable MBS 5 basis points Savings v. TE Semi- Annual Long-Term Bond 25 basis points 0.97% 3.97% TDHCA Williamsburg 12/02/15 $23,150, % 3.45% 3.50% 3.34%* Savings v. Taxable MBS 11 basis points Savings v. TE Semi- Annual Long-Term Bond 16 basis points 1.01% 4.46% *Bonds had a bond coupon equal to the MBS Pass-Through rate of 3.45% and were sold at a price of 101%. R. Wade Norris Eichner Norris & Neumann PLLC November 18 20, Fairmont Millennium Park Chicago 19

35 NEW FANNIE MAE 16-YEAR FIXED-RATE TAX-EXEMPT MONTHLY MBS PASS-THROUGH PUBLICLY OFFERED BOND FINANCING STRUCTURE (MOD REHAB) (CONT D) Coupon is expected to decline even further as more cross over MBS buyers come in on future deals and if tax exempt rates continue to slowly recover versus taxable rates as the distrust of municipal bonds and other non-u.s. government debt securities created by the 2008 financial crisis continues to subside. One would expect this execution to become more and more competitive, especially in markets where tax exempt bond volume is available through issuers who charge very low (e.g., 5-10 basis points per year) or no ongoing fees. In such markets, the monthly MBS pass-through structure almost eliminated (reduces to about 45 days) the net negative arbitrage associated with the Borrowers, paying two sets of interest under the short-term cashbacked bonds plus taxable Fannie Mae MBS sale structure. For sophisticated developers, this structure allows potentially more flexible prepayment options; yield maintenance through 10 years to par call versus absolute 10-year lock-out associated with traditional municipal bonds. On the other hand, short-term cash backed bonds plus taxable Fannie Mae MBS sale may be better option where ongoing Issuer fees are very high (eg., basis points). R. Wade Norris Eichner Norris & Neumann PLLC

36 SUMMARY OF BORROWING/UNDERWRITING RATES Estd. Actual All-In Borrowing and Underwriting Rate 1. Short-Term Cash Backed Tax Exempt Bonds with Taxable Loan Sale FHA/ GNMA 223f (Mod Rehab) 3.50% FHA/ GNMA 221(d)(4) (Sub Rehab / New Cons) 4.00% Fannie Mae or Freddie Mac Mod Rehab (Freddie deemphasizing see TEL Structure Below) 4.50% 2. Private Placement -Mod Rehab 4.15% to 4.35% -Sub Rehab/New Cons Cons Period 2.30% to 2.55% Floating Perm Period 4.45% to 4.75% 3. New Freddie Mac TEL Program (Mod Rehab, Sub Rehab, New Cons) (Cons Period; SIFMA or LIBOR ) Perm 4.20% to 4.85% (lower end for mod rehab) Year Maturity FR Freddie/Fannie Publicly Offered Bonds (Sub Rehab/New Cons or Forward Loan) 5.00% to 5.20% 5. New 16-Year FR Fannie Mae Tax Exempt Monthly Pass-Through Publicly Offered Bond Structure (Mod Rehab) 4.00% to 4.50% R. Wade Norris Eichner Norris & Neumann PLLC