HUD s Rental Assistance Demonstration Program

Transcription

1 NALHFA 2014 Annual Educational Conference April 2-5, 2014 Omni Hotel at CNN Center HUD s Rental Assistance Demonstration Program Presented By: John B. Rucker, III Executive Vice President john.rucker@merchantcapital.com

2 DEBT FINANCING STRATEGIES FOR RAD TRANSACTIONS

3 I went to see a fight and a bond deal broke out

4 4% Bond Transactions Unlike 9% tax credits, there is no ceiling or limited pool of 4% tax credits. Non-competitive. They are automatically allocated once you receive volume cap. At least 50% of the project s aggregate basis must be financed with taxexempt bonds. Minimum set-aside requirement (i.e., 20/50 or 40/60). Gross rent paid by tenants may not exceed 30% of the imputed income limitation.

5 RAD Bond Issue Challenges Often, RAD transactions are too small to finance in the bond market. Costs of issuance are too high. Can multiple RAD projects be aggregated? Who will the bond issuer be? Can one bond issue be structured with different equity syndicators?

6 How can RAD transactions get financed in today s market? Freddie Mac / Fannie Mae FHA Programs Private Placements Standard & Poor s Unenhanced Bond Program Slide 6

7 Interest rates continue to fluctuate.

8 Helicopter Ben as a child.

9 Interest rates on bond deals are priced off of the MMD index 4.75% 4.50% Recent Performance of 30-year MMD 1 (since January 2013) ** Since May 2013, 30-year MMD is up 106 basis points 4.25% 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% Source: Bloomberg. Reflects market conditions as of February 6, 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

10 Currently, taxable debt is more cost efficient than tax-exempt debt. Since 2008, we have experienced a unique opportunity to finance affordable housing by combining tax-exempt bonds with 4% LIHTC and an FHAinsured loan. Results from the fact that since the financial crisis of 2008, US Governmentbacked debt has traded at yields dramatically lower than all other long-term debt instruments, including tax-exempt bonds.

11 Why not just borrow in the taxable market? With today s low taxable loan rates, why not just borrow funds in the taxable market? Reason: Under Section 42, in order to qualify for the full value of the 4% LIHTC, at least 50% of aggregate basis of the building and land must financed from tax-exempt bond proceeds. However, tax-exempt bonds only need to remain outstanding until the project s placed-in-service date.

12 Interest rates began to move sharply higher in May when the Fed turned hawkish. 4.75% 10-Year Treasury vs. 30-year MMD % 3.75% 3.25% 3.72% (+93 bps since May 2) 2.75% 2.25% 2.65% (+102 bps since May 2) 1.75% 1.25% 5/1/2013 6/1/2013 7/1/2013 8/1/2013 9/1/ /1/ /1/ /1/2013 1/1/2014 2/1/ Year UST 30-Year MMD Source: Bloomberg. Reflects market conditions as of March 1, 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

13 FHA Programs Section 221(d)(4) and 223(f) Loans combined with Short-term Tax-exempt Bonds Rates on taxable GNMA MBS are well below rates on comparable taxexempt GNMA-collateralized bonds. With the rebound in equity pricing on 4% LIHTC deals, borrowers can take advantage of the market dislocation by issuing short-term tax-exempt bonds with conventional FHA loans. The borrower issues short-term tax-exempt bonds to meet the 50% test under LIHTC requirements. The bonds are collateralized with proceeds from a conventional FHA mortgage loan. After the project is placed in service, the tax-exempt bonds are retired with proceeds from the FHA mortgage loan. Benefits include: Permanent borrowing costs are reduced by over 100 bps Negative arbitrage greatly reduced Slide 13

14 Comparison Comparison FHA Loan Amount FHA Loan Term Tax-exempt Bond Term Traditional Long-Term Tax-exempt GNMA Backed Bonds $10,000, years 40 years Short-Term Cash-Collateralized Bonds with Taxable GNMA Sale HUD 221(d)4 $10,000, years 2 years Short-Term Cash-Collateralized Bonds with Taxable GNMA Sale HUD 223(f) $10,000, years 2 years Mortgage Loan Interest Rate Bonds 5.13% GNMA 4.75% GNMA 4.15% 3rd Party Fees 0.15% 3rd Party Fees 0.00% 3rd Party Fees 0.00% Servicing + GNMA Fee 0.25% Servicing + GNMA Fee 0.25% Servicing + GNMA Fee 0.25% Total ML Rate 5.53% Total ML Rate 5.00% Total ML Rate 4.40% Tax-exempt Bond 0.35% Tax-exempt Bond 0.35% Negative Arbitrage Deposit $1,026,000 $70, % x $10,000,000 x 2 years 0.35% x $10,000,000 x 2 years 10.26% of Mortgage Loan 0.70% of Mortgage Loan $70, % x $10,000,000 x 2 years 0.70% of Mortgage Loan For discussion purposes only. Assumes a 2-year construction period

15 FHA Programs (cont d) Section 221(d)(4) or 223(f) Loans combined with Short-term Tax-exempt Bonds Short-term Tax-exempt Bond Execution Underwriter Trustee Lender Proceeds Proceeds from Lender Investors Project Fund Proceeds Collateral Fund Construction Draw Developer Builds project These amounts will equal each other so the bond investor is always 100% secured by cash. After the project is placed in services, the taxexempt bonds will be retired with proceeds from the FHA mortgage loan. Slide 15

16 Piecing It All Together Case Study: Providence at Cascade Apartments Key financing points: 240-unit residential rental facility in Atlanta, Georgia Urban Residential Finance Authority of the City of Atlanta Revenue Bonds Series 2012 in the amount of $10,500, (d)(4) mortgage loan in the amount of $11,900,000 Short-term tax-exempt bonds were issued to obtain full syndication of 4% LIHTC QCT attracted CRA motivated LIHTC investor $500,000 soft loan from Invest Atlanta (formerly URFA)

17 Case Study: Providence at Cascade Apartments Sources and Uses of Funds Sources and Uses of Funds Sources of Funds Uses of Funds Tax-exempt Bonds 11,900,000 Acquisition Costs 5,570,000 Federal Equity 5,728,998 Construction Costs 9,735,069 State Equity 1,898,944 Professional Fees 429,524 ADA Soft Loan 500,000 Financing Fees 1,329,374 Deferred Developer Fee 444,357 Soft Costs 288,804 Reserves 1,319,529 Other 100,000 Developer Fee 1,700,000 Total 20,472,299 20,472,299

18 FNMA / Freddie Mac

19 Fannie Mae & Freddie Mac Preservation Short Term Bonds Structuring Issue enough Bonds to meet 50% test Bond Deal is essentially off to the side Savings of legal fees over Standard Freddie Mac/Fannie Mae Mod Rehab public sale structure Will have negative arbitrage on bonds as a cost which you will not have in standard public sale mod rehab structure. Allows for greater cash flow Timing Benefits Slide 19

20 Private Placements The Issuer sells bonds directly to one investor (or a limited number of sophisticated investors) without a public offering. Financing observations include: Lower issuance costs; sometimes higher interest rates Less financial disclosure No credit rating or credit enhancement required Depending on investor, 90 days for bond closing Longer call date (typically 15 years to 18 years) Debt service coverage of 1.15x 1.20x Slide 20

21 Some RAD deals may be financed without credit enhancement. Standard & Poor s currently rates unenhanced affordable housing projects investment grade, typically in the A category. Underwriting assumptions include: 1.20x DSC (HAP properties); 1.40x DSC (non-hap properties) Vacancy loss based on historical trends Occupancy capped at 95% Standard & Poor s will underwrite Section 8 rent overhang Operating expense savings accepted, but must be validated Repair and replacement reserves based on capital needs assessment report No minimum rehab per unit

22 Some bond deals may be financed without credit enhancement (cont d) Financing observations include: No credit enhancement or mortgage insurance 35-year amortization 35-year term 10-year par call 35-year interest rate currently ~ 6.00% Financial disclosures include annual audit and occupancy data days for closing 100% loan-to-value Non-recourse Bonds priced off the MMD index 1 Source: Standard & Poor s 1 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

23 Standard & Poor s Unenhanced Bond Program Case Study In May 2012, Merchant Capital served as sole manager on $9,360,000 of Residential Care Facilities for the Elderly Authority of Fulton County (The Hellenic Tower Project) Senior Living Facility Revenue Bonds Series Bond proceeds were used to finance the acquisition and rehabilitation of a 125-unit senior apartment complex known as The Hellenic Tower, located in Atlanta, Georgia. Standard SOURCES & AND Poor s USES OF assigned FUNDS its A rating on the Series PRICING 2012 OBSERVATIONS bonds using its Sources of Funds Term unenhanced affordable housing rating criteria. 3 Principal Coupon Yield Spread The Series 2012 bonds are 4 Par Amount 9,360, , Original secured Issue Discount by a first mortgage lien (270,300) and pledge 2024 of all 1,890,000 project revenues, Total 9,089, ,365, including the Section 8 HAP contract payments. Uses of Funds Project The FundSeries 2012 bonds will be amortized over 30 years at a financing rate of 1 8,004,673 Total/Ave 9,360, Debt 4.95%. Service Reserve Fund 383,149 Operations and Maintenance Fund 100,000 Cost of Issuance 2 601,878 Total 9,089,700 Notes: 1 The Project Fund includes acquisition price and rehabilitation 2 Includes underwriter s discount, attorney fees, rating agency fee, Trustee fees and other cost of issuing the bonds 3 The 2015 Term is taxable 4 The taxable bond is a spread to UST. The tax-exempt bonds are a spread to MMD ,580,

24 In Closing