Major Tax-Exempt Bond and Loan Executions for Affordable Housing Projects

Transcription

1 Major Tax-Exempt Bond and Loan Executions for Affordable Housing Projects May 15, 2017 Presented by: R. WADE NORRIS, ESQ. (202) (o) (202) (c) EICHNER NORRIS & NEUMANN PLLC th Street, N.W., Suite 750 Washington, D.C * Copyright by R. Wade Norris, Esq. May 15, All rights reserved. This document may not be reproduced without the prior written permission of the author.

2 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. 2

3 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 dollars of AA and Aaa rated paper 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? 3

4 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% 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 Jan Year MMD 10-Year UST 4

5 LONG-TERM RATE COMPARISON: 30-YEAR MMD (TAX-EXEMPT) VERSUS 10-YEAR CONSTANT MATURITY TREASURY (TAXABLE) JANUARY 1, BPS 7.00% 6.00% 5.00% 4.00% 400 BPS 3.00% 2.00% 1.00% 0.00% Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan Year MMD 10-Year UST 5

6 THE ALL IMPORTANT 50% RULE To be sure your project is worthy of the subsidy inherent in 4% LIHTC, Congress piggybacked 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.) 6

7 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. 7

8 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 or an earlier mandatory tender date* (e.g., 1.50% x 2 years or 3.0% 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 75% to 85% 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, or the taxable Fannie Mae or Freddie Mac or rural development affordable housing loan. *For 221(d)(4) new construction projects where the project is expected to be placed in service in months, we would normally set a 36-month bond maturity, but price to a 24-month mandatory tender date to minimize interest costs. 8

9 SHORT-TERM CASH-BACKED TAX-EXEMPT BONDS SUMMARY OF RELATIVE ALL-IN BORROWING RATES FHA Insured 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) Section 221(d)(4) (New Cons/Sub Rehab) 3.50%* v. 4.50%* 1.00% 4.00%* v. 4.50%* 0.50% 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 4.40% v. 4.70% 0.30% * FHA has lowered the annual Mortgage Insurance Premium ( MIP ) on most affordable housing loans from 45 basis points to 25 basis points, making the FHA execution even more competitive versus other tax exempt debt products.. 9

10 SHORT-TERM CASH-BACKED TAX-EXEMPT BONDS OTHER ADVANTAGES Total issuance costs are lower on short-term cash backed bonds than on long-term municipal bond financings backed by these FHA/GNMA and Fannie Mae credits. 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. 10

11 THE MAIN COMPETITION 2. TAX-EXEMPT BOND OR TAX-EXEMPT LOAN BANK PRIVATE PLACEMENT PROGRAMS 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 (currently 0.90%) or 1-month LIBOR (currently 1.00%) plus %) before the loan reaches Conversion or stabilized occupancy (e.g., 1.15 DSC for 90 consecutive days; 85-90% LTV). 11

12 TAX-EXEMPT DRAW DOWN BANK PRIVATE PLACEMENT BOND OR TAX-EXEMPT LOAN FINANCING STRUCTURE MOD REHAB, SUB REHAB, NEW CONS Interest Rates Bond Rate Construction: One-Month LIBOR Mod Rehab Sub Rehab/ New Cons N/A 1.00% Plus: Spread 2.00% to 2.50% = Bond/Loan Interest Rate 3.00% to 3.50% Floating* Upfront Fees (est.) Origination % App Bond Rate Permanent: 16 to 18-year LIBOR Swap 2.45% 2.45% Bond Costs of Issuance Plus: Spread 2.00% to 2.30% 2.20% to 2.70% = Bond/Loan Interest Rate 4.45% to 4.75% 4.65% to 5.15% Credit Enhancement N/A N/A Servicing Fees Remarketing Agent N/A N/A Issuer Trustee Total Fee Stack % *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 05/15/2017; 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 nonbank provider. Total Permanent Mortgage Rate (Underwriting Rate and Actual Permanent Borrowing Rate) 4.60% to 4.90% 4.80% to 5.30%** 12

13 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 from a required pre-conversion loan equalization payment by the Borrower based on debt service coverage 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). 13

14 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. 14

15 COMPARISON OF SHORT-TERM CASH-BACKED BONDS + FHA TO PRIVATE PLACEMENTS AND OTHER EXECUTIONS While private placement perm rates may be basis points higher than FHA, private placements do offer very low perm rates described on slide 12 that are locked at closing; 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. 15

16 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. Also offers very low perm rates and potentially available in a broad range of markets. 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. 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) take pre-conversion risk versus most other private placements, thus perhaps slightly higher costs. Terms are quite comparable to those of bank private placements (slide 12). 16

17 4. NEW FANNIE MAE 16-YEAR FIXED-RATE TAX-EXEMPT MONTHLY MBS PASS-THROUGH PUBLICLY OFFERED BOND FINANCING ( M.TEBs ) STRUCTURE 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. Over the past two years, Fannie Mae has pioneered a new, 16-year fixed rate tax exempt multifamily Fannie Mae MBS pass-through structure initially for mod rehab projects. One of our underwriter clients, RBC Capital Markets, played a major role. 17

18 M.TEBs (CONT D) 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. Buyers want the security of an (almost) immediate, monthly agency pass-through. The savings in bond rate versus a taxable Fannie Mae MBS has ranged from 5 to 10 basis points, while the savings versus a semi-annual pay Fannie Mae credit enhanced tax-exempt bond has been about 15 to 25 basis points. 18

19 M.TEBs (CONT D) Bond coupon rates as low as 3.05% to 3.15%. Fannie Mae is aggressively promoting very low guaranty and servicing fees. 35-year loan amortization to 16-year balloon, 1.15 DSCR; 85-90% LTV; mod-rehab and forwards (sub rehab/new construction) executions. Result: All-in borrowing rates as low as 3.85% to 4.25% on mod rehab; 4.00% to 4.40% rate on Forwards, but several points of negative arbitrage on Forwards version. 19

20 M.TEBs (CONT D) Fannie Mae will rebate 0.75% for issuance costs to compete with private placements within Fannie Mae DUS Loan Raises guaranty/servicing fee spread but lowers out-of-pocket expense of execution to better compete with Freddie TEL and other placements. Greater prepayment flexibility yield maintenance/prepayment premium versus 16-year absolute lockout. 20

21 M.TEBs (CONT D) We Have Now Closed 7 M.TEBs Over the Past 2 Years 4 with a Large Nationwide Developer, 3 with Experienced Regional Developers COMPARISON OF M.TEBs TO OTHER FANNIE MAE ENHANCED EXECUTIONS ALL MOD REHAB LOANS Underwriter: RBC Capital Markets Date of Official Statement $ Amount of Bonds/Loan 10-Yr UST 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 Spread to 10-Yr Yield Maintenan ce Savings v. Taxable MBS Savings v. TE Semi-Annual Pay Bond ML Rate IHDA Fullerton Ct. (Nat l Dev.) 01/21/15 TDHCA Williamsburg (Regional Dev.) 12/02/15 IHDA Woodland Towers (Nat l Dev.) 06/09/16 IHDA Crossroads of East Ravenswood (Nat l Dev.) 06/21/16 IHDA Gates Manor (Nat l Dev.) 08/10/16 TDHCA Skyline Apartments (Regional Dev.) 09/09/16 JHFA Timberwood Trace (Nat l Dev.) 01/25/17 $21,750, % 3.05% 3.25% 3.00% 1.13% 10 yrs; par call 5 bps 25 bps 3.97% $23,150, %* 3.45% 3.50% 3.34%* 1.16% 15.5 yrs 11 bps 16 bps 4.46% $7,400, % 2.90% 3.02% 2.85% 1.17% 10 yrs; par call 5 bps 17 bps 3.55% $19,500, % 2.85% 2.97% 2.80% 1.09% 10 yrs; par call 5 bps 17 bps 3.50% $8,600, % 2.75% 2.90% 2.625% 1.125% 10 yrs; par call 12.5 bps 27.5 bps 3.325% $18,750, % 2.65% 2.85% 2.60% 0.93% 15.5 yrs 5 bps 25 bps 3.51% $16,000, % 3.42% 3.75% 3.40% 0.87% 15.5 yrs 2 bps 35 bps 4.39% *Bonds had a bond coupon equal to the MBS Pass-Through rate of 3.45% and were sold at a price of 101%. 21

22 M.TEBs ADVANTAGES BOND COUPON FALLING QUICKLY RELATIVE TO MARKET Note: 30 basis point decline in spread to 10-year Treasury in 7 months. IL Woodland Towers 06/09/ bps FL Timberwood Trace 01/25/17 87 bps 30 bps decline in spread to the 10-year! FURTHER DECLINES EXPECTED WITH MORE BUYERS, AS IN SINGLE FAMILY. MOREOVER: FL Timberwood Trace 01/25/ % bond coupon, but priced in a down market in a non-specialty state. Coupon would have been basis points lower, if: Specialty State (e.g., NY, CA) bps Firmer Market Tone 5 bps Possible Exchange Feature bps Bond Coupon = 3.05% to 3.15% Guaranty/Servicing, Issuer, Trustee, Rebate Fees.80 to 1.10 All-in Borrowing Cost on mod rehab execution as low as 3.85% to 4.25% *Issuer fees may vary widely, above assumes 10 bps/year. 22

23 M.TEBs (CONT D) The product may be 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 eliminates (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 and 15 years under private placements. On the other hand, short-term cash backed bonds plus taxable Fannie Mae MBS sale may be continue to be a better option where ongoing Issuer fees are very high (e.g., basis points). 23

24 SUMMARY OF BORROWING/UNDERWRITING RATES 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 Mod Rehab 4.40% 2. Bank Private Placement -Mod Rehab 4.60% to 4.90% -Sub Rehab/New Cons Cons Period 3.00% to 3.50% Floating Perm Period 4.80% to 5.30% 3. New Freddie Mac TEL Program (Mod Rehab, Sub Rehab, New Cons) 4. New 16-Year FR Fannie Mae Tax Exempt Monthly Pass-Through Publicly Offered Bond Structure (Mod Rehab) Similar to Bank Private Placements above 3.85% to 4.25% 24