Housing Bonds Susannah Lipsyte, Associate General Counsel

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1 Housing Bonds Susannah Lipsyte, Associate General Counsel

2 Overview of NYC Housing Development Corporation Established in 1971 under laws of the State of New York as a public benefit corporation for the purpose of financing affordable multi-family housing in the City of New York Governed by 7-member Board of Directors appointed by Mayor and Governor; chaired by Commissioner of NYC Department of Housing Preservation and Development A staff of 174 manages over $13.14 billion of assets, including a multi-family portfolio of over 180,000 units with $9.17 billion in mortgage loans and loan interests as of July 31, 2014 The #1 issuer in the nation of mortgage revenue bonds for affordable multi-family housing in eight of the last ten years (2013, 2012, 2010, 2009, 2008, 2006, 2005, & 2004) CY 2013 was a record year with a total issuance of $1.9 billion, including $656 million of Capital Fund Bonds for NYCHA $21.87 billion of mortgage revenue bonds issued since inception $9.45 billion of bonds outstanding as of April 30, 2014 General obligation of HDC rated Aa2/AA+ by Moody s and Standard & Poor s, respectively Separately capitalized, mortgage insurer (REMIC) rated AA by S&P. 2

3 Municipal Bonds An obligation of the Issuer to repay the purchaser (with interest) over the life of the bond Issued in order to finance a public purpose like roads, bridges, schools and affordable housing Interest is usually tax exempt and attractive to high income people and corporations 3

The Issuer A Government or Governmental Entity Governmental Entities or Instrumentalities are created by the state or locality to perform tasks (including financing the task) for the government

4 The Issuer A Government or Governmental Entity Governmental Entities or Instrumentalities are created by the state or locality to perform tasks (including financing the task) for the government Municipal bonds exempt from federal securities laws registration requirements but not anti-fraud rules Called a Conduit when the issuer has no obligation to repay the debt because a specific revenue source is pledged to the bondholders HDC is a public benefit corporation which makes it a governmental entity of New York State 4

5 Public/Private Partnerships for Providing Affordable Housing Housing finance agencies can use the issuance of private activity tax exempt bonds coupled with low interest loans and low income housing tax credits to spur the development and preservation of affordable housing Bond proceeds are used to finance new construction or acquisition/rehabilitation of housing for persons with low and moderate incomes HDC profits coupled with City capital fund low interest loans Other issuers may use Federal or local monies to subsidize projects Private Developers (either charitable or profitmotivated entities) own such developments. Rules require different levels of affordability and compliance is monitored by the housing finance agency. 5

6 Private Activity Bonds Relate to bonds issued for private benefit Usually projects that will be owned or controlled by private entities Most regulated as you can only finance certain kinds of projects and there must be a public good related to the project. Kinds of private activity bonds: Multifamily rental housing Bonds for public works (but privately controlled) Single Family MRB 1st time homebuyers limits on mortgages Airport facilities Transportation facilities Stadiums Qualified industrial development Qualified student loans 6

7 Private Activity Bonds for Housing Qualified residential rental projects: Bond proceeds are used to finance new construction or acquisition and rehabilitation of housing for persons with low and moderate incomes To be for low and moderate income persons: 20% of the units must be for people earning 50% of median income or 40% of the units must be for people earning 60% of median income in NYC, it is 25% at 60% of median income because this is such a high-cost region 7

8 Private Activity Bonds What are the limits? volume limitation on a per capita basis Volume Cap of $100 per person (increases at inflation) Minimum of $285 million per state requires a public hearing (TEFRA) maximum bond maturity (relating to economic life of project) qualifying expense requirements (95/5) Relevant for determining funds for other uses such as community facilities, garages, commercial or retail. Equity or subsidy can pay for non-eligible bond uses. limitations on spread to Issuer 8

9 Steps to Issuing Tax Exempt Bonds Create development plan for affordable housing project Consult with bond issuer and its counsel regarding eligibility Find a bank or financial institution to act as credit enhancer on bonds Have issuer adopt a reimbursement resolution not later than 60 days from expending significant money on the project Apply for tax exempt financing and as-of-right tax credits Engage working group including: underwriter, issuer, borrower, credit enhancer, tax credit syndicator, trustee and all of the counsels that represent the team 9

10 Steps to Issuing Tax Exempt Bonds Drafts of documents relating to the bonds, underwriting, tax credits and credit enhancement are distributed TEFRA Hearing for public opinion All credit approvals received Issuer s approval of transaction Distribution of preliminary official statement Sale of Bonds Final Official Statement issued Closing 10

11 Low Income Housing Tax Credits Primary mechanism encouraging private development of affordable housing (for profit and not-for-profit) Governed by Section 42 of the Internal Revenue Code Implemented by state housing agencies Tax Credits > Tax Exemption $2.30 contribution per person/per state Credits are purchased for less than face value each dollar of credit is valued by market demand (usually between $.95 and $1.00 per dollar of credits) Pricing is even higher ($1.15 or more) in places with strong CRA demand like NYC, LA and SF Discretionary program 11

12 Tax Exempt Bonds Come with LIHTC: 50% Test In most instances pursuant to IRC Sec. 42(h) each building must receive an allocation of LIHTC from the state tax credit agency in order to qualify for tax credits A project may qualify for tax credits as of right if 50% or more of the aggregate basis of such building (and the land on which the building is located) is financed by tax-exempt volume cap bonds (private activity bonds). The as of right credits are only allocated at the 4% level and is a less generous subsidy. The state agency determines if the bond financed project has met the requirements of the qualified allocation plan and needs the credits for the project s viability. The test is performed in initial sizing for bond issuance and when the project is completed. 12

13 Recycling The Housing and Economic Recovery Act of 2008 (HERA) allowed for the recycling of prepayments from tax-exempt multifamily housing loans that would otherwise be used to redeem the tax exempt bonds that financed the pre-paying project HDC manages the recycling by issuing Convertible Option Bonds (COBs) or by directly allocating prepayments to new loans. COB structure (usually less than 1-year term and callable after 3 months) serves as an effective tool for recycling: Bridge the timing gap The statute requires that the new loan be made within six months of receipt of the prepayment and that the refunding bonds be issued (i) not later than four years of original issuance and (ii) before the maturity of original bonds (tax-credit bonds tend to have shorter term). Reduce carrying costs COB rate is usually lower than the rate for a typical four-year tax credit bond. Since this statute was put in place, HDC has developed a program that has successfully recycled approximately $893 million of tax-exempt bonds either through issuance of COBs (two-thirds) or direct allocations (one-third), to fund 67 developments containing a total of 20,387 units (3,971 units of new housing and 16,416 of preserved units). 13 HDC has also transferred over $313 million of Recycled Volume Cap to NYSHFA since 2012.

14 Recycling Recycled bonds are limited by supply and demand constraints. Supply is limited because only HFAs that issue a great deal of private activity bonds for deals with tax credits will have large prepayments available for recycling. Demand is limited because most multifamily housing requires significant subsidies and thus need LIHTC and demand for recycling would go up if volume cap was less available than is the case generally today. HDC is unusual because we have such affordable housing needs across income spectrums that we subsidize housing at non-tax credit levels and have historically been private activity bond cap constrained. 14

15 Investments from Banks are a Crucial Part of Affordable Housing Finance Banks invest in affordable housing by buying bonds, buying housing tax credits, buying other credits and providing construction loans Banks are incentivized to do this because of requirements in the Community Reinvestment Act (CRA) Lenders receive ratings from outstanding to unsatisfactory that is determined by U.S. regulatory staff Banks that may be seeking regulatory approval for mergers or changes in service seek the highest rating level CRA was a response to a historic lack of investment by banks in low income communities. 15

16 Participants in a Deal Every deal requires a multitude of players to be completed Issuer Bond Counsel Issues Bonds / Services Loans / Monitors Work Tax Credit Syndicator Syndicate s Counsel Tax Credit Agency Sells LIHTC and Invests Proceeds in Project Rating Agency Trustee Trustee Counsel Rates Bonds and Handles Transactions Credit Enhancement LOC Bank Short-Term LOC Bank Long-Term LOC Bank Counsel Mortgage Insurance Mortgage Insurance SONYMA REMIC Fannie Mae Freddie MAC Credit Enhancement / Mortgage Insurance Deal Bond Underwriter / Re-Marketing Agent Underwriter / Re-Marketing Agent Counsel Helps Size and Sell Bonds Borrower Borrower s Counsel Borrower s Financial Advisor Borrower s Accountant General Contractor Receives Proceeds and Pays Mortgage Other Gov t Approvals / Involvement 16

Questions & Answers Please visit our website: www.nychdc.

17 Questions & Answers Please visit our website: Contact: Susannah Lipsyte Associate General Counsel Phone: (212)

Private Activity Bonds

Private Activity Bonds Private Activity Bonds Subject to U.S. Treasury Regulations Below market interest rates Issued in the name of a City, County, or State Authority (NIFA) Interest on the bonds is exempt