11-19 Bond Basics

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Housing Bond Basics

A Developers Perspective

David Lakari

Renewal Housing Associates, LLC

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Questions

1. Why go through all this?

2. How long does it take?

3. What does a typical deal look like?

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Why go through all this?

Non-recourse loanHigher loan amount due to:

Tax-exempt interest rate (maybelower)

Loan insurance provided by US government oragency

Longer term loan (up to 40 years)

Lower debt service coverage requirements

Higher loan-to-value ratiosMost important of all:

Access to 4% LIHTC (not competitive)

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Why NOT to do this!

Complex & time consuming transactions Tax-exempt interest rates are sometimes

higher than taxable rates (like right now)

LIHTC investors sometimes have lessinterest in bond-financed 4% credit dealsthan in 9% credits (also true now)Perceived as higher risk due to more debt

High debt increases interest expense, thusgreater Tax Losses passed through toinvestors who may not want them.

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How long does it take?

Weekly bond callsPrepare

documentsMarket &pricebonds

Closing!Commence rehab

Begin bond calls

(monthly or bi-weekly)

HUD & EquityunderwritingLegal noticesPublic hearing

HUD firmcommitment

Engageprofessionals

LenderBond underwriter

Equity investorLawyersArchitectThird partyreports

Market study

AppraisalArchitectural

reviewBond inducement

Prepareapplications

Month 1-3 +?Months 3-6 +?

Months 6-8 +?

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Sources & Uses

Tax-exempt bonds $ 4,400,000LIHTC equity 2,100,000

Seller loan 2,850,000

OHFA soft loan 250,000Interim income 400,000

Cash purchased 400,000

Developer fee loan 100,000TOTAL SOURCES $ 10,500,000

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Sources & Uses

Acquisition $ 4,200,000Hard construction cost 3,400,000

Design fees 300,000

Financing fees & interestexpense during constr.

650,000

Costs of bond issuance 150,000

LIHTC fees 200,000Developer fees 1,000,000

Reserves 600,000

TOTAL USES $ 10,500,000

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Summary

1. Why go through all this?

2. How long does it take?

3. What does a typical deal look like?

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Bond Financing for

Residential Rental Facilities

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Table o f Cont ents

Bond What Is It?

Types of Multifamily Housing Bond Issues

Requirements Applicable to Multifamily Housing BondFinancings

Benefits of Issuing Tax-Exempt Bonds

Typical Participants of a Bond Deal

Typical Bond Documents

Flow of Funds

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Bond What I s It ?

A debt investment in which an investor loans money to an entity (corporate or governmental)that borrowers the funds for a defined period of time at a fixed interest rate. Bonds are usedby companies, municipalities, states and U.S. and foreign governments to finance a variety ofprojects and activities.

Bonds are commonly referred to as fixed-income securities and are one of the three main

asset classes, along with stocks and cash equivalents. The indebted entity (issuer) issues abond that states the interest rate (coupon) that will be paid and when the loaned funds (bondprincipal) are to be returned (maturity date). Interest on bonds is usually paid every sixmonths (semi-annually). The main categories of bonds are corporate bonds, municipalbonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simplyTreasuries.

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Types of Mul t i fam i ly Housing Bond Issues

New Money Issues

Proceeds are used to finance the construction or acquisition and, in somecases, rehabilitation of a multifamily rental housing project

Private Activity Bond Issues

Section 501(c)(3) Bond Issues Essential Function or Government Purpose Bond Issues

Refunding Issues

Proceeds are to be used to pay off bonds previously issued to finance amultifamily rental housing project, generally to achieve significant savings in

interest rates

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Requi rem ent s Appl icab le t o Mul t i fam i ly Hous ing Bonds

Section 142(d) permits the issuance of tax-exempt bonds to finance the

construction or acquisition and rehabilitation of multifamily housing projects to beowned by profit motivated sponsors if a number of requirements are met

Residential rental housing

Low income occupancy requirements

Qualified Project Period

15% rehab requirement on acquisition financings

Prohibition of tax-exempt refinancing for existing owners Alternative minimum tax

Good Costs/Bad Costs

2% Costs of Issuance Limitation

Required Approvals

Public approval or TEFRA requirement

Volume Allocation Issuer and State (if reqd)

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Benef i ts o f Issu ing Tax -Ex em pt Bonds

Low Interest Rates on Borrowing

Reduce the all-in borrowing rate

Often increase available loan proceeds

Additional Equity Proceeds from 4% Low Income Housing Tax Credits

Private activity bonds generally eligible to receive 4% low income housingtax credits

Less competition for bonds versus 9% credits

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Typica l Par t ic ipants o f a Bond Deal

Underwriter Underwriters Counsel

Issuer

Issuers Counsel/Consultant

Bond Counsel

Owner

Owners Counsel

Owners Financial Consultant

Credit Enhancer

Credit Enhancers Counsel

Construction Phase Credit Enhancer and Counsel

RatingAgency

Trustee and Trustees Counsel

Tax Credit Syndicator and Counsel

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Typica l Par t ic ipants o f a Bond Deal (c ont .)

Issuer

Any State, political subdivision, agency, authority or other legal entity authorized under state lawto borrow money through the creation and sale of debt. The Issuer generally serves as aconduit i.e. they do not use their credit rating to support the bonds.

Common goals may include providing rental housing where supplies are tight and for persons ofmoderate, low or very low income

Issuers Counsel A lawyer or firm acting on behalf of the Issuer by providing a legal opinion regarding the legal

status of the Issuer, the Issuers authority to issue debt and the Issuers authority to execute thebond documents.

Bond Counsel

Provides a legal opinion to the bondholders as to the validity of bonds under state law and the

tax-exempt status of bonds under federal and state law. Drafts main financing documents such as Indenture, Financing Agreement, Regulatory

Agreement and closing papers

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Underwriter A municipal securities dealer who assists the owner in assessing the availability of private

activity volume cap, choosing optimal financing structure (including credit enhancement, ifany), coordinates financing participants, obtains rating, if any and sells the bonds

Underwriters Counsel

A lawyer or firm acting on of behalf of the Underwriter in conducting a due diligence analysisof the Issuer (or conduit borrower) while also drafting the Official Statement, Bond PurchaseAgreement, Continuing Disclosure Agreement and if applicable, the RemarketingAgreement.

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Owner

Develops, builds, owns and often manages the project

In some cases, may be a Section 501(c)(3) corporation, the issuer or another public body

Owners Counsel

Passes on legal matters for owner

Should be experienced in real estate matters and bond financings

Owners Financial Consultant

Some owners may engage financial consultant to advise them on matters relating to interestrates, alternative financing structures, issuer requirements, credit enhancement, etc.

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Credit Enhancer

A government sponsored enterprise, federal agency, bank, or insurance company that entersinto a formal and legally binding pledge of financial support to strengthen the credit of alower-rated Issuer. The Credit Enhancer assures timely repayment of the bonds this iswhat gives most bond issues their AA or AAA rating and results in lower interest rates.

Credit Enhancers Counsel

Drafts credit enhancement documents, passes on legal matters for credit enhancer andreviews and comments on bond documents and closing papers

Construction Phase Credit Enhancer and Counsel

Some highly competitive long-term credit enhancers (such as Fannie Mae, Freddie Mac andmost bond insurers) generally will not accept the risk of default during construction orrehabilitation and lease-up (most banks and FHA will accept this risk)

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Rating Agency

Most credit enhanced bonds are rated AAA or AA (Standard & Poors) or Aaa or Aa(Moodys) the top two categories which produce lowest interest rates for an issue of agiven maturity

Trustee and Trustees Counsel

Administers the trust indenture and makes payments to bondholders

Also serves as dissemination agent under the Continuing Disclosure Agreement on mostfixed rate financings

Tax Credit Syndicator and Counsel

Sell credits to investors to generate equity for the project

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Typica l Bond Doc um ent s

Trust Indenture (between Issuer and Trustee)

The Trust Indenture establishes the trust estate which serves as the security for a bondtransaction. The trust estate may consist of payments made by the borrower under theloan agreement, revenues pledged to the payment of the bonds or any other collateralpledged to the payment of the bonds.

The Trust Indenture also provides the terms of the bonds, including payment dates,maturities, interest rates, redemption provisions, registration, transfer and exchange. andother basic financial terms.

Loan or Financing Agreement (between Issuer, Trustee and Owner)

Prepared by Bond Counsel

Sets forth terms under which bond proceeds are loaned to the Owner to provide for theconstruction or acquisition and rehabilitation of the project

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Typica l Bond Doc um ent s (c ont .)

Regulatory Agreement (between Issuer, Trustee and Owner)

Prepared by Bond Counsel

Details certain provisions of the Internal Revenue Code and regulations applicable to tax-exempt multifamily housing revenue bonds

May include certain certificates required by the Internal Revenue Code

Official Statement (between Underwriter and potential buyers of the bonds) Normally prepared by Underwriters Counsel and signed by the Issuer and/or the Owner

Provides disclosure to investors and potential investors regarding the terms of the bonds,security, risk factors and financial and operating information concerning the Owner (similar to astock prospectus)

The Official Statement is used by the Underwriter to sell the bonds

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Typica l Bond Doc um ent s (c ont .)

Bond Purchase Agreement (between Issuer, Underwriter and Owner)

Prepared by Underwriters Counsel

Provides that, upon the satisfaction of certain requirements, the Issuer will agree to issue thebonds following the pricing of the bonds and the execution of the Bond Purchase Agreement

Other Common Documents

Mortgage or Deed of Trust Credit Enhancement Facility

Reimbursement Agreement

IntercreditorAgreement

Continuing Disclosure Agreement

Remarketing Agreement

Various closing certificates

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Tradi t iona l St ruc t ur ing Opt ions

Revenue

Bonds

UnratedUnenhanced

RatedEnhanced

Variable RateLetter of Credit Bond Insurance FHA / USDAFixed Rate

Fixed RateVariable Rate

May SwapDesired % toFixed Rate

Direct Placement

RatedUnenhanced

Fixed Rate

May SwapDesired % toFixed Rate

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FHA (HUD) Insur ed Loans

Loan funded with private capital but federallyguaranteed, administered through HUD

Combined with GNMA guarantee to achieve AAA rating

Long term, fixed interest rate

Maximizes loan dollars Low interest rate

Mortgage insurance premium

Non-recourse to borrower

Assumable

Often used in projects involving other federal programs

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New Cons t r uc t ion /

Subst ant ia l Rehabi l i t a t ion

Insured under Section 221(d)4

Construction and permanent loan

Current interest rate

5.65% plus 0.45% MIP (taxable)

5.45% plus 0.45% MIP (tax exempt)

40 year term

Maximum mortgage amount, lower of:

90% of NOI (1.11 DSCR)

90% of project (replacement) cost

Per dwelling unit limit

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Subst ant ia l Rehabi l i t a t ion

Like new standard - no replacement needs 5 yearsafter project completion

Substantial Rehab definition:

$6,500/unit x High Cost Factor ($16,250/unit)

Substantial replacement of two or more major buildingcomponents

15% of replacement cost

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Acquis i t ion/Ref inance

Insured under Section 223(f)

Current interest rate

4.75% + 0.45% MIP (taxable)

5.45% +0.45% MIP (tax exempt)

35 year term

Maximum loan amount the lower of:

85% NOI (1.17 DSCR)

85% LTV

85% project (replacement) cost

Per dwelling unit limits

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Ac quis i t ion/Ref inanc e c ont

No Prevailing Wage/Davis Bacon

Critical health/safety repairs must be completed prior toclosing

Initial repair escrow

Initial/ongoing replacement reserve deposit sufficientlycapitalized for entire loan period

Cash out up to 80% LTV

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Proc ess ing T im ef ram e

221(d)4:

Preliminary application preparation 120-180 days

Preliminary application review 45 days

Firm application preparation 120-180 days

Firm application review 45 days

Closing 30-60 days

223(f):

Firm application preparation 120-180 days

Firm application review 60 days

Closing 30-45 days

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Transac t ion Cost s

Lender Financing/Placement Fee 1% - 3.5% of insured mortgage

Lenders Reviewers Physical Conditions Needs Assessment - $6,500 Market study/appraisal - $11,500

Architectural/cost review - $10,500 HUD Fees

Initial MIP 0.45% x insured mortgage Application Fee 0.30% x insured mortgage Inspection Fee 0.50% x improvements

Legal Fees Borrowers Counsel - $20,000 Lenders Counsel - $30,000

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TRANSACTION COSTS c on t

Bond Issuance Costs ($4.5m loan)

Underwriter $45,000

Underwriters Counsel $25,000

Bond Counsel $30,000 Issuer/Issuers Counsel $18,500

Trustee/Trustees Counsel $10,000

Rating Agency $10,000

Lag Deposit, Printing, etc $20,000 Negative Arbitrage $?????

FLOW OF FUNDS

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BORROWER/

RENTALPROJECT

FLOW OF FUNDS

FHA LENDER

GNMA ISSUER/SERVICER

GNMA

(Processing Agent)

BOND

TRUSTEE

BONDHOLDER

(Investor)

BOND ISSUER

(GovernmentAgency)

BONDUNDERWRITER

BOND

COUNSEL

Loan Agreement

Trust

Indenture

P&I Payments

Loan $

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When does an FHA/HUD insur ed loan

m ake sense?

Best used when . . .

Sponsor has long term site control

Maximum loan proceeds are essential

Sponsor requires fully non-recourse debt When used in concert with other public resources

Minimum loan size - $3,500,000 +

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Rec ent HUD Guidel ines for

FHA/LIHTC Transac t ions

LIHTC Cash Escrow reduced to 20% of mortgagablecosts

Final plans and specifications submitted prior to closing

HUD Cost Certification not required where loan to cost isless than 80%

Firm Commitment issued conditioned upon 2530approval

Designation of a LIHTC Coordinator in each HUB andProgram Center office

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FHA/Bond Issues

20% of LIHTC equity (and all other sources) must bedeposited with HUD Lender at Initial Closing. Balance ofLIHTC equity paid in during construction

Need to coordinate HUD underwriting with tax credit

equity underwriting

Bonds must be used to finance at least 50% of basis.This may require issuing B bonds

Borrower must work closely with Bond Underwriter to

understand and structure Neg Arb and B bondissuance costs.

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FHA/Bond Issues c ont

Choose cast of characters carefully.

FHA Lender

Bond Underwriter

Tax Credit Equity Investor Bond Counsel

Issuer