Financing Structures for Affordable Housing Transactions ...

Financing Structures for Affordable Housing Transactions in the current Market

May 2019

Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190

[email protected]

Historically Flat Yield Curve (as of 04/19/19)

Source: Bloomberg. Thomson Reuters

Reflects market conditions as of February 18, 2019

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

2KENT NEUMANN | 202-973-0107 | [email protected]

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MMD UST

1-year MMD = 1.54%

1-year UST = 2.46%

30-year UST = 2.99%

30-year MMD = 2.70%

1-year vs 30-year SpreadUST: 0.53MMD: 1.16

• Short Term Cash-Backed Bonds with Taxable Perm Loan

• New Cash Backed Forward

• Fannie Mae – M-TEM / M-TEB

• Tax-Exempt Seller “take back” Bonds

• R2R FHA Affordable Program


Tax Exempt Multifamily Housing Financings in the Current Market

• Taxable construction and/or perm loans still available in the current market at historically low rates including:

• FHA/GNMA (221(d)(4) / 223(f))

• Rural Development (538 / 515)

• GSE loans (mod/light in-place rehab)

• Other (taxable) State and/or Local loan programs


Short Term Cash-Backed Bonds with Taxable Perm Loan

• Favorable Underwriting Terms (vary by product) include:

• 35-40 year amortization• Fully amortizing debt / no resizing at conversion (FHA/RD)• Non-recourse & integrated construction and perm• David Bacon wages triggered if federal funds used for sub

rehab / new construction deals• Most are structured as draw-down loans to avoid neg arb• FHA debt qualifies for 10-year hold exemption (for

acquisition credits)• Rates range from low 4% to mid 5%

KENT NEUMANN | 202-973-0107 | [email protected]

Short Term Cash-Backed Bonds with Taxable Perm Loan

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• Project still need tax exempt bonds to qualify for 4% Low Income Housing Tax Credits

• At least 50% of aggregate basis (including building and land) must be financed with tax exempt bond proceeds

• Provides a significant (~30% or higher) additional source of funds for affordable housing transactions

• Can be used with other “longer term” bond structures to meet 50% test

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4% Low Income Housing Tax Credits: The 50% Test


Short Term Cash Backed Bonds

Borrower

LP Investor

PermLender

Debt service payments

Lenderfunds

Bond proceeds

Bond proceeds

Trustee

Bond Holders

Cashcollateral

KENT NEUMANN | 202-973-0107 | [email protected] 7

Bond Amount to meet 50% test < Taxable Loan Amount (see prior slide): No additional collateral needed!

Bond Amount to meet 50% test > Taxable Loan Amount: Need other collateral sources of funds including:

• Subordinate Loan Proceeds• Seller Note• Tax Credit Equity

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Short Term Cash Backed Bonds


Methods to reduce transaction costs and generate more proceeds:

• Pooled financings – multiple projects w/ one aggregate bond issuance

• No long term bond related fees• Potential for additional tax credit equity due to increased basis• No net interest cost on bonds and in some cases, additional

investment earnings can be used for other project costs

Other Cost Saving Features/Options


Short Term Yield Curve (as of 04/19/19)

Source: Bloomberg. Thomson Reuters Reflects market conditions as of February 18, 2019Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds


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2-Year UST 2-Year MMD (plus credit spread)

2-Year MMD + credit spread 1.95

Less: 2-year UST (2.39)

Net 2-year Bond Rate (0.44)

Pricing Indications

Bond RateAvg Investment Yield

2.35%

1.95%

40 BPS Positive Arbitrage

§ Bondholders are receiving (tax exempt) interest while bonds are outstanding

§ Cash collateral can be invested in treasury while held with the Trustee

Trustee

Bond HoldersTreasury Investment

(Needs to go back to IRS)

Negative/Positive Arbitrage


Initial Cash-Backed Bond Holder

Borrower

Construction Lender

Permanent Lender

Equity Investor

Upon Conversion

Tax Exempt Bonds

LenderFunds

Bond Proceeds

Bond Proceeds

Trustee

CashCollateral

Cash Backed Forward


BondDebt Service Payments

Gross Bond Interest through PIS:

Est. Equity %:

$600,000 35.0%

Est. Bond Rate:

Est. Investment Rate:

Est. Positive Earnings:

2.00%2.50%

0.50%

Cash Backed Forward


Advantages:

§ Positive Earnings During Cash Backed Mode*:

Est. $20 Million Bond Deal

$200,000 (24 mo.)§ Additional Equity: $210,000 (18 mo.)

§ Allows Equity Investor to also serve as Construction Lender without certain tax implications

§ If Bonds > Perm Loan, allows other funds to be used as collateral (reduced construction loan)

§ In Texas, significantly reduces interest costs on construction loan due to draw down structure

Disadvantages:

§ Additional Costs of Issuance for Cash Backed Bonds:

* Subject to Bond Counsel approval§ Construction Loan is Taxable (if not already due to

relationship of parties)

$130,000 (est)

• Fannie Mae Lender provides forward commitment

• For new construction or sub rehab deals - Construction Lender needed before conversion

• Bond initially secured by cash collateral and construction loan funds and replaced at conversion with MBS

• Interest on Construction Loan and Gross Bond Interest includable in Eligible Basis

• Bonds rated “Aaa” or “AA+”

• Fannie to credit 75 bps for Bond related costs (paid upon conversion)

• Negative Arbitrage prior to conversion (~0.75% - 1.00% per year with investments)

• 4.40-4.60% Mortgage Rate: Often results in additional loan proceeds 3-4X upfront costs due to low all in mortgage rate

Fannie Mae MTEB/MTEM


• Flexible interest only period; 35 year amort (40 for some deals)

• Hybrid structure (immediate/forward) available for some mod/sub rehab deals

• Can be structured with Taxable Supplemental or Tax Exempt Earn-out debt

• Total Bonds issued in the amount equal to the greater of:

• Permanent Loan – (no other series of tax exempt bonds needed)

• 55% of aggregate basis – (second cash backed or other series of tax exempt bonds needed).

• Seller note, equity or other soft funds can be used to securitize cash backed bonds• Yields can often be blended to reduce or eliminate total negative arbitrage for the deal• Fully integrated bond and underwriting documents developed by Tiber Hudson can be

utilized

Fannie Mae MTEB/MTEM


MBS Pass Through Payment

Bond Holder

Borrower

Permanent Lender

Trustee

Construction Lender Equity Investor

Upon Conversion

Tax Exempt Bonds

Bond Payments

LenderFunds

Bond Proceeds

Bond Proceeds

CashCollateral

Fannie Mae Forward MTEB/MTEM


MortgagePayments

Negative/Positive Arbitrage for Fannie Mae Forward MTEB/MTEM

17

Bond Rate Avg. Investment Yield

2.35%

3.35%

MTEB/MTEM:100 BPS Negative Arbitrage

§ Bondholders are receiving (tax-exempt) interest while bonds are outstanding

§ Cash collateral can be invested in treasury while held with the Trustee

Trustee

BondholdersTreasury Investment

Blended Bond Yield reduces overall Negative Arbitrage cost

2.35%

1.95%

Short-Term:40 BPS Positive Arbitrage


• Many 4% preservation deals include seller financing inthe form of a subordinate “take-back” note (common inRAD transactions)

• Due to the LIHTC 50% test, tax-exempt bonds inexcess of the permanent financing are often required inthese deals

• Several ways to address this issue with various bondstructures (often with a positive result)

Tax Exempt Seller “Take Back” Note & Bonds


GOALS: (1)Lock in today’s rates for future tax

credit deals and/or(2)Qualify for exemption for 10-year

hold rule (for acquisition credits)

FHA Refinancing to Re-syndication (R2R)


• NEW LOAN: FHA 223(f) loan to refinance existingdebt or purchase project. Keep rehab to a minimum.

When ready for Bonds/4% Credits• Step 1: TPA (transfer of physical asset) process

• Step 2: Supplemental FHA 241(a) loan

• Step 3: Use short term tax exempt bonds to qualifyfor 4% tax credits

FHA Refinancing to Re-syndication (R2R)


Contact Information

Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190

[email protected]

Allison King, Esq.Direct: (202) 973-0118

[email protected]

Lauren Marcus, Esq.Direct: (202) 973-0122

[email protected]

Alex Zeltser, Esq.Direct: (202) [email protected]


mailto:[email protected]




Financing Structures for Affordable Housing Transactions ...

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