NALHFA Multifamily Workshop FINANCING PANEL

NALHFA WORKSHOPFinancing and Partnering

Creating Affordable Housing with Tax-Exempt Bonds and Low-Income Housing Tax Credits

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©2011 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC

Raymond James® is a registered trademark of Raymond James Financial, Inc.

Nicholas HofferVice President – Raymond James

[email protected](727)567-1263

9/13/2013

ROLE OF UNDERWRITER & SYNDICATOR

1. Coordination and Execution

2. Financial Structuring

- Collateralized Revenue Bonds

3. Tax Credit Equity Investing

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COORDINATION & EXECUTIONWhy? Who? What? When?

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BENEFITS

Tax-exempt bonds are required to secure 4% low income housing tax credits.

Tax-exempt financing often allows projects to qualify for property tax abatement.

Historically, tax-exempt bonds carried interest rates that were lower than conventional financing.

Tax-exempt credit-enhancement programs typically allow for more aggressive underwriting than conventional financing offered by the same lenders, including:

► Higher allowable LTV/LTC;

► Lower required DSCR;

► Longer amortization and maturity;

► Low/no equity required;

► Increased appraisal value; and

► Forward pricing/commitment available.

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► Lender / Credit Enhancer

► Lender / Credit Enhancer’s Counsel

► Tax Credit Equity Provider

► Tax Credit Equity Provider’s Counsel

► Trustee

► Trustee’s Counsel

► Rating Agency

FINANCING PARTICIPANTS

► Issuer

► Bond Counsel

► Issuer’s Counsel

► Financial Advisor

► Underwriter(s)

► Underwriter’s Counsel

► Borrower / Developer

► Borrower’s Counsel

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MAJOR DOCUMENTS

Borrower

Trustee

3

Underwriter

Issuer

1. Trust Indenture, between Issuer and Trustee, creating a trust estate whereby Issuer issues bonds and assigns its rights under the Loan Agreement (and other loan documents) to secure such bonds.

2. Loan Agreement (and other loan related documents such as a Promissory Note and a security instrument such as a Mortgage) evidencing the loan of bond proceeds from Issuer to Borrower, and Regulatory Agreement mandating the use of the real estate for a finite period of time.

3. Bond Purchase Agreement obligating Issuer to sell, and Underwriter to buy, the bonds when and if issued.

4. Official Statement, containing disclosures about the bonds (including information about Issuer, Borrower, Project, and Trustee) and used by Underwriter to market the bonds to investors.

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FINANCING TIMELINE

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Bond Financing TeamDeveloper Team

Week 1► Developer selects underwriter and works with underwriter to determine: appropriate issuer; availability of

private activity bond volume allocation; optimal financing structure and possible forms of credit enhancement, if any; and various other financing participants.

Weeks 2 through 7 (or longer for FHA)► Owner and underwriter finalize proposed financing structure and team.► Application filed with lender or credit enhancer, if any, which begins loan underwriting process.► “Official action” or “reimbursement” resolution passed by issuer.► Borrower applies for private activity bond volume allocation.

FINANCING TIMELINE

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11-12 Weeks prior to Closing► Underwriter prepares and circulates initial financing participants list, rough financing timetable and basic

term sheet.► “All hands” organization meeting or conference call to review financing.

8-10 Weeks prior to Closing► Bond counsel circulates initial drafts of the bond documents.► Credit enhancer’s counsel counsel, if any, circulate(s) initial drafts of credit enhancement commitment(s)

and documents.► Underwriter’s counsel prepares and distributes initial drafts of the underwriting documents, including a

remarketing agreement for variable rate financings.

FINANCING TIMELINE

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6-7 Weeks prior to Closing► “All hands” meeting or conference call to review comments on initial drafts of documents.► Respective counsels prepare revised drafts of documents reflecting first round of comments.► Underwriter submits documentation and cash flows to rating agency, if any.

4-5 Weeks prior to Closing► Obtain private activity bond volume allocation: key event as borrower must normally close within 60 to

90 days from the date of allocation, depending on issuer and/or state, or lose the allocation.► Notice published (minimum of 14 days) for TEFRA hearing by the issuer.► Initial comments received from rating agency, if any.► Documents in “substantially final form” submitted to the issuer.

FINANCING TIMELINE

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3-4 Weeks prior to Closing► TEFRA hearing held by the issuer; issuer passes bond resolution and approves TEFRA hearing.► Credit enhancement commitment received, if any; rating received from rating agency, if any.► 4% low income housing tax credit commitment delivered and basic equity structure finalized.► Preliminary Official Statement finalized, “deemed final” by the issuer and/or borrower, and printed and/or

published electronically.

2-3 Weeks prior to Closing► Underwriter prices and sells bonds; Bond Purchase Agreement executed.► Parties commence preparation of final documents, including pricing information.► Bond counsel circulates closing certificates.

FINANCING TIMELINE

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1-2 Weeks prior to Closing► Conference call to discuss comments on final documents, closing certificates, and other materials

needed to close, prior to closing the bonds.► Final Official Statement published.

Week of Closing► Transaction “pre-closed” on one day and closed/funded on the following day or the second following day.

FINANCIAL STRUCTURINGTraditional AlternativesRecent Developments

Collateralized Revenue Bonds

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TRADITIONAL FINANCING ALTERNATIVES

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Current Market Rates – Permanent Phase

Typical Underwriting Metrics

Non-Enhanced*

7.50 – 9.00%

Amort: 30-35 yrsMaturity: I/O+15-35 yrs

LTV: 65-90%Min DSC: 1.20x

Timeline: 60-150 days

* Depends solely on the strength of the real estate

and/or the sponsors.

Direct-Pay C/E

6.50 – 7.00%


LTV: 80-90%Min DSC: 1.15x

Timeline: 90-120 days

Priv. Placement

6.20 – 7.50%


LTV: 70-95%Min DSC: 1.05-1.15xTimeline: 90-120 days

A- – Non-Rated AAA/AA Non-Rated

REMINDER—MAJOR DOCUMENTS

Borrower

Trustee

3

Underwriter

Issuer

1. Trust Indenture, between Issuer and Trustee, creating a trust estate whereby Issuer issues bonds and assigns its rights under the Loan Agreement (and other loan documents) to secure such bonds.

2. Loan Agreement (and other loan related documents such as a Promissory Note and a security instrument such as a Mortgage) evidencing the loan of bond proceeds from Issuer to Borrower, and Regulatory Agreement mandating the use of the real estate for a finite period of time.

3. Bond Purchase Agreement obligating Issuer to sell, and Underwriter to buy, the bonds when and if issued.

4. Official Statement, containing disclosures about the bonds (including information about Issuer, Borrower, Project, and Trustee) and used by Underwriter to market the bonds to investors.

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FUND FLOWS—NON-CREDIT ENHANCED

Borrower

Trustee2

1

Investor(s)

Underwriter

Issuer

Project

1. Issuer sells Bonds to Underwriter pursuant to Bond Purchase Agreement; Underwriter sells Bonds to Investor(s); proceeds from the sale of Bonds is placed on deposit with Trustee.

2. Trustee lends Bond Proceeds to Borrower pursuant to Loan Agreement; Borrower uses Bond Proceeds to acquire, construct, and equip the Project.

3. Project generates Revenue which Borrower uses to make Loan Payments to Trustee.

4. Trustee makes Bond Payments to Investors.

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Bonds

BondProceedsBonds

BondProceeds

BondProceeds

BondProceeds Revenue

LoanPayments

3

BondPayments

4

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FUND FLOWS—DIRECT-PAY CREDIT ENHANCED

Borrower

Trustee2

1

CreditEnhancer

Investor(s)

Underwriter

Issuer

Project

1 11

5

3

2

Bonds

BondProceedsBonds

BondProceeds

BondProceeds


LoanPayments

Reimbursement for Loan Payments

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BondPayments

1. Issuer sells Bonds to Underwriter pursuant to Bond Purchase Agreement; Underwriter sells Bonds to Investor(s); proceeds from the sale of Bonds is placed on deposit with Trustee.


3. Credit Enhancer advances funds from its credit enhancement facility to Trustee to make Loan Payments on behalf of Borrower.


5. Project generates Revenue, which the Borrower uses to reimburse Credit Enhancer for advanced Loan Payments.

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FUND FLOWS—PRIVATE PLACEMENT

Borrower

Trustee2

1

Investor

Issuer

Project

1

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Bonds

BondProceeds

BondProceeds


LoanPayments

3

BondPayments

4

1. Issuer sells Bonds to Investor; proceeds from the sale of Bonds is placed on deposit with Trustee.


3. Project generates Revenue which Borrower uses to make Loan Payments to Trustee.


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RECENT MARKET DEVELOPMENTS

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Tax-exempt markets continue to be inefficient

compared to taxable markets.

FHA 221(d)(4)42y term / 40y amort. / 2y IO► Tax-exempt*: 6.45%► Taxable: 5.45%

Fannie Mae / Freddie Mac17y term / 35y amort. / 2y IO► Tax-exempt*: 6.50% ► Taxable: 5.65%

* Tax-exempt structures also include significant negative arbitrage during construction.

Multifamily RevenueBond Issuance

Interest Rates

Par

Am

ount

($M

illio

ns)

Per

cent

Num

ber o

f Tra

nsac

tions

0.0

2.0

4.0

6.0

8.0

200620072008200920102011201220132014

10y T Note30y MMD

0

100

200

300

400

0

2,000

4,000

6,000

8,000Par AmountNumber

COLLATERALIZED REVENUE BONDS

“Escrow Bonds”

► Short-term bond financing through the “placed in service” date.

► 100% collateralized by highly-rated investments.

► Capitalized interest is gross-funded at closing.

► Redemption provisions can provide flexibility during construction period.

► Can be used with any permanent loan, including FHA and Fannie/Freddie affordable debt products.

Tax Analysis

► Bond proceeds used to pay qualified construction costs.

► Bonds are repaid from subsidies, tax credit investments, or other forms of financing.

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CRB SECURITY & LOAN ADVANCES

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BondProceeds

1

4

1. Bond Investor purchases the Collateralized Revenue Bonds (“CRBs”).

2. Trustee invests the Bond Proceeds in direct obligations of the Federal Government (“US Gov Sec”) maturing before the maturity date of the CRBs.

3. Trustee funds Borrower’s draw requests upon requisition, but only after receipt of at least the same amount of Loan Proceeds.

4. After the “placed-in-service” date, Trustee retires the CRBs with maturing US GovSec.

Borrower

TrustIndenture

Bond Investor

US GovSec

2

3 3

Lender

LoanProceeds

FUND FLOWS—CRB

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BondProceeds

LoanProceeds

1

6

6

TrustIndenture

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1. Bond Investor purchases the Collateralized Revenue Bonds (“CRBs”).

2. Trustee deposits proceeds from the sale of CRBs in Project Account of the Trust Indenture.

3. Borrower makes draw requests to Lender, with which funds Borrower pays project related costs.

4. Lender releases funds raised by selling the loan in the taxable capital markets (or from its balance sheet) to Trustee.

5. Trustee deposits Lender’s loan proceeds into Escrow Account and simultaneously releases funds in Project Account to Borrower. The combined balance of Project Account and Escrow Account never drops below principal amount of CRBs.

6. After the ‘placed-in-service’ date, Trustee retires the CRBs with amounts held on deposit in Escrow Account.

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3

2

Trustee

ProjectAcct

EscrowAcct

Borrower

LenderTaxable Capital Markets

Bond Investor

4

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TAX CREDIT EQUITY INVESTINGRisks

Investment Structuring

©2011 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC

Raymond James® is a registered trademark of Raymond James Financial, Inc.

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OVERVIEW

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The Low Income Housing Tax Credit (“LIHTC” or “Credit”) was enacted as part of the Tax Reform Act of 1986, and made permanent in 1993.

► 9% competitive Credits and 4% “as-of-right” (non-competitive) Credits.

LIHTC is a supply-side program offering incentives to private industry to develop new, or rehabilitate existing, affordable housing.

In order for a project to qualify for Credits it must satisfy the “Qualified Low Income Housing Test”, restricting the income of tenants and rents charged to qualifying tenants.

► “20/50 Test” – 20% of the units are reserved for tenants whose income is less than 50% of Area Median Gross Income (“AMGI”) and rents charged to qualifying tenants are capped at 15% of AMGI.

► “40/60 Test” – 40% of the units are reserved for tenants whose income is less than 60% of AMGI and rents charged to qualifying tenants are capped at 18% of AMGI.

Projects must remain in compliance with the Qualified Low Income Housing Test for a period of at least fifteen years and adhere to specific tax credit rules for a period of thirty years.

RISKS

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Construction

Subsequent to LIHTC Investor contributing capital to the project, the Eligible Basis may be reduced, generating fewer Credits.

► LIHTC Investor will receive reduced amount of Credits.

Operations

The Qualified Basis may be temporarily or permanently reduced as a result of actions taken by the property manager during the compliance period.

The project may not generate sufficient cash flow to support debt service payments (and (i) the General Partner is unable to fund operating deficits, and (ii) the Tax Credit Syndicator, acting through the Upper Tier Partnership, is unwilling to fund support loans) and the Lender forecloses on the project, redirecting the flow of Credits to the Lender.

The project may not produce the projected tax losses which will reduce LIHTC Investor’s total return.

INITIAL CASH FLOWS

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OperatingPartnership

TaxCredit

Syndicator

UpperTier

Partnership

LIHTCInvestor

GeneralPartner

Project

3

2 4

3

7

Issuer 6

Sponsor

1

5

1. The Sponsor of the project forms and capitalizes General Partner to manage the construction and operation of the project.

2. Tax Credit Syndicator forms the Upper Tier Partnership.

3. General Partner and Upper Tier Partnership form and capitalize Operating Partnership that owns the project.

4. Upper Tier Partnership sells limited partnership interests to LIHTC Investor.- LIHTC Investor’s capital contribution

represents the vast majority of tax credit equity being contributed to the project.

- Tax Credit Syndicator may guarantee the yield received by LIHTC Investor.

5. Upper Tier Partnership invests as a limited partner in Operating Partnership.

6. Issuer makes a non-recourse loan (funded by issuing bonds) to Operating Partnership, secured by a first lien mortgage on the project.

7. Operating Partnership uses (a) capital contributed by Upper Tier Partnership and General Partner, and (b) loan from Issuer to build and stabilize the project.

TAX BENEFITS FROM OPERATIONS

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TaxCredit

Syndicator

Project

2 2

1

1

1

OperatingPartnership

LIHTCInvestor

GeneralPartner

UpperTier

Partnership

1. The project generates Credits and, as a result of significant depreciation expense, tax losses (collectively, “Tax Benefits”) which are passed on to Operating Partnership which allocates Tax Benefits to Upper Tier Partnership and General Partner in accordance with tax credit and profit and loss waterfall established in the operating partnership agreement.- Tax credit and profit and loss waterfall in the

operating partnership agreement typically provides for substantially all Tax Benefits to be allocated to Upper Tier Partnership.

2. Upper Tier Partnership distributes Tax Benefits to LIHTC Investor and Tax Credit Syndicator pursuant to tax credit and profit and loss waterfall established in the upper tier partnership agreement.- Tax credit and profit and loss waterfall in the

upper tier partnership agreement typically provides for substantially all Tax Benefits to be allocated to LIHTC Investor.

DISCLAIMER

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The information contained herein is solely intended to facilitate discussion of potentially applicable financing applications and is not intended to be a specific buy/sell recommendation, nor is it an official confirmation of terms. Any terms discussed herein are preliminary until confirmed in a definitive written agreement. While we believe that the outlined financial structure or marketing strategy is the best approach under the current market conditions, the market conditions at the time any proposed transaction is structured or sold may be different, which may require a different approach.

The analysis or information presented herein is based upon hypothetical projections and/or past performance that have certain limitations. No representation is made that it is accurate or complete or that any results indicated will be achieved. In no way is past performance indicative of future results. Changes to any prices, levels, or assumptions contained herein may have a material impact on results. Any estimates or assumptions contained herein represent our best judgment as of the date indicated and are subject to change without notice. Examples are merely representative and are not meant to be all-inclusive.

Raymond James shall have no liability, contingent or otherwise, to the recipient hereof or to any third party, or any responsibility whatsoever, for the accuracy, correctness, timeliness, reliability or completeness of the data or formulae provided herein or for the performance of or any other aspect of the materials, structures and strategies presented herein. Raymond James is neither acting as your financial advisor nor Municipal Advisor (as defined in Section 15B of the Exchange Act of 1934, as amended), and expressly disclaims any fiduciary duty to you in connection with the subject matter of this Presentation.

Municipal Securities Rulemaking Board (“MSRB”) Rule G-17 requires that we make the following disclosure to you at the earliest stages of our relationship, as underwriter, with respect to an issue of municipal securities: the underwriter’s primary role is to purchase securities with a view to distribution in an arm’s-length commercial transaction with the issuer and it has financial and other interests that differ from those of the issuer.

Raymond James does not provide accounting, tax or legal advice; however, you should be aware that any proposed transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and/or legal counsel.

Raymond James and affiliates, and officers, directors and employees thereof, including individuals who may be involved in the preparation or presentation of this material, may from time to time have positions in, and buy or sell, the securities, derivatives (including options) or other financial products of entities mentioned herein. In addition, Raymond James or affiliates thereof may have served as an underwriter or placement agent with respect to a public or private offering of securities by one or more of the entities referenced herein.

This Presentation is not a binding commitment, obligation, or undertaking of Raymond James. No obligation or liability with respect to any issuance or purchase of any Bonds or other securities described herein shall exist, nor shall any representations be deemed made, nor any reliance on any communications regarding the subject matter hereof be reasonable or justified unless and until (1) all necessary Raymond James, rating agency or other third party approvals, as applicable, shall have been obtained, including, without limitation, any required Raymond James senior management and credit committee approvals, (2) all of the terms and conditions of the documents pertaining to the subjecttransaction are agreed to by the parties thereto as evidenced by the execution and delivery of all such documents by all such parties, and (3) all conditions hereafter established by Raymond James for closing of the transaction have been satisfied in our sole discretion. Until execution and delivery of all such definitive agreements, all parties shall have the absolute right to amend this Presentation and/or terminate all negotiations for any reason without liability therefor.

The information presented herein may include references to swaps or other derivative products and associated risks. This Presentation does not include a complete explanation of interest rate swaps or other derivative products or their associated risks. Before any decision with respect to the use of swaps or other derivative products can be made, you should receive a complete presentation that details such associated risks, which may be significant. You should not enter into any transaction involving swaps or other derivative products unless you fully understand all such risks and have independently determined that such transaction is appropriate for you.