financing structures for affordable housing transactions
TRANSCRIPT
Financing Structures for Affordable Housing Transactions in the current Market
May 2019
Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190
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]
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049
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
3KENT NEUMANN | 202-973-0107 | [email protected]
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
4KENT NEUMANN | 202-973-0107 | [email protected]
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
5
• 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
6
4% Low Income Housing Tax Credits: The 50% Test
KENT NEUMANN | 202-973-0107 | [email protected]
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
8
Short Term Cash Backed Bonds
KENT NEUMANN | 202-973-0107 | [email protected]
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
9KENT NEUMANN | 202-973-0107 | [email protected]
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
10KENT NEUMANN | 202-973-0107 | [email protected]
1.00
1.50
2.00
2.50
3.00
3.50
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
1/1/2018
2/1/2018
3/1/2018
4/1/2018
5/1/2018
6/1/2018
7/1/2018
8/1/2018
9/1/2018
10/1/2018
11/1/2018
12/1/2018
1/1/2019
2/1/2019
3/1/2019
4/1/2019
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
11KENT NEUMANN | 202-973-0107 | [email protected]
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
KENT NEUMANN | 202-973-0107 | [email protected] 12
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
KENT NEUMANN | 202-973-0107 | [email protected] 13
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
14KENT NEUMANN | 202-973-0107 | [email protected]
• 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
15KENT NEUMANN | 202-973-0107 | [email protected]
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
KENT NEUMANN | 202-973-0107 | [email protected] 16
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
KENT NEUMANN | 202-973-0107 | [email protected]
• 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
18KENT NEUMANN | 202-973-0107 | [email protected]
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)
19KENT NEUMANN | 202-973-0107 | [email protected]
• 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)
20KENT NEUMANN | 202-973-0107 | [email protected]
Contact Information
Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190
Allison King, Esq.Direct: (202) 973-0118
Lauren Marcus, Esq.Direct: (202) 973-0122
Alex Zeltser, Esq.Direct: (202) [email protected]
21KENT NEUMANN | 202-973-0107 | [email protected]