Alternative Tax Exempt Multifamily Housing Bond Executions in
Alternative Tax Exempt Multifamily Housing Bond Executions in the Current Market JANUARY 2017 Kent Neumann, Esq. Eichner Norris & Neumann PLLC kneumann@ennbonds. com 202 -973 -0107 (direct) 703 -568 -0190 (cell)
CURRENT TAX EXEMPT MULTIFAMILY HOUSING BONDS STRUCTURES • Short term Bonds with Long term FHA MAP Loan • Tax-Exempt Seller “take back” Bonds • New R 2 R FHA Affordable Program • FHA Risk Share under 542(c) • New Fannie Mae M-TEMS • Freddie Mac TEL Kent Neumann 202 -973 -0107 2
COMBINED TAXABLE GNMA SALE WITH SHORT TERM TAX EXEMPT BONDS AND 4% LIHTC – FAQ/ISSUES Bond Amount to meet 50% test > Taxable FHA Loan Amount: n Other (bankruptcy remote) sources of funds (i. e. bridge equity, subordinate loan proceeds, etc. ) are needed to cover the differential. Timing of funding is critical. Seller Take-Back loan can often be used to collateralize bonds (see applicable slides) Investment and other options to reduce cost: n Although short term rates have gone up, taxable investment options have gone up also: Ex. 1. 50% bond rate less 1. 25% investment rate = 0. 25% net interest cost per year on bonds. n Seller Take-Back Bonds can sometimes be used to help reduce costs further (see applicable slides) n Multiple loans/projects can be pooled into a single bond issuance to spread out fixed closing costs – all deals need to be in a position to close within the same timeframe. Kent Neumann 202 -973 -0107 3
COMBINED TAXABLE GNMA SALE WITH SHORT TERM TAX EXEMPT BONDS AND 4% LIHTC – FAQ/ISSUES Publically Offered vs. Privately Placed: n Potential tax implications if Bond Purchaser is “related” to the Borrower (see § 1. 148 program investment regulations) n Costs of issuance are very close. Interest and investment options can vary. Issuer considerations: n Possible limitation on Issuer Fees due to short maturity and Loan Yield limitations n Some states have very limited private activity volume cap – although this structure does use the minimum amount of bonds to meet the 50% test n A few Issuers do not allow the structure due to limitations on fees. Kent Neumann 202 -973 -0107 4
Tax-Exempt Seller “take back” Note & Bonds • Many 4% preservation deals and affordable transaction located in high cost areas require subordinate gap and/or “soft” funds to get the financing to work. This can often include seller financing in the form of a subordinate “take-back” note for deals with a “friendly” seller. This is very common in RAD transactions. • These deals will have higher eligible basis for tax credits (generating more tax credit proceeds) but no significant impact the size of the permanent loan. • Due to the LIHTC 50% test, tax-exempt bonds in excess of the permanent financing are often required in these deals. Kent Neumann 202 -973 -0107 5
Tax-Exempt Seller “take back” Note & Bonds (con’t) • Option 1: Instead of allocating the seller note to a reduction of the purchase price of the Project, Bond proceeds can often be “allocated” for the full purchase price of the Project and the seller can “allocate” the note as new funds to the deal – which can be used to collateralize that portion of bonds. • Makes it much easier to meet the 50% test (equity or other soft funds are no longer needed for collateral. • Often results in saving from additional investment opportunities and eliminating the need for bridging of other collateral funds. Kent Neumann 202 -973 -0107 6
Tax-Exempt Seller “take back” Note & Bonds (con’t) • Option 2: Instead of issuing additional short-term tax-exempt bonds that will be sold to 3 rd party, it is often possible to convert some of the subordinate debt to tax-exempt through the project’s “placed-inservice” and then convert it to taxable debt thereafter. • By running the surplus cash note from the Borrower to the municipal bond issuer, creating a corresponding note from the Issuer to the Seller and allocating the corresponding amount of tax exempt bond volume cap to the acquisition of the project, the note would apply towards meeting the 50% test – even though no cash is actually moving. • Results in significant saving of additional interest from the reduction of debt service on the “take back” Bonds. • Note that tax-exempt private activity volume cap upfront/ongoing issuer fees would still be applicable. Kent Neumann 202 -973 -0107 and any 7
NEW FHA Refinancing to Resyndication (R 2 R) Program for Affordable Projects GOAL: Lock in todays low financing rates for future tax credit deals. Applicable for existing affordable housing projects still in 15 -year tax credit compliance period (target: years 9 -14) or otherwise not yet ready for tax credit syndication. Kent Neumann 202 -973 -0107 8
NEW FHA Refinancing to Resyndication (R 2 R) Program for Affordable Projects • NEW LOAN: Current owner (or new purchaser) can use a taxable fha loan (223 f or 223(a)(7)) to refinance existing debt or purchase an affordable project. • Goal is to keep rehab to a minimum (preserve as much as possible for future tax credit deal). • Highlights of 223 f loan: – – Exempt from LIHTC 10 -year rule (Section 42(d)(6)) 35+ year full amortization and term 80 -90% LTV / 1. 11 DSCR ~3. 50% all in mortgage rate including 25 bps MIP for affordable deals – Possible exemption from Davis Bacon wages; Non-recourse Kent Neumann 202 -973 -0107 9
FHA Refinancing to Resyndication (R 2 R) WHEN READY TO INTEGRATE TAX CREDITS (Upon Year 15 or otherwise): Owner would simultaneously take 3 steps… Step 1: Sell project to new tax credit borrower at full appraised value - with ~3. 50% fha debt in place (not prepaid) pursuant to HUD’s TPA (transfer of physical asset) process. - TPA can take 90 -120 days - Remaining term of fha loan would be 30+ years - No prepayment fees or substantial transfer fees are applicable for TPA Kent Neumann 202 -973 -0107 10
FHA Refinancing to Resyndication (R 2 R) Step 2: Close on a new supplemental FHA 241(a) loan equal to the lower of (a) 90% of rehabilitation and related construction costs or (b) 1. 11 dscr for total fha debt. 241(a) loan highlights: § Designed as a supplemental loan in second position behind a senior fha loan. § Is a construction loan program (clc/plc) and not limited to 223(f) pilot rehab limits. § Loan term/amortization can be up to 40 years although default is for it to match the remaining term on the senior fha loan. § Possible exemption of Davis Bacon wage requirements (depends on senior fha loan in place). Kent Neumann 202 -973 -0107 11
FHA Refinancing to Resyndication (R 2 R) Step 3. Use tax exempt bonds in an amount necessary to meet the 50% test to qualify for 4% tax credits (generating ~35% of additional sources of funds). § Need to issue bonds in excess of 50% of aggregate basis to qualify for 4% low income housing tax credits § 95% Bonds need to be spent on “good” costs of project – excluding existing assumed fha debt in senior position § If not enough “good” costs to spend all bonds, a portion of the existing fha loan may need to be repaid just enough to free up additional “good” costs. Original 223(f) loan can be structured to allow for this flexibility. Could also allow for increased 241(a) sizing depending on constraint. Kent Neumann 202 -973 -0107 12
Refinancing to Resyndication (R 2 R) with FHA • • Results: – Locks in today’s low rates for ~70% or more of the total debt – Avoids prepayment fees/costs on fha loan (~5 -9% of loan balance) Compare: Loan Amount Rate Annual Pmt Tax Credit Year 223(f) $7, 000 3. 25% $335, 100 10 241(a) $3, 000 5. 25% $187, 464 15 Total: $10, 000 3. 825% $522, 564 vs. Loan Amount Rate Annual Pmt Tax Credit Year 223(f) $10, 000 5. 25% $624, 888 15 Over $100, 000 in annual debt service savings and eliminates ~$500, 000 in potential prepayment fees. Kent Neumann 202 -973 -0107 13
Refinancing to Resyndication (R 2 R) with FHA § Although this is a very streamlined/ state-of-the-art execution, it does have a lot of moving and inter-related parts. Many assumptions are required in order to demine future sizing of the transaction. As such, it is very important to work closely with the borrower as well as Bond and 4% tax credit experts to model deals with conservative assumptions. These include: § Purchase price (subject to appraisal) § Scope of rehab and related costs § Tax credit equity pricing § Aggregate basis calculation (for bond sizing) § Mortgage rate/term on 241 loan Kent Neumann 202 -973 -0107 14
FHA Risk Share Loan Program • FHA insurance program under Section 542(c) of the Housing and Community Development Act of 1992 allows state and local HFAs to share the risk and mortgage insurance premium on multifamily housing transactions. • Unlike FHA MAP loans (i. e. 221(d) & 223(f)) these loans are currently not eligible to be “wrapped” with GNMA Securities. As a result, financing options under these programs over the past 8+ years have not been as favorable as MAP loans due to the less liquid market. However, recent changes to the program have changed this. • In 2015, the Dept of Treasury working with the Federal Financing Bank (FFB) agreed to purchase certain qualifying FHA risk share loans at very competitive rates. Transactions with ~$40, 000 per unit in rehabilitation or less can currently obtain all-in rates below 4. 00%. • FFB will buy the direct risk share taxable loans but they can be combined with short-term taxexempt bonds to qualify for 4% tax credits. Acquisition/Rehab Deals - Perm Interest Rate Stack (est. ) Loan Rate – Permanent: Mortgage Insurance Premium: Servicing (varies based on lender): Total: Kent Neumann 3. 25% 0. 25%* 0. 50% 4. 00% Upfront Fees (est. ) Costs of Issuance 2. 00% * The 542 loan program was included in the recent MIP reduction 202 -973 -0107 15
FHA Risk Share Loan Program (con’t) • Construction and Permanent Financing & Reduced Costs of Issuance: No separate construction lender is required. The HFA acts as Issuer and Lender. • Fast Execution Time: 90 – 120 days. Unlike MAP loans, the HFA provides full underwriting. • Underwriting Terms: Up to 90% Lt. V; 1. 15 DSCR; 35/40 year amortization / term (balloon feature expected to be available soon); ~6 -month DSRF typically required for “AAA” rating of Bonds. • Non-Recourse, David Bacon, Negative Arbitrage New Const/Sub Rehab - Perm Interest Rate Stack (est. ) Bond Rate: Mortgage Insurance Premium (MIP): Servicing Fee (varies based on lender): Issuer Fee (varies based on issuer): Total: Kent Neumann 4. 00% 0. 25%* 0. 50% 0. 25% 5. 00% Upfront Fees (est. ) Costs of Issuance 2. 00% * The 542 loan program was included in the recent MIP reduction 202 -973 -0107 16
Pricing Comparison ISSUER ■ Jacksonville Housing Finance Authority ■ California Statewide Communities Development Authority UNDERWRITER ■ RBC Capital Markets ■ Stifel, Nicolaus & Company, Incorporated SELLER/SERVICER ■ Jones Lang La. Salle Multifamily, LLC ■ Greystone Servicing Corporation, Inc. PROJECT NAME ■ Timberwood Trace Apartments ■ Watts Arms Apartments LOCATION ■ Jacksonville, Florida ■ Los Angeles, California LOAN PURPOSE ■ Acquisition/Rehab TAX EXEMPTION ■ Federal and State RATING ■ Aaa ■ No Rating PRICING DATE ■ 01/25/2017 ■ 01/27/2017 CREDIT ENHANCEMENT ■ Fannie Mae MBS Pass Through PAR AMOUNT ■ $16, 000 ■ $17, 080, 000 BOND MATURITY ■ 02/01/2033 ■ 03/01/2034 BOND INTEREST RATE ■ 3. 40% ■ 3. 10% REFERENCE RATE INDEX ■ 15 -Year MMD ■ 10 -Year LIBOR Swap REFERENCE RATE ■ 2. 71% ■ 2. 40% PRICING SPREAD ■ +69 bps ■ +70 bps Source: Bloomberg. Thomson Reuters Please note the bond interest rate does not include servicing or guaranty fee Cody Wilson (404) 504 -2785 17
Overview ■ When structuring a tax-exempt bond transaction, the Fannie Mae DUS lender has the following three executions: 1. Bond Credit Enhancement — Fannie Mae provides credit enhancement for tax-exempt bonds 2. Fannie MBS combined with tax-exempt bonds — A Fannie Mae MBS is issued simultaneously with short-term cash collateralized tax-exempt bonds — The short-term cash collateralized bonds are issued to achieve compliance with the 50% Rule 1 3. M. TEB — A Fannie Mae MBS is issued as collateral for tax-exempt bonds ■ Stifel recently developed its own version of M. TEB called M-TEMS (Multifamily Tax-Exempt Mortgage-backed Securities). ■ The M-TEMS structure is very similar to the M. TEB structure with the follow modifications: — M-TEMS has fewer documents (no loan agreement) — M-TEMS has more tailored disclosure — M-TEMS could accommodate a draw down feature to reduce interest cost at closing — M-TEMS do not require a credit rating (cost savings ~$18, 500) — M-TEMS are priced off a different index Notes: 1 The developer must finance 50% of project costs with tax-exempt bonds and keep those bonds outstanding until the project’s placed-in-service date in order to get full value for the 4% low income housing tax credit (“LIHTC”) equity Cody Wilson (404) 504 -2785 18
M-TEMS Structure STEP 1 – The Fannie Mae DUS lender originates loan with Sponsor and Underwriter prices M-TEMS Certificates CERTIFICATE PROCEEDS ACCOUNT LENDER TRUSTEE M-TEMS Proceeds Originate Mortgage Loan Lender warehouse funds UNDERWRITER M-TEMS Qualified project costs SPONSOR PROJECT M-TEMS Proceeds INVESTOR STEP 2 – Fannie Mae securitizes the loan with MBS which is purchased by the trustee with M-TEMS proceeds used to pay for the purchase of the MBS LENDER TRUSTEE Transfer of MBS M-TEMS Proceeds Mortgage Loan and Note Delivery of MBS CERTIFICATE PROCEEDS ACCOUNT FANNIE MAE Cody Wilson (404) 504 -2785 19
M-TEMS Certificates Payment Allocations 3. 94% (Mortgage Rate) LENDER 3. 625% (Mortgage Rate - Servicing Fee) FANNIE MAE SPONSOR 3. 10% (Mortgage Rate – Servicing Fee – Guaranty Fee) $11, 040 (Issuer and Trustee annual fees) TRUSTEE $8, 540 ISSUER ASSUMPTIONS: Par Amount M-TEMS Certificate Rate Servicing Fee Guaranty Fee Annual Issuer Fee Annual Trustee Fee 3. 10% M-TEMS INVESTOR $17, 080, 000 3. 100% 0. 315% 0. 525% 0. 050% $2, 500 Note: The figures presented above are based on a recent M-TEMS transaction The annual Issuer fee and Trustee fee are paid outside of the Fannie Mae MBS rate stack Cody Wilson (404) 504 -2785 20
Freddie Direct Tax-Exempt Loan (TEL) Program • • • Construction Bank (the “Initial” Funding Lender), funds the loan on a drawn down basis and takes the real estate risk Pre-Conversion. At Conversion, the loan is sold to the Freddie Mac Seller/Servicer, who then sells it to Freddie Mac several weeks thereafter. Freddie Mac, typically will securitizes pools of such loans in an “M Class” securitization. Allows Borrower to work with its Bank during the Pre-Conversion phase. Slightly higher costs than bank private placements due to multiple Lenders/counsels. Important to have an experienced tax-exempt attorney and/or participant due to complex tax exempt rules. Borrower Note & Mortgage Tax Exempt Gov’t Lender Note Funding Lender Governmental Lender Borrower/ Project Owner $ Loan to Borrower $ Funding Loan to Gov’t Lender Construction/Perm Interest Rate Stack Bond Rate – Construction (VR): LIBOR + 2. 50 2. 85% Bond Rate – Permanent (FR): 10 -year Treasury + 3. 00 4. 50%* Upfront Fees (est. ) Origination 1. 00% Costs of Issuance 2. 00 3. 00% * Rates have varied depending on location, sponsor and other factors. Kent Neumann 202 -973 -0107 21
Kent Neumann, Esq. Eichner Norris & Neumann PLLC kneumann@ennbonds. com 202 -973 -0107 (direct) 703 -568 -0190 (cell) Kent Neumann 202 -973 -0107 22
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