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Financing Structures for Affordable Housing Transactions in the Current Market
May 2019
Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190
Long Term Yield Curves (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
10-year UST versus 30-year MMD
2KENT NEUMANN | 202-973-0107 | [email protected]
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8.00
10-YR UST 10-YR UST Average 30-YR MMD 30-YR MMD Average
Historical Average = 3.53%4/19/2019 = 2.56%
Historical Average = 4.09%4/19/2019 = 2.70%
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
3KENT NEUMANN | 202-973-0107 | [email protected]
1.00
1.50
2.00
2.50
3.00
3.50
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
Historically Flat 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
4KENT NEUMANN | 202-973-0107 | [email protected]
0.00
0.50
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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
• 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
5KENT NEUMANN | 202-973-0107 | [email protected]
Short Term Cash-Backed Bonds with Taxable Perm Loan
• Favorable Underwriting Terms include:
• 35/40 year amortization• Fully amortizing debt / no resizing at conversion• 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)• All in rates from low 4% - 5% range
KENT NEUMANN | 202-973-0107 | [email protected]
Short Term Cash-Backed Bonds with Taxable Perm Loan
6
• 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 independently or with other “longer term” bond structures to meet 50% test
7
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] 8
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
9
Short Term Cash Backed Bonds
KENT NEUMANN | 202-973-0107 | [email protected]
Example Sources and Uses
10
Short-Term Cash-Collateralized Bonds with Taxable Perm Loan
Sources
Taxable Loan Funds $9.0 M
Bond Proceeds(1) 7.0 M
4% Tax Credit Equity 3.5 M
Deferred Developer Fee 0.0 M
Subordinate Financing 0.5 M
Total Sources 20.0 M
Uses
Redemption of Bonds $7.0 M
Acquisition 8.0 M
Rehabilitation 3.0 M
Developer Fee 1.0 M
Financing Costs + Soft Costs + Reserves 1.0 M
Total Uses 20.0 M
(1) $7 million sized on 50% test ($13 million total costs)
10KENT 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
11KENT 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
12KENT NEUMANN | 202-973-0107 | [email protected]
1.00
1.50
2.00
2.50
3.00
3.50
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
13KENT NEUMANN | 202-973-0107 | [email protected]
Issuer Fees*: 0.10% - 3.00%
Bond Counsel*: $35,000 - $100,000
Underwriter’s Fee: 0.50% - 1.00%
Underwriter’s Counsel:
Miscellaneous: $10,000 - $20,000
Negative Arbitrage*: ZERO
$30,000 - $50,000
KENT NEUMANN | 202-973-0107 | [email protected] 14
Costs of the Short Term Bond Deal
Bond Application/Volume Cap/Initial Approval• As soon as possibleDocument Preparations and Review• Around Submission of Taxable Loan ApplicationBond Pricing• ~2 weeks before ClosingPre-close/Close• Simultaneous with Taxable Loan closing
Timing of the Short Term Bond Deal
15KENT NEUMANN | 202-973-0107 | [email protected]
• Long term tax exempt rates are starting to trend lower thantaxable rates
• Newer “pass through” bond structure sold to certain buyersbased on historic average life has recently priced well in themarket while reducing certain traditional bond costs
• Negative arbitrage can still result in significant up front depositfor 221 loans depending on initial draw (we can help with this)
• Other factors for structure should be discussed well inadvance of starting documents
Long Term Bonds Backed by GNMAs
16KENT 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
17KENT NEUMANN | 202-973-0107 | [email protected]
GOAL: Lock in today’s rates forfuture tax credit deals …
FHA Refinancing to Re-syndication (R2R)
18KENT NEUMANN | 202-973-0107 | [email protected]
• NEW LOAN: FHA 223(f) loan to refinance existingdebt or purchase project. Keep rehab to a minimum.
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• ~4.25% all-in rate including 25bps MIP for affordable
deals• Exemption from Davis-Bacon wages; Non-recourse
FHA Refinancing to Re-syndication (R2R)
19KENT NEUMANN | 202-973-0107 | [email protected]
WHEN READY TO INTEGRATE TAX CREDITS(Upon Year 15 or otherwise): Owner wouldsimultaneously take 3 steps …
FHA Refinancing to Re-syndication (R2R)
20KENT NEUMANN | 202-973-0107 | [email protected]
Step 1: TPA (transfer of physical asset) process.
Highlights of TPA
• Take 90-120 days• Remaining term of FHA loan would be 30+ years• No prepayment fees or substantial transfer fees• Cost is 5bps to HUD and any charge the lender
wants to impose for any help they give
FHA Refinancing to Re-syndication (R2R)
21KENT NEUMANN | 202-973-0107 | [email protected]
Step 2: Supplemental FHA 241(a) loan.
Highlights of 241(a)• Second position FHA loan sized to the lower of (a) 90% of
rehabilitation and related construction costs or (b) 1.11 DSCRfor total FHA debt
• 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 defaultis for it to match the remaining term on the senior FHA loan
• Possible exemption of Davis-Bacon wage requirements
FHA Refinancing to Re-syndication (R2R)
22KENT NEUMANN | 202-973-0107 | [email protected]
Step 3: Use tax exempt bonds to qualify for 4%tax credits.
Highlights of Bonds/4% Credits• Need to pass 50% test to qualify for 4% low income
housing tax credits• 95% Bonds need to be spent on “good” costs of project• Flexibility structured into original 223(f) loan to account
for potential sizing issues
FHA Refinancing to Re-syndication (R2R)
23KENT 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]
24KENT NEUMANN | 202-973-0107 | [email protected]