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Housing Bond Basics
A Developers Perspective
David Lakari
Renewal Housing Associates, LLC
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Questions
1. Why go through all this?
2. How long does it take?
3. What does a typical deal look like?
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Why go through all this?
Non-recourse loanHigher loan amount due to:
Tax-exempt interest rate (maybelower)
Loan insurance provided by US government oragency
Longer term loan (up to 40 years)
Lower debt service coverage requirements
Higher loan-to-value ratiosMost important of all:
Access to 4% LIHTC (not competitive)
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Why NOT to do this!
Complex & time consuming transactions Tax-exempt interest rates are sometimes
higher than taxable rates (like right now)
LIHTC investors sometimes have lessinterest in bond-financed 4% credit dealsthan in 9% credits (also true now)Perceived as higher risk due to more debt
High debt increases interest expense, thusgreater Tax Losses passed through toinvestors who may not want them.
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How long does it take?
Weekly bond callsPrepare
documentsMarket &pricebonds
Closing!Commence rehab
Begin bond calls
(monthly or bi-weekly)
HUD & EquityunderwritingLegal noticesPublic hearing
HUD firmcommitment
Engageprofessionals
LenderBond underwriter
Equity investorLawyersArchitectThird partyreports
Market study
AppraisalArchitectural
reviewBond inducement
Prepareapplications
Month 1-3 +?Months 3-6 +?
Months 6-8 +?
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Sources & Uses
Tax-exempt bonds $ 4,400,000LIHTC equity 2,100,000
Seller loan 2,850,000
OHFA soft loan 250,000Interim income 400,000
Cash purchased 400,000
Developer fee loan 100,000TOTAL SOURCES $ 10,500,000
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Sources & Uses
Acquisition $ 4,200,000Hard construction cost 3,400,000
Design fees 300,000
Financing fees & interestexpense during constr.
650,000
Costs of bond issuance 150,000
LIHTC fees 200,000Developer fees 1,000,000
Reserves 600,000
TOTAL USES $ 10,500,000
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Summary
1. Why go through all this?
2. How long does it take?
3. What does a typical deal look like?
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Bond Financing for
Residential Rental Facilities
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Table o f Cont ents
Bond What Is It?
Types of Multifamily Housing Bond Issues
Requirements Applicable to Multifamily Housing BondFinancings
Benefits of Issuing Tax-Exempt Bonds
Typical Participants of a Bond Deal
Typical Bond Documents
Flow of Funds
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Bond What I s It ?
A debt investment in which an investor loans money to an entity (corporate or governmental)that borrowers the funds for a defined period of time at a fixed interest rate. Bonds are usedby companies, municipalities, states and U.S. and foreign governments to finance a variety ofprojects and activities.
Bonds are commonly referred to as fixed-income securities and are one of the three main
asset classes, along with stocks and cash equivalents. The indebted entity (issuer) issues abond that states the interest rate (coupon) that will be paid and when the loaned funds (bondprincipal) are to be returned (maturity date). Interest on bonds is usually paid every sixmonths (semi-annually). The main categories of bonds are corporate bonds, municipalbonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simplyTreasuries.
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Types of Mul t i fam i ly Housing Bond Issues
New Money Issues
Proceeds are used to finance the construction or acquisition and, in somecases, rehabilitation of a multifamily rental housing project
Private Activity Bond Issues
Section 501(c)(3) Bond Issues Essential Function or Government Purpose Bond Issues
Refunding Issues
Proceeds are to be used to pay off bonds previously issued to finance amultifamily rental housing project, generally to achieve significant savings in
interest rates
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Requi rem ent s Appl icab le t o Mul t i fam i ly Hous ing Bonds
Section 142(d) permits the issuance of tax-exempt bonds to finance the
construction or acquisition and rehabilitation of multifamily housing projects to beowned by profit motivated sponsors if a number of requirements are met
Residential rental housing
Low income occupancy requirements
Qualified Project Period
15% rehab requirement on acquisition financings
Prohibition of tax-exempt refinancing for existing owners Alternative minimum tax
Good Costs/Bad Costs
2% Costs of Issuance Limitation
Required Approvals
Public approval or TEFRA requirement
Volume Allocation Issuer and State (if reqd)
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Benef i ts o f Issu ing Tax -Ex em pt Bonds
Low Interest Rates on Borrowing
Reduce the all-in borrowing rate
Often increase available loan proceeds
Additional Equity Proceeds from 4% Low Income Housing Tax Credits
Private activity bonds generally eligible to receive 4% low income housingtax credits
Less competition for bonds versus 9% credits
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Typica l Par t ic ipants o f a Bond Deal
Underwriter Underwriters Counsel
Issuer
Issuers Counsel/Consultant
Bond Counsel
Owner
Owners Counsel
Owners Financial Consultant
Credit Enhancer
Credit Enhancers Counsel
Construction Phase Credit Enhancer and Counsel
RatingAgency
Trustee and Trustees Counsel
Tax Credit Syndicator and Counsel
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Typica l Par t ic ipants o f a Bond Deal (c ont .)
Issuer
Any State, political subdivision, agency, authority or other legal entity authorized under state lawto borrow money through the creation and sale of debt. The Issuer generally serves as aconduit i.e. they do not use their credit rating to support the bonds.
Common goals may include providing rental housing where supplies are tight and for persons ofmoderate, low or very low income
Issuers Counsel A lawyer or firm acting on behalf of the Issuer by providing a legal opinion regarding the legal
status of the Issuer, the Issuers authority to issue debt and the Issuers authority to execute thebond documents.
Bond Counsel
Provides a legal opinion to the bondholders as to the validity of bonds under state law and the
tax-exempt status of bonds under federal and state law. Drafts main financing documents such as Indenture, Financing Agreement, Regulatory
Agreement and closing papers
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Typica l Par t ic ipants o f a Bond Deal (c ont .)
Underwriter A municipal securities dealer who assists the owner in assessing the availability of private
activity volume cap, choosing optimal financing structure (including credit enhancement, ifany), coordinates financing participants, obtains rating, if any and sells the bonds
Underwriters Counsel
A lawyer or firm acting on of behalf of the Underwriter in conducting a due diligence analysisof the Issuer (or conduit borrower) while also drafting the Official Statement, Bond PurchaseAgreement, Continuing Disclosure Agreement and if applicable, the RemarketingAgreement.
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Typica l Par t ic ipants o f a Bond Deal (c ont .)
Owner
Develops, builds, owns and often manages the project
In some cases, may be a Section 501(c)(3) corporation, the issuer or another public body
Owners Counsel
Passes on legal matters for owner
Should be experienced in real estate matters and bond financings
Owners Financial Consultant
Some owners may engage financial consultant to advise them on matters relating to interestrates, alternative financing structures, issuer requirements, credit enhancement, etc.
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Typica l Par t ic ipants o f a Bond Deal (c ont .)
Credit Enhancer
A government sponsored enterprise, federal agency, bank, or insurance company that entersinto a formal and legally binding pledge of financial support to strengthen the credit of alower-rated Issuer. The Credit Enhancer assures timely repayment of the bonds this iswhat gives most bond issues their AA or AAA rating and results in lower interest rates.
Credit Enhancers Counsel
Drafts credit enhancement documents, passes on legal matters for credit enhancer andreviews and comments on bond documents and closing papers
Construction Phase Credit Enhancer and Counsel
Some highly competitive long-term credit enhancers (such as Fannie Mae, Freddie Mac andmost bond insurers) generally will not accept the risk of default during construction orrehabilitation and lease-up (most banks and FHA will accept this risk)
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Typica l Par t ic ipants o f a Bond Deal (c ont .)
Rating Agency
Most credit enhanced bonds are rated AAA or AA (Standard & Poors) or Aaa or Aa(Moodys) the top two categories which produce lowest interest rates for an issue of agiven maturity
Trustee and Trustees Counsel
Administers the trust indenture and makes payments to bondholders
Also serves as dissemination agent under the Continuing Disclosure Agreement on mostfixed rate financings
Tax Credit Syndicator and Counsel
Sell credits to investors to generate equity for the project
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Typica l Bond Doc um ent s
Trust Indenture (between Issuer and Trustee)
The Trust Indenture establishes the trust estate which serves as the security for a bondtransaction. The trust estate may consist of payments made by the borrower under theloan agreement, revenues pledged to the payment of the bonds or any other collateralpledged to the payment of the bonds.
The Trust Indenture also provides the terms of the bonds, including payment dates,maturities, interest rates, redemption provisions, registration, transfer and exchange. andother basic financial terms.
Loan or Financing Agreement (between Issuer, Trustee and Owner)
Prepared by Bond Counsel
Sets forth terms under which bond proceeds are loaned to the Owner to provide for theconstruction or acquisition and rehabilitation of the project
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Typica l Bond Doc um ent s (c ont .)
Regulatory Agreement (between Issuer, Trustee and Owner)
Prepared by Bond Counsel
Details certain provisions of the Internal Revenue Code and regulations applicable to tax-exempt multifamily housing revenue bonds
May include certain certificates required by the Internal Revenue Code
Official Statement (between Underwriter and potential buyers of the bonds) Normally prepared by Underwriters Counsel and signed by the Issuer and/or the Owner
Provides disclosure to investors and potential investors regarding the terms of the bonds,security, risk factors and financial and operating information concerning the Owner (similar to astock prospectus)
The Official Statement is used by the Underwriter to sell the bonds
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Typica l Bond Doc um ent s (c ont .)
Bond Purchase Agreement (between Issuer, Underwriter and Owner)
Prepared by Underwriters Counsel
Provides that, upon the satisfaction of certain requirements, the Issuer will agree to issue thebonds following the pricing of the bonds and the execution of the Bond Purchase Agreement
Other Common Documents
Mortgage or Deed of Trust Credit Enhancement Facility
Reimbursement Agreement
IntercreditorAgreement
Continuing Disclosure Agreement
Remarketing Agreement
Various closing certificates
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Tradi t iona l St ruc t ur ing Opt ions
Revenue
Bonds
UnratedUnenhanced
RatedEnhanced
Variable RateLetter of Credit Bond Insurance FHA / USDAFixed Rate
Fixed RateVariable Rate
May SwapDesired % toFixed Rate
Direct Placement
RatedUnenhanced
Fixed Rate
May SwapDesired % toFixed Rate
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FHA (HUD) Insur ed Loans
Loan funded with private capital but federallyguaranteed, administered through HUD
Combined with GNMA guarantee to achieve AAA rating
Long term, fixed interest rate
Maximizes loan dollars Low interest rate
Mortgage insurance premium
Non-recourse to borrower
Assumable
Often used in projects involving other federal programs
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New Cons t r uc t ion /
Subst ant ia l Rehabi l i t a t ion
Insured under Section 221(d)4
Construction and permanent loan
Current interest rate
5.65% plus 0.45% MIP (taxable)
5.45% plus 0.45% MIP (tax exempt)
40 year term
Maximum mortgage amount, lower of:
90% of NOI (1.11 DSCR)
90% of project (replacement) cost
Per dwelling unit limit
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Subst ant ia l Rehabi l i t a t ion
Like new standard - no replacement needs 5 yearsafter project completion
Substantial Rehab definition:
$6,500/unit x High Cost Factor ($16,250/unit)
Substantial replacement of two or more major buildingcomponents
15% of replacement cost
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Acquis i t ion/Ref inance
Insured under Section 223(f)
Current interest rate
4.75% + 0.45% MIP (taxable)
5.45% +0.45% MIP (tax exempt)
35 year term
Maximum loan amount the lower of:
85% NOI (1.17 DSCR)
85% LTV
85% project (replacement) cost
Per dwelling unit limits
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Ac quis i t ion/Ref inanc e c ont
No Prevailing Wage/Davis Bacon
Critical health/safety repairs must be completed prior toclosing
Initial repair escrow
Initial/ongoing replacement reserve deposit sufficientlycapitalized for entire loan period
Cash out up to 80% LTV
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Proc ess ing T im ef ram e
221(d)4:
Preliminary application preparation 120-180 days
Preliminary application review 45 days
Firm application preparation 120-180 days
Firm application review 45 days
Closing 30-60 days
223(f):
Firm application preparation 120-180 days
Firm application review 60 days
Closing 30-45 days
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Transac t ion Cost s
Lender Financing/Placement Fee 1% - 3.5% of insured mortgage
Lenders Reviewers Physical Conditions Needs Assessment - $6,500 Market study/appraisal - $11,500
Architectural/cost review - $10,500 HUD Fees
Initial MIP 0.45% x insured mortgage Application Fee 0.30% x insured mortgage Inspection Fee 0.50% x improvements
Legal Fees Borrowers Counsel - $20,000 Lenders Counsel - $30,000
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TRANSACTION COSTS c on t
Bond Issuance Costs ($4.5m loan)
Underwriter $45,000
Underwriters Counsel $25,000
Bond Counsel $30,000 Issuer/Issuers Counsel $18,500
Trustee/Trustees Counsel $10,000
Rating Agency $10,000
Lag Deposit, Printing, etc $20,000 Negative Arbitrage $?????
FLOW OF FUNDS
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BORROWER/
RENTALPROJECT
FLOW OF FUNDS
FHA LENDER
GNMA ISSUER/SERVICER
GNMA
(Processing Agent)
BOND
TRUSTEE
BONDHOLDER
(Investor)
BOND ISSUER
(GovernmentAgency)
BONDUNDERWRITER
BOND
COUNSEL
Loan Agreement
Trust
Indenture
P&I Payments
Loan $
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When does an FHA/HUD insur ed loan
m ake sense?
Best used when . . .
Sponsor has long term site control
Maximum loan proceeds are essential
Sponsor requires fully non-recourse debt When used in concert with other public resources
Minimum loan size - $3,500,000 +
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Rec ent HUD Guidel ines for
FHA/LIHTC Transac t ions
LIHTC Cash Escrow reduced to 20% of mortgagablecosts
Final plans and specifications submitted prior to closing
HUD Cost Certification not required where loan to cost isless than 80%
Firm Commitment issued conditioned upon 2530approval
Designation of a LIHTC Coordinator in each HUB andProgram Center office
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FHA/Bond Issues
20% of LIHTC equity (and all other sources) must bedeposited with HUD Lender at Initial Closing. Balance ofLIHTC equity paid in during construction
Need to coordinate HUD underwriting with tax credit
equity underwriting
Bonds must be used to finance at least 50% of basis.This may require issuing B bonds
Borrower must work closely with Bond Underwriter to
understand and structure Neg Arb and B bondissuance costs.
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FHA/Bond Issues c ont
Choose cast of characters carefully.
FHA Lender
Bond Underwriter
Tax Credit Equity Investor Bond Counsel
Issuer