Western Mortgage Advisory Council (WMAC)
Annual Western Lender’s Conference
April 15-17, 2015
The Curtis Hotel
Denver, Colorado
Recent and Projected and Affordable Housing Share
Multifamily Rental Housing Starts
R. Wade Norris, Esq.
Eichner Norris & Neumann PLLC
1225 19th Street, N.W., 7th Floor
Washington, D.C. 20036
Phone: (202)973-0100
Fax: (202)296-6990
email: [email protected]
website: www.ennbonds.com
HISTORIC AND PROJECTED MULTIFAMILY
HOUSING STARTS (THOUSANDS)
(FOR RENT) 2000 - 2014
400
310
350
270
250
300
250
180
200
125
150
100
50
0
2000****
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
2013**
2014**
*2013 & 2014 Estimated Data from The State of the Nation's Housing, 2013 & 2014, Joint Center for Housing Studies of Harvard University
**Estimate based on rental = 90% of 340,000 total multifamily starts from Freddie Mac, Multifamily Research Perspectives, Multifamily Mid-Year Outlook 2014, July 31, 2014
According to Harvard Studies, 2000-2008 yearly multifamily rental housing starts averaged 230,000 units per year
R. Wade Norris
Eichner Norris & Neumann PLLC
202-973-0100
2
HISTORICAL MULTIFAMILY COMPLETIONS AND
PROJECTED DEMAND
Harvard Studies estimates that “pent
up demand,” if satisfied, would drive
total multifamily rental housing demand
as high as 400,000 to 470,000 units
per year for the next decade.
R. Wade Norris
Eichner Norris & Neumann PLLC
202-973-0100
3
Source: Wells Fargo Securities, LLC, Economics Group, U.S. Outlook
R. Wade Norris
Eichner Norris & Neumann PLLC
202-973-0100
4
•
Of the total multifamily rental apartment starts each year, roughly one-third are
affordable, i.e., 100% of the units rented to tenants with income ≤ 100% at 60%
of AMI (for a family of 4, adjusted for family size).*
•
For example, in 2012, 94,000 (37.6%) of the 250,000 rental units started in the
U.S. were affordable.
•
These units come from the two major Low Income Housing Tax Credit
(“LIHTC”) programs:
•
–
9% LIHTC. Very powerful subsidy – Borrower can syndicate to cover ≈ 70% of Total
Development Costs (“TDC”); he or she gets a small bank loan, and that’s it – not attractive
to FHA lenders – too small. 9% LIHTC accounts for roughly one half of all affordable units.
Over subscribed 4 or 5:1.
–
4% LIHTC. Borrower can syndicate to cover approximately 30-35% of TDC; requires at
least 50% of eligible basis to be funded with tax exempt private activity bonds, as described
below. Accounts for roughly one half of affordable units. Larger loan → more attractive to
FHA lenders. Private activity volume wildly available (outside of NY state).
Under either program, rents charged on affordable units cannot exceed 30%
of the applicable income limit for the affordable units. E.g., if project is 100% ≤
60% of AMI, and AMI for family of 4 is $80,000, then income limit for family of 4
is 60% of $80,000 or $48,000 and monthly rent limit is 30% of $48,000 which is
$14,400 per year or $1,200 per month.
________________________________
*Tax exempt bonds may also be used on projects where 20% of the rents are set aside for persons at 50% of AMI; usually large urban projects which often use
different debt financing structures.
R. Wade Norris
Eichner Norris & Neumann PLLC
202-973-0100
5
• Very different from market rate apartment developments.
– Developer gives up a lot of the “ups”-gain on sale or refi after
stabilized occupancy – Project must remain affordable rental
project, generally for 30-55 years.
– Restricted rents plus low income occupancy reduces NOI, but
tax credits fund 30-40% of TDC.
– Developer gets substantial up-front development fee (5-10%
or slightly more); plus construction contract if project has a
related contractor, plus annual management fees, assuming
Developer has related management company.
– Major industry – perhaps 50,000 units per year presently for
4% LIHTC plus tax exempt bonds.
R. Wade Norris
Eichner Norris & Neumann PLLC
202-973-0100
6
Western Mortgage Advisory Council (WMAC)
Annual Western Lender’s Conference
April 15-17, 2015
The Curtis Hotel
Denver, Colorado
MAJOR TAX EXEMPT BOND OR LOAN EXECUTIONS FOR AFFORDABLE
MULTIFAMILY RENTAL HOUSING PROJECTS
R. Wade Norris, Esq.
Eichner Norris & Neumann PLLC
Brian H. Dale
Citi Community Capital
1225 19th Street, N.W., 7th Floor
Washington, D.C. 20036
Phone: (202)973-0100
email: [email protected]
1801 California Street, Suite 3700
Denver, CO 80202
Phone: (303) 308-7403
email: [email protected]
YOU!!!
…are an affordable housing (100% at 60% of AMI) developer.*
• You are mad (see picture) because you applied for 9% LIHTC and they were oversubscribed.
• How do you structure the tax exempt bonds required to prime the 4% LIHTC you now must
have in order to finance your deal?
________________________________
*Tax exempt bonds may also be used on projects where 20% of the rents are set aside for persons at 50% of AMI; usually large urban projects which often use different debt
financing structures.
R. Wade Norris
Brian H. Dale
8
ALTERNATIVE TAX EXEMPT BOND EXECUTIONS
•
Since the 2008 financial crisis, in some government or quasi-governmental debt
markets, taxable rates are lower than tax-exempt muni rates. For example, rates on
taxable GNMA securities are lower by 50-75 basis points (“bps”) than rates on longterm municipal bonds rated AA+ or Aaa backed by the same GNMAs.
•
“That’s Crazy!!!” you say. You pay federal and state income tax on the interest on
Ginnies (40+% of your return if you are a high bracket tax payer), which, you keep if you
instead purchase the long-term municipal bond backed by the Ginnie. How can the
rates on the taxable Ginnies be lower?
•
We live in a crazy world. Since 2008, the world trusts U.S. Treasury Bonds, GNMAs,
and to a degree, Fannie Mae and Freddie Mac long-term debt securities, and not
much else (relatively), including even AA- and Aaa-rated bonds. The world still thinks
that the reliability of rating agencies is quite questionable; if they were that reliable
they would have never rated hundreds of billions of paper AA and Aaa prior to 2008,
which became worth 10 or 15¢ or nothing. “So if I can do a simple taxable conventional
FHA loan at a lower rate, why would I use muni bonds?”
R. Wade Norris
Brian H. Dale
9
LONG TERM RATE COMPARISON: 30-YEAR MMD (TAX EXEMPT)
VERSUS 10-YEAR CONSTANT MATURITY TREASURY (TAXABLE)
9.00%
8.00%
Early 2008 – Taxable US Government Securities
Rates Fall Below Tax Exempt Municipal Rates
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
30-Yr MMD
R. Wade Norris
10-Yr US Treasury
Brian H. Dale
10
LONG TERM RATE COMPARISON: 30-YEAR MMD (TAX EXEMPT)
VERSUS 10-YEAR CONSTANT MATURITY TREASURY (TAXABLE)
JANUARY 1, 2008 - PRESENT
6.00%
5.00%
400 BPS
4.00%
153 BPS
3.00%
2.00%
1.00%
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
30-Year MMD
R. Wade Norris
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
10-Year US Treasury
Brian H. Dale
11
ALTERNATIVE TAX EXEMPT BOND EXECUTIONS
•
To be sure your project is worthy of the subsidy inherent in 4% LIHTC, Congress
piggy-backed on the states’ private activity bond volume allocation systems. If
your project is good enough to get an allocation of private activity bond volume
then it will qualify for 4% LIHTC (almost “automatically,” but you do have to fill out
the forms).
•
Thus, the 50% Rule: To be eligible for 4% LIHTC, you have to finance at least
50% of “eligible basis” plus land (basically, total development cost less any
commercial component) with volume limited tax-exempt private activity bonds
under Section 142(d) of the Code and keep them outstanding until the project’s
placed-in-service date (roughly, completion of rehab for a mod-rehab project or
certificate of occupancy for a new construction/sub-rehab project).
•
So, if your project is affordable, you will be using at least some tax-exempt private
activity bonds! (Remember: No tax exempt bonds = No 4% LIHTC = No affordable
housing project.)
R. Wade Norris
Brian H. Dale
12
SHORT-TERM CASH BACKED TAX EXEMPT BONDS
HOW IT WORKS
•
Issue short-term tax exempt bonds equal to 50% of project’s eligible basis plus land* with a
maturity roughly twice the targeted placed-in-service date (to provide for construction
delays).
•
Two funds established under Bond Trust Indenture and invested in same AA+ rated
investment vehicle:
•
A “Project Fund” in which all the tax exempt bond proceeds are deposited, and
•
A “Collateral Fund” in which FHA lender advances or GNMA or Fannie Mae MBS proceeds or
Freddie Mac loan proceeds are deposited.
•
Financings structured so that as each dollar of tax exempt bond proceeds is disbursed from
the Project Fund to pay project costs, an equal amount of “replacement proceeds” must be
simultaneously deposited into the Collateral Fund. The principal of the Bond issue thus
remains 100% cash collateralized.
________________________________
*Note: This may be greater than or lower than the taxable loan amount. Most developers aim for 52-55% of eligible basis to provide a cushion. The short-term cashed
backed bond structure often produces a lower bond amount, which lowers bond financing costs.
R. Wade Norris
Brian H. Dale
13
SHORT-TERM CASH BACKED TAX EXEMPT BONDS
HOW IT WORKS (CONT’D)
•
In addition, at Bond closing, the interest which will accrue on the Bonds through the stated
maturity date (eg., 0.90% x 2 years or 1.8% of the tax exempt bond amount) is deposited (in
bankruptcy remote funds) into a capitalized interest account of the Bond Fund, securing the
full payment of the maximum amount of interest which can accrue on the Bonds through
maturity.
•
This cash collateralization of principal plus interest enables the financing to obtain an AA+
rating on the short-term Bonds from Standard & Poor’s, based on the rating of the underlying
investments (often a highly rated money market fund), without other credit enhancement.
•
When the project loan has been fully funded, rehabilitation or construction has been
completed and the project has been placed in service the tax exempt bonds are redeemed.
•
Any excess prefunded capitalized interest is returned to the Borrower and the Project’s only
remaining debt (except for certain subordinate loans often used for affordable housing
projects) is the taxable FHA insured mortgage loan, or the taxable Fannie Mae or Freddie Mac
affordable housing loan.
R. Wade Norris
Brian H. Dale
14
SUMMARY OF RELATIVE ALL-IN BORROWING RATES
Short-Term Cash
Backed Tax-Exempt
Bonds + Taxable
Loan Sale
Long-term (18, 35 or
40-year) TaxExempt Bonds
Backed by
FHA/GNMA, Freddie
Mac or Fannie Mae
Estimated
Approximate
Savings in All-in
Rate
FHA Insured
Section 223(f) (Acq/ Mod Rehab)
3.75%
v.
4.40%
0.65%
Section 221(d)(4) (New Cons/ Sub
Rehab)
4.25%
v.
4.50%
0.25%
Plus: Dramatic Reduction in Construction Period Negative Arbitrage; 1%-1.5% v. 8-10% for Longterm
Bonds.*
Fannie Mae – Moderate Rehab Loans
R. Wade Norris
About 4.50%
v.
5.00%
0.50%
Brian H. Dale
15
SHORT-TERM CASH BACKED TAX EXEMPT BONDS
OTHER ADVANTAGES
•
Borrowers who are willing to price to a 12-month mandatory tender in public offerings, can drive the
bond coupon down to 35 – 40 bps (the lowest we have seen is 28 bps), and limit the capitalized interest
deposit required at closing to 12 months. This involves some potential remarketing expense, if required,
and some interest rate risk upon the remarketing. However, there is almost no history of 12-month
remarketing rates on AA+ rated tax exempt paper ever exceeding 1.0% over the past two decades.
•
Total issuance costs are lower on short-term cash backed bonds than on long-term municipal bond
financings using these FHA and Fannie Mae platforms.
•
Another potential major advantage of short-term cash backed tax exempt bonds—elimination of ongoing
administrative fees after Bonds are redeemed. Where ongoing fees are high (e.g. issuer fees of 25 to 40
or 50 basis points per year), this can be a major advantage. These issues involve an average of 11 months
of ongoing fees or slightly more versus 15 years of ongoing fees.
R. Wade Norris
Brian H. Dale
16
THE MAIN COMPETITION –
TAX EXEMPT BOND OR TAX EXEMPT LOAN PRIVATE
PLACEMENT
•
CRA Impact on Affordable Housing Finance. Especially if the developer has a project in a major urban
market (e.g., Boston, New York, Washington D.C., Miami, Chicago, San Francisco, Los Angeles), there may
be another competitive execution. Large banks are required under the Community Reinvestment Act
(“CRA”) to do a certain dollar volume of public benefit “lending” activities and a certain dollar volume of
“investment” activities in the markets where they have a presence, or they risk severe limitations on their
future activities (e.g., new products, mergers, etc.). Thus, large banks are huge buyers of both tax exempt
bonds or loans (and 9% and 4% LIHTC) in markets where they have a presence. This substantially lowers
tax credit yields and tax exempt all-in borrowing rates in CRA driven markets.
•
Starting in the late 1990’s, to satisfy CRA goals, banks began to buy non credit enhanced bonds, backed
only by a first deed of trust and certain pre-“Conversion” General Partner guaranties (e.g., completion,
payment). They buy the tax exempt bonds or fund the tax exempt loan (the nomenclature depends on
the type of CRA credit sought) on a “draw down” basis, as loan advances are made. This eliminates
negative arbitrage on a sub rehab or new construction loan (similar to forward delivery funding on an
FHA 221(d)(4) loan).
•
Moreover, for sub rehab/new construction loans, the Banks offer very low all-in construction period
borrowing rates (e.g., SIFMA (.02%) or 1-month LIBOR (0.15%) plus 2.25-2.50%) before the loan reaches
“Conversion,” or stabilized occupancy (e.g., 1.15 DSC for 90 consecutive days; ≤ 90% LTV).
R. Wade Norris
Brian H. Dale
17
TAX EXEMPT DRAW DOWN PRIVATE PLACEMENT BOND OR TAX EXEMPT
LOAN FINANCING STRUCTURE – MOD REHAB, SUB REHAB OR NEW CONS
Underwriting
Bond Rate – Construction: SIFMA
Upfront Fees (est.)
Mod Rehab
Sub Rehab/New Cons
N/A
0.02%
Plus: Spread
2.25% to 2.50%
= Bond/Loan Interest Rate
2.27% to 2.52%
Floating*
Bond Rate – Permanent: 16 to 18-year
LIBOR Swap
1.0 - 1.5%
App.
0.25
Bond Costs of
Issuance
0.75 – 1.50
2.50 – 3.25%
2.24%
2.28%
Plus: Spread
1.80% to 2.00%
2.10% to 2.40%
= Bond/Loan Interest Rate
4.04% to 4.24%
4.38% to 4.68%
Credit Enhancement
N/A
N/A
Servicing Fees
0.00
0.00
Remarketing Agent
N/A
N/A
Issuer
0.125
0.125
Trustee
0.125
0.025
Total Fee Stack
0.15
0.15
Total Permanent Mortgage Rate
(Underwriting Rate and Actual
Permanent Borrowing Rate)
Origination
4.19% to 4.39%
4.53% to 4.83%**
*Add 15 basis point fee stack below for all-in construction period borrowing rate.
** Most bond private placements funded on “draw down” basis, which eliminates construction period negative arbitrage.
• Estimated Rates as of 04/10/2015; 35-year loan amort.; 1.15 - 1.20 DSCR; 80 - 90% LTV. If not in a part of Bank CRA footprint, some banks product may
only be available at somewhat higher rates and somewhat tighter underwriting terms.
R. Wade Norris
Brian H. Dale
18
COMPARISON OF PRIVATE PLACEMENT TO SHORT TERM
CASH BACKED BONDS + FHA
•
FHA insured loan is only available credit enhancement which is non-recourse
during pre-conversion phase – all others (Private Placement, Fannie Mae, Freddie
Mac) require deep pocket General Partner guarantees during this phase.
•
FHA offers greater prepayment flexibility – closed for 2 years to 108% decreasing
1% per year thereafter v. yield maintenance of 12% or higher declining over a
longer period (e.g., 15 years)
•
Private placement sponsors will generally bridge tax credit equity payments
through larger first deed of trust secured construction loans paid down at perm
phase; with FHA no lien on real estate permitted to secure a tax credit bridge loan.
R. Wade Norris
Brian H. Dale
19
COMPARISON OF PRIVATE PLACEMENT TO SHORT TERM
CASH BACKED BONDS + FHA
•
For sub rehab/new construction private placement deals there is a new loan underwriting and possible
loan downsizing based on DSC or LTV at “Conversion;” unlike an FHA 221(d)(4) loan (which only requires
cost certification). The very low perm rates are locked at closing (e.g., 4.20 to 4.40% including third party
fees on fully funded mod rehab loans or 4.50 to 5.00% for a draw down construction/perm loan); and
the structure readily accommodates a loan pay down at Conversion from other funding sources.
•
The perm rate will generally be somewhat higher (20-50 bps) than a 221(d)(4) rate and the loan will have
a 35 year amortization to a 16 to 18 year balloon (versus 35 or 40 year loan amortization and no balloon
on FHA); but no Davis Bacon wages, possibly more flexible/quicker loan underwriting and multiple banks
competing in many CRA-driven markets.
•
Private placements may also be available from non-bank financial institution sponsors in some markets.
•
Freddie Mac has recently introduced its Tax Exempt Loan or “TEL” structure with many of the same
features and terms. Possibly even lower perm rates and potentially available in all markets, not just CRA,
but much less tested at this time, especially for sub rehab/new construction loans.
R. Wade Norris
Brian H. Dale
20
OTHER TAX EXEMPT BOND EXECUTIONS
•
There are a few other options, eg. An 18-year credit enhanced Freddie Mac or Fannie Mae Bond
issue for sub rehab / new construction or the new Fannie Mae monthly tax exempt MBS passthrough structure, but the two major options outlined above, (i) short-term cash backed bonds
with a taxable FHA 223(f) or FHA 221(d)(4) or a Fannie Mae mod rehab loan and (ii)Tax Exempt
Bond or Loan Draw Down Private Placements probably comprise 80-90% of the market and
generally the most competitive terms for affordable housing loans.
R. Wade Norris
Brian H. Dale
21
SUMMARY OF BORROWING/UNDERWRITING RATES
Estd. Actual All-In
Borrowing Rate
Underwriting
Rate
FHA/ GNMA §223f (Mod Rehab)
3.75%
3.75%
FHA/ GNMA §221(d)(4) (Sub Rehab / New Cons)
4.25%
4.25%
Fannie Mae or Freddie Mac Mod Rehab (Freddie
deemphasizing – see “TEL” Structure Below)
4.50%
4.50%
4.20% to 4.40%
4.20% to 4.40%
2.25% to 2.50%
2.25% to 2.50%
Floating
Floating
4.50% to 5.00%
4.50% to 5.00%
(Cons Period; SIFMA or
LIBOR +220-250)
(Cons Period; SIFMA or
LIBOR +220-250)
Perm 4.10 to 4.50%
Perm 4.10 to 4.50%
(lower end for mod rehab)
(lower end for mod rehab)
1. Short-Term Cash Backed Tax Exempt Bonds
with Taxable Loan Sale
2. Private Placement
-Mod Rehab
-Sub Rehab/New Cons
Cons Period
Perm Period
3. New Freddie Mac “TEL” Program (Mod
Rehab, Sub Rehab, New Cons)
*May be attractive on non-tax credit deals.
R. Wade Norris
Brian H. Dale
22