David Dill

CASE STUDY: SHORT TERM COLLATERALIZED BONDS
David Dill, Vice President
CASE STUDY 1: NEW CONSTRUCTION
The Waters at Willow Run – 4% Tax Credits and FHA 221(d)(4) insured mortgage
Problem
• Given rent restrictions there is not enough cash flow to provide the level of
return on equity that can be achieved in traditional debt & equity structures
used in market rate developments.
• 9% tax credits provide the largest equity investments, but there are a limited
amount of 9% credits available.
Solution
• 4% Low Income Housing Tax Credits provide a financing mechanism to provide
the equity needed to develop affordable housing.
• 4% Tax Credits combined with an FHA 221(d)(4) insured mortgage loan provide
both the leverage and equity necessary to develop new construction affordable
housing.
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
How do you finance new construction Affordable Housing?
• To receive the 4% Tax Credits, at least 50% of the Aggregate Basis of a project
must be financed with Tax Exempt Bonds.
• In today’s credit market, long term conventional FHA loans charge a lower
interest rate then a Tax Exempt Bond secured by a GNMA security.
• The short term collateralized bonds:
• significantly reduce negative arbitrage
• achieve the lowest cost of borrowing
• meet the requirements to receive the 4% credits.
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
Achieving the Lowest Interest Rate
• Key Project Information:
• Location: Austin, TX approximately 20 minutes north of downtown
Austin
• Units: 242
• Rent Restrictions: 100% of the units at 60% AMI
• Approximate Construction Period: 24 months
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
The Waters at Willow Run
• Key Participants:
• Developer: Atlantic Housing Foundation
• Tax Credit Syndicator: City Real Estate Advisors
• Bond Underwriter: Merchant Capital
• FHA Lender: Centerline Capital
• Issuer: Texas Department of Housing and Community Affairs
• Bond Counsel: Bracewell Giuliani
• Borrower’s Counsel: Locke Lord LLP
• Underwriters Counsel: Sidley Austin LLP
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
The Waters at Willow Run
• Key Terms of the Bond Issue:
• Closing Date: September 24th, 2013
• Maturity Date: October 1, 2016
• Initial Mandatory Tender Date: October 1, 2014
• Optional Prepayment: 6 months at Par
• Rating: S&P A-1+
• Interest Rate: 35bps
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
Bond Structure
SOURCES
Total
Tax Exempt Bonds (FHA Loan)
Taxable FHA Loan
LIHTC Equity
Initial Operating Deficit LOC
Deferred Developer Fee
Total
$
$
14,500,000.00
4,287,700.00
6,840,390.00
770,723.00
1,617,022.00
28,015,835.00
USES
Land Cost & Site Work
Direct Construction Costs
Offsite Costs
Architectural Fees & Indirect Construction Costs
Bond Transaction Costs
Real Estate and Mortgage Costs
General Transaction Costs
Capitalized Interest (FHA Loan)
Reserves
Cost Contingency
Developer Fee
Surplus / (Deficit)
Total
Total Size of FHA loan:
$
$
1,589,951.74
17,018,389.00
295,000.00
806,784.06
917,276.06
581,490.75
737,759.77
505,702.00
1,769,735.63
625,000.00
3,168,746.00
28,015,835.00
$
18,787,700.00
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
Sources & Uses
Traditional Long-Term Bonds Secured by a GNMA
Short Term Collateralized Bonds with Taxable GNMA
Bond & Mortgage Information
FHA Loan Amount
Tax Exempt Bond Amount
FHA Loan Term
Tax Exempt Bond Term
$ 18,787,700.00
$ 18,787,700.00
40 Years
40 Years
$ 18,787,700.00
$ 14,500,000.00
40 Years
2 Years
Interest Rate**
Bond Rate (est.)
Bond Fees
Servicing & GNMA Fee
Total Rate Stack
4.50%
0.15%
0.25%
4.90%
Mortgage Rate
Bond Fees
Servicing & GNMA Fee
Total Rate Stack
3.80%
0.15%
0.25%
4.20%
Tax Exempt Bond Rate
0.35%
Construction Period Interest
Mortgage Interest
Bond Interest
Total Construction Period Interest
$
$
1,380,895.95
1,380,895.95
** Interest rates are as of the closing date of September 2013 and do not reflect current market rates.
$
$
505,702.00
101,500.00
607,202.00
NEW CONSTRUCTION: FHA 221(D)(4) & 4% CREDITS
Structure Comparison
CASE STUDY 2: ACQUISITION REHAB
WHPC Southern Bond Pool – 4% Tax Credits, 9 Properties, Fannie Mae Guaranteed Loan
Problem
• Properties that have a smaller number of units or have relatively low values can
be difficult to finance using 4% LIHTC and tax exempt bonds because of the high
fixed costs.
• Tax Credit syndicators usually do not have interest unless the potential equity
investment is off a sufficient size.
Solution
• In a pooled structure legal fees and other fixed costs are typically lower than if
the properties were financed individually.
• By creating a portfolio of smaller properties, the size the equity investment is
large enough to attract investor interest.
• The loan is structured with one mortgage (as opposed to 9 separate mortgages).
This structured allowed for one tax credit partnership and significantly
decreased reporting requirements and costs.
ACQUISITION REHAB
How do you acquire and rehabilitate small properties?
• Key Project Information:
• Location: Multiple locations throughout southern Wisconsin
• Number of Properties: 9
• Units: 537
• Rent Subsidy: Approximately 78% of the units are covered by Section 8
• Rent Restrictions: Varies by property
• Construction Period: Approximately 9 months
ACQUISITION REHAB
WHPC Southern Bond Pool
• Key Participants:
• Developer: Wisconsin Housing Preservation Corp
• Tax Credit Syndicator: Boston Capital
• Bond Underwriter: Merchant Capital
• Fannie Mae Lender: Centerline Capital
• Issuer: Public Finance Authority
• Bond Counsel: Jones Walker LLP
• Underwriters Counsel: Sidley Austin LLP
• Issuer Counsel: Eichner Norris & Neumann PLLC
NEW CONSTRUCTION: 221(D)(4)
WHPC Southern Bond Pool
• Key Terms of the Bond Issue:
• Closing Date: April 24th, 2014 (anticipated)
• Maturity Date: April 1, 2017
• Initial Mandatory Tender Date: April 1, 2015
• Optional Prepayment: 6 months at Par
• Rating: S&P A-1+
• Interest Rate: 35bps (anticipated)
ACQUISITION REHAB
Bond Structure
• Key Terms of the Fannie Mae Loan:
• Term: 192 months (16 years)
• Amortization: 35 year
• Interest Rate: 5.30% (estimate)
• Maximum LTV: 90%
• Minimum DSC: 1.15x
• The loan is structured with one mortgage (as opposed to 9 separate
mortgages). This structured allowed for one tax credit partnership and
significantly decreased reporting requirements and costs.
ACQUISITION REHAB
Key Loan Terms
SOURCES
Total
Tax Exempt Bonds (FNMA Loan)
Tax Exempt Bonds (Equity Bridge Loan)
LIHTC Equity
Related Party Loan
Funds from Project Operations
Equity Bridge Loan
Total
$
$
20,400,000.00
435,000.00
10,977,918.00
10,915,901.00
935,616.00
5,548,192.00
49,212,627.00
USES
Acquisition Costs
Rehabilation Construction Costs
Architech, Engineering, Third Party Reports and misc. Professional fees
Capitalized Interest
Bond Costs including interest costs
Real Estate Costs
Mortgage Costs
Tax Credit Fees
Operating Deficit Reserve
Insurance Escrow
Pay off Equity Bridge Loan
Developer Fee
Surplus / (Deficit)
Total
$
$
27,673,850.00
9,663,247.00
517,785.00
813,606.00
412,308.41
241,398.38
349,313.21
85,909.00
972,000.00
59,770.00
5,983,192.00
2,440,248.00
0.00
49,212,627.00
Total Par Amount of Fannie Mae Loan: $
Total amount of the Equity Bridge Loan: $
20,663,000.00
5,983,192.00
Total Amount of Tax Exempt Bonds: $
20,835,000.00
ACQUISITION REHAB
Sources & Uses
OTHER FINANCING OPTIONS
S&P Rated Transactions
•
Standard & Poor’s currently rates unenhanced affordable housing projects
investment grade, typically in the “A” category.
• Underwriting assumptions include:
• 1.20x DSC (HAP properties); 1.40x DSC (non-HAP properties)
• Vacancy loss based on historical trends
• Standard & Poor’s will underwrite Section 8 rent “overhang”
• Operating expense savings accepted, but must be validated
• Repair and replacement reserves based on capital needs assessment report
• No minimum rehab per unit
S&P RATED
Standard & Poor’s Rated Transactions
Financing observations include:
• No credit enhancement or mortgage insurance
• 35-year amortization
• 35-year term
• 10-year par call
• 35-year interest rate currently approximately 6.00%
• Financial disclosures include annual audit and occupancy data
• 75-90 days for closing
• 100% loan-to-value
• Non-recourse
S&P RATED
Standard & Poor’s Rated Transactions
CONTACT INFORMATION
David Dill, Vice President
[email protected]
425-455-8122

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