Rhode Island Housing

Public/Private Partnership: Syndicated Loan Structure

Management Innovation: Financial Management
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Public/Private Partnership: Syndicated Loan Structure

Management Innovation: Financial Management

The strategic objective in the financial innovation was to create a program that would allow
the State to implement a legislative initiative to support affordable housing. While approved
by the legislative leadership in concept, the program was unable to be accommodated in a
budget that was already in deficit status. This innovation created a financial solution to the
budget-based problem and allowed the legislation to be enacted. Because of its usefulness
and acceptance by all parties involved, it has been replicated three times in three separate
fiscal years.

The innovation had the following six objectives: (1) provide a financial means to increase
affordable housing stock throughout the State for very low income families, (2) provide an
operating subsidy for the new units, (3) have the State fund the equity in the program out of
its general revenues (as opposed to our HFA’s revenues), (4) encourage a public/private
partnership in the financing structure, (5) fund with a flexible structure that allowed periodic
draw-downs and carried below-market interest rates, and (6) greatly reduce cost of issuance
and other up-front costs.

As background, while the new housing program was endorsed at the legislative level,
financing it through an already deficit-based State budget was a challenge. A State
supported bond structure was an obvious possibility, but typical bond structure inflexibility
and transaction costs became a serious impediment to addressing the special financial needs
(proceeds restrictions, delayed draw-down, legislative desire that debt service be subject to
annual appropriation, disproportionately high issuance expenses associated with a small
bond, and need for prepayment optionality) of this program. We suggested a more flexible,
below market rate, syndicated loan structure (“Syndicated Loan” or “Loan”). We would act
as the conduit between the State and a consortium of local banks.

To accomplish this, we developed a financing structure that is supported by annual State

funded budget appropriations, which in turn pay debt service on privately placed, syndicated
bank loans. With us as the administrator and pass-through entity, the banks could obtain
CRA credits, even though their Loan was not secured by any of the affordable properties
and was not guaranteed by us. From a credit perspective, the banks looked solely to the
goodwill of the State. It was agreed that it was much more likely that the State would honor
its debt obligations to the local bank group over time, than if it entered into a similar loan
structure with us. (Our caution stemmed from a previous arrangement where we advanced
funding on behalf of the State and were never repaid.)

Seven local banks agreed to participate at terms highly favorable to the State. The banks
agreed to fund $22 million in a taxable financing structure (taxable because of 9% low
income housing tax credits in some of the units) with a fixed interest rate that was lower
than that of even an equivalent tax-exempt bond. More specifically, the Loan rate is
 Rhode Island Housing
Public/Private Partnership: Syndicated Loan Structure
Management Innovation: Financial Management
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approximately 350 basis points less than a conventionally priced 10-year bank term loan. It
has a flexible take-down schedule and initial debt service payments are delayed until future
fiscal years. The State has agreed to repay the Loan out of annual appropriations. We are
explicitly excluded from any repayment obligation in the financing agreement. No
underwriter was involved in the placement; negotiations with the banks were conducted
directly through us and the legislative leadership.

Very importantly, the interest savings from this syndicated loan structure are about $750
thousand annually (although this will decline over the next seven years as the loan pays
down.) This annual savings, if thought of as additional debt service availability, would
support another $4.25 million in loan proceeds (on a 7 year amortization schedule). In terms
of front-end savings, issuance costs have been lower than those associated with a bond
financing by approximately $400 thousand and delayed take-downs saved another $600
thousand at the front-end of the Loan.

The program has provided $22 million (cumulatively over three fiscal years) of State funded
grant monies that would not have been otherwise available. This has allowed the leveraging
of another $132 million in federal grants, tax credit syndication proceeds and mortgage
loans, for a total of $154 million. Translated into affordable housing, the new program will
allow the creation of approximately 1200 affordable apartments targeting very-low-income
households.

In summary, the Syndicated Loan is a creative solution to a multifaceted strategic objective.

Its benefits include the following: (1) it uses State, not HFA, funding; (2) it produced a
significant opportunity to leverage other funds; (3) it subsidized twelve hundred affordable
units targeted at very low income families; (4) it provided an opportunity for a public /
private partnership based on CRA credits; (5) it is operationally streamlined since it is
unsecured (i.e., no collateral was pledged to the Syndicated Loan); (6) and it produced
savings of approximately $1 million up-front and $600 thousand annually today.