Housing Bond Basics

A Developer’s Perspective

David Lakari
Renewal Housing Associates, LLC
 Questions

1. Why go through all this?

2. How long does it take?

3. What does a typical deal look like?

 Why go through all this?
Non-recourse loan
Higher loan amount due to:
– Tax-exempt interest rate (maybe lower)
– Loan insurance provided by US government or
agency
– Longer term loan (up to 40 years)
– Lower debt service coverage requirements
– Higher loan-to-value ratios
Most important of all:
Access to 4% LIHTC (not competitive)
 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 less
interest in bond-financed 4% credit deals
than in 9% credits (also true now)
– Perceived as higher risk due to more debt
– High debt increases interest expense, thus
greater Tax Losses passed through to
investors … who may not want them.
 How long does it take?

Month 1-3 +?
Engage Months 3-6 +?
professionals Months 6-8 +?
Lender
Bond underwriter Begin bond calls
Equity investor (monthly or bi- Weekly bond calls
Lawyers weekly) Prepare
Architect HUD & Equity documents
Third party underwriting Market &
reports Legal notices price
Market study Public hearing bonds
Appraisal HUD firm Closing!
Architectural commitment Commence rehab
review
Bond inducement
Prepare
applications
 Sources & Uses
Tax-exempt bonds $ 4,400,000
LIHTC equity 2,100,000
Seller loan 2,850,000
OHFA soft loan 250,000
Interim income 400,000
Cash purchased 400,000
Developer fee loan 100,000
TOTAL SOURCES $ 10,500,000
 Sources & Uses
Acquisition $ 4,200,000
Hard construction cost 3,400,000
Design fees 300,000
Financing fees & interest 650,000
expense during constr.
Costs of bond issuance 150,000
LIHTC fees 200,000
Developer fees 1,000,000
Reserves 600,000
TOTAL USES $ 10,500,000
 Summary

1. Why go through all this?

2. How long does it take?

3. What does a typical deal look like?

 Bond Financing for
Residential Rental Facilities
Table of Contents

• Bond – What Is It?

• Types of Multifamily Housing Bond Issues
• Requirements Applicable to Multifamily Housing Bond
Financings
• Benefits of Issuing Tax-Exempt Bonds
• Typical Participants of a Bond Deal
• Typical Bond Documents
• Flow of Funds
 Bond – What Is 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 used
by companies, municipalities, states and U.S. and foreign governments to finance a variety of
projects 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 a
bond that states the interest rate (coupon) that will be paid and when the loaned funds (bond
principal) are to be returned (maturity date). Interest on bonds is usually paid every six
months (semi-annually). The main categories of bonds are corporate bonds, municipal
bonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to as simply
“Treasuries”.
 Types of Multifamily Housing Bond Issues

• “New Money” Issues

• Proceeds are used to finance the construction or acquisition and, in some
cases, 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 a
multifamily rental housing project, generally to achieve significant savings in
interest rates
Requirements Applicable to Multifamily Housing Bonds

• Section 142(d) permits the issuance of tax-exempt bonds to finance the

construction or acquisition and rehabilitation of multifamily housing projects to be
owned 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 req’d)
 Benefits of Issuing Tax-Exempt 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 housing
tax credits
• Less competition for bonds versus 9% credits
 Typical Participants of a Bond Deal
• Underwriter
• Underwriter’s Counsel
• Issuer
• Issuer’s Counsel/Consultant
• Bond Counsel
• Owner
• Owner’s Counsel
• Owner’s Financial Consultant
• Credit Enhancer
• Credit Enhancer’s Counsel
• Construction Phase Credit Enhancer and Counsel
• Rating Agency
• Trustee and Trustee’s Counsel
• Tax Credit Syndicator and Counsel
 Typical Participants of a Bond Deal (cont.)

Issuer
• Any State, political subdivision, agency, authority or other legal entity authorized under state law
to borrow money through the creation and sale of debt. The Issuer generally serves as a
“conduit” – 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 of
moderate, low or very low income

Issuer’s Counsel
• A lawyer or firm acting on behalf of the Issuer by providing a legal opinion regarding the legal
status of the Issuer, the Issuer’s authority to issue debt and the Issuer’s authority to execute the
bond 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
Typical Participants of a Bond Deal (cont.)

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, if
any), coordinates financing participants, obtains rating, if any and sells the bonds

Underwriter’s Counsel
• A lawyer or firm acting on of behalf of the Underwriter in conducting a due diligence analysis
of the Issuer (or conduit borrower) while also drafting the Official Statement, Bond Purchase
Agreement, Continuing Disclosure Agreement and if applicable, the Remarketing
Agreement.
Typical Participants of a Bond Deal (cont.)
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

Owner’s Counsel
• Passes on legal matters for owner
• Should be experienced in real estate matters and bond financings

Owner’s Financial Consultant

• Some owners may engage financial consultant to advise them on matters relating to interest
rates, alternative financing structures, issuer requirements, credit enhancement, etc.
Typical Participants of a Bond Deal (cont.)
Credit Enhancer
• A government sponsored enterprise, federal agency, bank, or insurance company that enters
into a formal and legally binding pledge of financial support to strengthen the credit of a
lower-rated Issuer. The Credit Enhancer assures timely repayment of the bonds – this is
what gives most bond issues their AA or AAA rating and results in lower interest rates.

Credit Enhancer’s Counsel

• Drafts credit enhancement documents, passes on legal matters for credit enhancer and
reviews 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 and
most bond insurers) generally will not accept the risk of default during construction or
rehabilitation and lease-up (most banks and FHA will accept this risk)
Typical Participants of a Bond Deal (cont.)
Rating Agency
• Most credit enhanced bonds are rated “AAA” or “AA” (Standard & Poor’s) or “Aaa” or “Aa”
(Moody’s) – the top two categories which produce lowest interest rates for an issue of a
given maturity

Trustee and Trustee’s Counsel

• Administers the trust indenture and makes payments to bondholders
• Also serves as dissemination agent under the Continuing Disclosure Agreement on most
fixed rate financings

Tax Credit Syndicator and Counsel

• Sell credits to investors to generate equity for the project
Typical Bond Documents
Trust Indenture (between Issuer and Trustee)
• The Trust Indenture establishes the “trust estate” which serves as the security for a bond
transaction. The “trust estate” may consist of payments made by the borrower under the
loan agreement, revenues pledged to the payment of the bonds or any other collateral
pledged 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. and
other 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 the
construction or acquisition and rehabilitation of the project
Typical Bond Documents (cont.)

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 Underwriter’s 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 a
stock prospectus)
• The Official Statement is used by the Underwriter to sell the bonds
Typical Bond Documents (cont.)
Bond Purchase Agreement (between Issuer, Underwriter and Owner)
• Prepared by Underwriter’s Counsel
• Provides that, upon the satisfaction of certain requirements, the Issuer will agree to issue the
bonds 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
• Intercreditor Agreement
• Continuing Disclosure Agreement
• Remarketing Agreement
• Various closing certificates
 Traditional Structuring Options

Revenue
Bonds

Unrated Rated Rated

Unenhanced Unenhanced Enhanced

Variable Rate
Fixed Rate Direct Placement Fixed Rate Bond Insurance FHA / USDA
Letter of Credit

May Swap
Desired % to
Fixed Rate

Variable Rate Fixed Rate

May Swap
Desired % to
Fixed Rate
 FHA (HUD) Insured Loans

• Loan funded with private capital but federally

guaranteed, 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
 New Construction/
Substantial Rehabilitation
• 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
 Substantial Rehabilitation

• “Like new” standard - no replacement needs 5 years

after project completion
• Substantial Rehab definition:
– $6,500/unit x High Cost Factor ($16,250/unit)
– Substantial replacement of two or more major building
components
– 15% of replacement cost
 Acquisition/Refinance

• 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
 Acquisition/Refinance con’t

• No Prevailing Wage/Davis Bacon

• “Critical” health/safety repairs must be completed prior to
closing
• Initial repair escrow
• Initial/ongoing replacement reserve deposit sufficiently
capitalized for entire loan period
• Cash out up to 80% LTV
 Processing Timeframe

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
 Transaction Costs

• Lender
– Financing/Placement Fee – 1% - 3.5% of insured mortgage
• Lender’s 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
– Borrower’s Counsel - $20,000
– Lender’s Counsel - $30,000
 TRANSACTION COSTS con’t

• Bond Issuance Costs ($4.5m loan)

– Underwriter $45,000
– Underwriter’s Counsel $25,000
– Bond Counsel $30,000
– Issuer/Issuer’s Counsel $18,500
– Trustee/Trustee’s Counsel $10,000
– Rating Agency $10,000
– Lag Deposit, Printing, etc… $20,000
– Negative Arbitrage $?????
 FLOW OF FUNDS

BORROWER/ FHA LENDER GNMA

RENTAL GNMA ISSUER/ (Processing Agent)
PROJECT SERVICER

Loan Agreement
BOND ISSUER BOND
(Government TRUSTEE
Agency)
Trust

BOND Indenture
UNDERWRITER
Loan $
BONDHOLDER
BOND
P&I Payments (Investor)
COUNSEL
 When does an FHA/HUD insured loan
make 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 +
 Recent HUD Guidelines for
FHA/LIHTC Transactions
• LIHTC Cash Escrow reduced to 20% of “mortgagable”
costs
• Final plans and specifications submitted prior to closing
• HUD Cost Certification not required where loan to cost is
less than 80%
• Firm Commitment issued conditioned upon 2530
approval
• Designation of a LIHTC Coordinator in each HUB and
Program Center office
 FHA/Bond Issues

• 20% of LIHTC equity (and all other sources) must be

deposited with HUD Lender at Initial Closing. Balance of
LIHTC 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” bond
issuance costs.
 FHA/Bond Issues con’t

• Choose cast of characters carefully.

– FHA Lender
– Bond Underwriter
– Tax Credit Equity Investor
– Bond Counsel
– Issuer