taxable gnma sale for affordable apartment …...2018/04/10 · short-term cash backed tax exempt...

Combining Tax-Exempt, Short-Term Bonds withTaxable GNMA SALE for Affordable Apartment Financings*

________________________________* Copyright © by R. Wade Norris, Esq. October 3, 2017 All rights reserved. This document may not be reproduced without the prior written permission of the author.

Presented by:

R. WADE NORRIS, [email protected](202) 973-0110 (office)

(202) 744-1888 (cell)

Norris George & Ostrow PLLCThe Army Navy Office Building

1627 Eye Street, N.W., Suite 1220Washington, D.C. 20006

www.ngomunis.com

I. The Basics of Affordable Multifamily Rental Housing Financings

II. Recent Developments on Tax Exempt Short-Term Cash Backed Bonds – No Negative Arbitrage!

III. Future Higher Interest Rates and MBS Spreads?

IV. Forward Refinancing Opportunities for Affordable Housing Projects Approaching Year 15


• The Borrower agrees to rent 100% of units to tenants whose income is ≤ 60% of AMI (family of 4) – and – to cap rents at 30% of that amount.

• Obviously depresses revenues versus market rate apartments.

• BUT, eligible to sell 4% LIHTC (and maybe state tax credits), which finance 25% to 45% of total development cost with little give up by general partner on cash flow or residual.

R. Wade Norris, Esq. [email protected] (202) 973-0110 (office) (202) 744-1888 (cell) 3


• 50% Test. To be eligible for full 4% LIHTC, the Borrower must finance at least 50% of basis in land and buildings with volume limited tax-exempt private activity bonds under Section 142(d) and keep these outstanding until the project’s placed-in-service date (receipt of certificate of occupancy for new construction or completion of rehab for acq/rehab financings.

4R. Wade Norris, Esq. [email protected] (202) 973-0110 (office) (202) 744-1888 (cell)

II. Combining Taxable FHA Loan Sales withShort-Term Cash Backed Tax-Exempt Bonds and 4% LIHTC

• Post-2008 Solution: Flow FHA Lender Funds through Indenture on Tax Exempt Short-Term Cash Backed Bonds.

• “Magically” converts FHA Lender Funds into tax exempt bond proceeds, which are used to cover project costs.

• Satisfies 50% Test with, in most cases, almost no negative arbitrage or even positive arbitrage and 50-100 basis points lower all-in borrowing rates.


• Major Advantages of Tax Exempt Short-Term Cash Backed Bonds:

1. Qualifies the Project for 4% LIHTC.

2. Still lowers Mortgage Rate by 50 to 100 basis points.

3. Avoids huge (4-8%) negative arbitrage deposit on new construction/sub rehab (§221(d)(4)) deals.

4. Eliminates on-going issuer/administrative fees after 1-3 years; huge benefit where issuers charge major (25-50 basis points) ongoing fees as long as bonds are outstanding.

5. Flexible Financing Alternatives: Can sell bonds in public offering or private placement and can finance multiple loans in one tax exempt bond issue as long as loans close at the same time.

• Major Disadvantages:

0. None (ok, in a very small percentage of cases, a material cap i deposit).


Update: Recent Developments onShort-Term Cash Backed Tax Exempt Bonds with FHA Insured Loans

• Two Major Recent Developments relating to FHA Loans:

1. 10-Year U.S. Treasury Yields still barely above 2.0% – about 2.25%.

2. HUD has reduced MIP on affordable housing FHA loans from 45 to 25 basis points.

• Result:

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All-in Borrowing Rates

223(f) Pilot (Mod Rehab < $40k/door) ≈ 3.50% or less!

221(d)(4) (New Cons/Sub Rehab) ≈ 4.00% or less!

R. Wade Norris, Esq. [email protected] (202) 973-0110 (office) (202) 744-1888 (cell)

Forget the old FHA!!! FHA is Now…

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A Bigger… $2.6+ Billion!(Up from $2.2 Billion in FY16)

Faster… % Meeting Review Times221(d)(4) 60 days – 90.9%

223f 45 days – 85.3%

More Predictable… 90-92% Approved!

Player on Affordable Multifamily Housing FinancingsR. Wade Norris, Esq. [email protected] (202) 973-0110 (office) (202) 744-1888 (cell)

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$ 1.8 $ 1.8 $ 2.5 $ 7.9 $ 6.0 $ 7.9 $ 9.3 $ 6.5 $ 5.8 $ 6.2 $ 10.7$ 0.4 $ 0.2 $ 0.2 $ 0.4 $ 0.5 $ 0.5 $ 1.0 $ 1.9 $ 1.8 $ 2.0 $ 2.3$ 2.2 $ 1.9 $ 2.7 $ 8.3 $ 6.6 $ 8.4 $ 10.3 $ 8.4 $ 7.7 $ 8.1 $ 13.1

No Tax Creditswith Tax Credits

Total2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 FYTD Ann.$ -

$ 2.0

$ 4.0

$ 6.0

$ 8.0

$ 10.0

$ 12.0

$ 14.0

$ 1.8 $ 1.8 $ 2.5

$ 7.9$ 6.0

$ 7.9$ 9.3

$ 6.5 $ 5.8 $ 6.2

$ 10.7

$ 0.4 $ 0.2$ 0.2

$ 0.4

$ 0.5

$ 0.5

$ 1.0

$ 1.9$ 1.8 $ 2.0

$ 2.3

$ 2.2 $ 1.9$ 2.7

$ 8.3

$ 6.6

$ 8.4

$ 10.3

$ 8.4$ 7.7

$ 8.1

$ 13.1

Historical FHA Multifamily EndorsementsFYs 2007 through 2017 (annualized)

221(d)(4) new construction/substantial rehab and 223(f) refi ProjectsWith and Without Tax Credits ($ BB)

No Tax Credits with Tax Credits Total

Source: U.S. Department of Housing and Urban Development.

Results: 1. Annual FHA LIHTC Production (excluding §241(a))Now Tops $2.3 Billion (up from $2.0 billion in FY 2016)10 Times More Tax Credit Volume Than In 2008-2009!!!


Results: 1. Annual FHA LIHTC Production (including §241(a)) Now 265 Loans(up from 230 in FY 2016) and $2.6 Billion (up from $2.2 billion in FY 2016)!

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Basic MF FHA-LIHTC Production

Initial Endorsement FY 2017 – Annualized as of 08/23/17

Section of the Act# of FHA Loans

with Tax Credits

% of Closings Using Tax Credits

(by # of Loans)

Volume of FHA Loanswith Tax Credits

($ millions)

New Construction / Sub Rehab

82 44% $959

223(f), 223(a)(7),and 241(a)

183 24% $1,689.2

Total 265 28% $2,648.2Source: U.S. Department of Housing and Urban Development.


Results: 2. 5 Times the Number of Loans in 2017 v. 2007 – 2009!!!

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48 32 24 39 55 55 68 88 89 104 7217 6 1 22 20 12 50 143 111 108 1274 0 4 8 6 5 5 14 23 15 29

(d)(4)(f)(a)(7)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 FYTD

050

100150200250300

Initial Endorsements FY 07 thru FYTD- Tax Credit Projects – Number of Loans (excluding §241(a))

(d)(4) (f) (a)(7)

Source: U.S. Department of Housing and Urban Development.69 38 29 228


Results: 3. Dollar Volume Almost Quintupled in Last 5 Years Alone!!!

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Tota

l Ins

d Am

t. (m

ills)

$311 $121 $159 $255 $424 $345 $615 $741 $863 $1,131 $857$62 $36 $4 $135 $89 $33 $400 $1,112 $919 $861 $1,177$51 $0 $26 $41 $27 $109 $35 $88 $194 $98 $236

$424 $157 $189 $431 $540 $487 $1,050 $1,941 $1,976 $2,090 $2,270

(d)(4)(f)(a)(7)

Total (mill)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 FY 17 ANN

$0

$500

$1,000

$1,500

$2,000

$2,500

Insured Mortgage Amt. Tax Credit Projs. by Sect. of Act FY 17 annualized (mills) –FY 2007 – 2017 (excluding §241(a))

(d)(4) (f) (a)(7) Total (mill)



Results: 4. Greatly Accelerated Processing Times –Forget What You Know About the Old FHA!

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2017 FYTD – % of Deals that Met Review Timeframe

221(d)(4) 60-Day Review Period

223(f) 45-DayReview Period

223(a)(7) 30-Day Review Period

Northeast Region 97.6% 88.9% 66.7%

Midwest Region 92.6% 80.2% 95.5%

Southeast Region 97.4% 100.0% 100.0%

Southwest Region 94.7% 90.2% 96.4%

West Region 82.6% 66.3% 52.6%

National 90.9% 85.3% 84.2%



Results: 5. Much More Predictable, Professional Underwriting Process.Dramatically Improved “Hit Ratio”

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% of applications received which are approved – based on final decisions made

Stage of Processing

% ApprovedOct 2012 – June

2013% Approved

Q3-Q4 of FY16

# of Decisions FY17 through

08/22/17

% ApprovedFY17 through

08/22/17Refinancing – FIRM 75% 95% 747 92%

NewC/Sub Rehab PREAPP

48% 54% 296 45%

NewC/Sub Rehab FIRM 78% 93% 213 90%



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Example: §223(f)

Expected Placed in Service Date 12 Months

Recommended Tax Exempt Bond Maturity(No Mandatory Tender; No Optional Call)

18 Months

Invest Collateral Fund in 18-Month U.S. Treasury 1.30%

18-Month Tax Exempt Bond Coupon 1.20%

POSITIVE!!! (Not Negative) Arbitrage +0.10%

Fabulous Recent DevelopmentIncrease In Taxable Reinvestment Rates -v- Tax Exempt Bond Coupon =

NO NEGATIVE ARBITRAGE ON DEALS INVOLVING §223(f) AND MOST §221(d)(4) LOANS


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• Net Defeasance: Moreover, if the Borrower makes arrangements for the U.S. Treasuries to be bid and purchased for delivery to the Trustee at closing, NO DEPOSIT to cover capitalized interest is required since the investment earnings are locked in at closing!*

• The Trustee, on behalf of the Borrower, simply makes a small yield reduction payment to the U.S. Treasury from the locked-in positive arbitrage and you are done!**

• Only cost on Bond side is 2-3 points of costs of issuance.

• The best conditions we have had since we introduced the structure in 2008!!!



*Or invest in SLGS issued by the U.S. Treasury equal to the bond yield, now that the SLGS “window” has reopened for 3 months.

**Not needed with SLGS investment.


Recent Important DevelopmentsHow Short-Term Cash Backed Bond Issues Differ when

coupled with Section 221(d)(4) versus Section 223(f) Loans –Greater Capitalized Interest

• Section 221(d)(4) loans now make up a very large percentage of FHA loans we see.

• Have longer expected placed-in-service dates, e.g., 1.5 – 2 years, versus 12 months for Section 223(f) loans.

• Thus longer, e.g., 2 – 3 year bond maturities.

• Thus higher bond coupons, e.g., 1.25 – 1.50% (v. 0.75 – 1.00% for §223(f)).

• Thus much greater capitalized interest to be funded at closing – potentially 2.5 – 3.0% of Bonds.


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Example: §221(d)(4) New Construction/Sub Rehab; Assume 18-month Construction Period.• Majority Bond Counsel view (well over 15-20 bond counsel firms)

• Recommended Bond Structure: 36 Month Maturity24 Month Mandatory TenderNo Optional Call

• Invest moneys in Project Fund and Collateral Fund – i.e., an amount equal to the Bond issue – in 24 month U.S. Treasuries*. Reallocate ownership of this fixed portfolio from Project Fund to Collateral Fund without liquidating as the FHA Lender presents monthly FHA Lender advances to Trustee for deposit to Collateral Fund against disbursement of an equal amount of tax exempt Bond proceeds from the Project Fund to the Borrower/FHA Lender to cover project costs.



*Or invest in SLGS issued by the U.S. Treasury equal to the bond yield, now that the SLGS “window” has reopened for 3 months.


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Yield on 24-Month U.S. Treasury 1.35%

Tax Exempt Coupon on Bonds Priced to24-Month Mandatory Tender 1.25%

POSITIVE!!! Arbitrage 0.10%

SAME GREAT RESULT AS ABOVE!!!



• Zero capitalized interest cost to Borrower.


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• Minority/Conservative Bond Counsel view (3 or 4 bond counsel firms)

• The vast majority of bond counsel firms will give a clean opinion on transactions structured as set forth above. A handful of firms are not comfortable with investing in a fixed portfolio of U.S. Treasuries (or SLGS) without liquidating and reallocating ownership on §221(d)(4) deals as described above.

• This can force the investment of a substantial majority of the cash securing the bonds into liquid taxable government backed money market funds which currently yield only about 20 basis points versus 135 basis points above.

• Moreover, this yield cannot be locked in at closing.• Gross Funding of Capitalized Interest: As a result, instead of making no upfront deposit

and making no negative arbitrage deposit at closing, on these transactions the full capitalized interest – or about 2.5% of the Bond amount (1.25% x 2 years) – must be deposited in bankruptcy remote funds at closing (i.e., the capitalized interest must be “gross funded,” assuming 0% investment earnings).

BUT: SUBSTANTIAL NEGATIVE ARBITRAGE ONA SMALL NUMBER OF DEALS INVOLVING §221(d)(4) LOANS


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• On a $20.0 million bond issue, this is a $500,000 negative arbitrage deposit at closing!

• With creative steps, the issue can be structured so that one third or more of this deposit can be returned to the Borrower if the project is placed in service on its expected placed-in-service date but the expected negative arbitrage is still about $300,000 to $400,000 under this scenario versus $0 above.

• The amount of this negative arbitrage and the size of the upfront deposit can be dramatically reduced on a substantial rehab loan with a large first draw to cover project purchase price and other upfront costs, and other steps may be available to further reduce the negative arbitrage deposit.

SUBSTANTIAL NEGATIVE ARBITRAGE ONA SMALL NUMBER OF DEALS INVOLVING §221(d)(4) LOANS


• If the Borrower has a choice of Issuers and Bond Counsel, it should discuss alternatives carefully with the bank or investment bank structuring the tax-exempt debt and with the bond purchaser’s or underwriter’s counsel (that would be us! ) at the very outset of the financing (i.e., before applying for bond volume and selecting the issuer).


THE MAIN COMPETITION – BANK PRIVATE PLACEMENTS AND FREDDIE MAC TAX EXEMPT LOAN OR “TEL” PRIVATE PLACEMENT STRUCTURE –

ADVANTAGES OF COMPETITIVE EXECUTIONS• Especially in high cost markets, many projects require a construction loan that is

much larger than the supportable permanent debt . A portion of the larger construction loan often provides critical “bridge” financing to later tax credit equity installments and subordinate loan pay-ins.

• Private placement sponsors and bank construction lenders on Fannie/Freddie sub rehab or new construction financings will readily provide such a larger construction loan, since the entire construction loan is secured by a first deed of trust; with FHA, on the other hand, no lien on real estate is permitted to secure a tax credit or other bridge loan.

• Instead, on FHA loans, the bridge loan (either taxable or in the form of subordinate tax exempt bonds if needed to satisfy the 50% rule) must be secured by a pledge of tax credit equity installments, deep pocket general partner guarantees of completion and payment and/or possibly a pledge of general and/or limited partnership interests. Such debt may be more difficult to place.


TECHNIQUES TO REDUCE OR ELIMINATEADVANTAGES OF COMPETITIVE EXECUTIONS

• The need for such a bridge loan can often be eliminated or reduced through the use of “seller take-back debt.”

• Under this approach, a “seller take-back note” is executed by the Borrower and delivered to the Seller in payment of a portion of the project purchase price. This is often used to maximize the purchase price on RAD transactions and other preservation deals, where the new borrower has been set up by or has a close relationship with the housing authority or profit-motivated project seller.

• A robust purchase price also increases the federal and state tax credits available to the purchaser.

Two Approaches with Seller Notes:• Where the Seller Note comprises a large percentage of the project purchase price on an

acquisition/rehab financing (e.g., many RAD deals), proceeds paid to the Seller (as reflected by the Seller Note) may sometimes be escrowed and delivered to the Bond trustee to help collateralize the tax exempt bonds. Disadvantage: Increases size of short-term cash backed bonds and related fees. Advantages: Only one set of tax-exempt bonds to satisfy the 50% test.


TECHNIQUES TO REDUCE OR ELIMINATEADVANTAGES OF COMPETITIVE EXECUTIONS

• As an alternative , the seller take-back note or portion thereof can also be effectively converted to tax exempt debt by having the issuer of the tax exempt cash backed “Series A Bonds” issue tax exempt “Series B Subordinate Bonds,” backed by a surplus cash note from the Borrower . Disadvantage: 2 sets of tax-exempt bond documents. Advantage: No underwriting or origination fee on the series B tax-exempt bonds since they are acquired by the seller.

• Especially if the Seller is a for-profit entity, this also makes the seller take-back terms more attractive to Seller (interest is tax exempt) and the Series B Bonds count as tax exempt debt for satisfying the 50% Test, if needed.

• Moreover, the subordinate tax exempt bonds can be delivered to the Seller as partial consideration of the transfer of the project without cash changing hands, reducing or eliminating the need for bridge financing and putting the FHA execution on more even footing with the placements.


UNIQUE ADVANTAGES OF FHA LOANS

• FHA insured loan is the 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.*

• On an FHA 221(d)(4) sub rehab/new construction loan, there is a cost certification at final endorsement, but no new loan underwriting; differs from sub rehab/new construction private placement deals and sub rehab/new construction Fannie/Freddie deals where there is a new loan underwriting and possible loan downsizing based on DSC or LTV at “Conversion.” This feature put many borrowers into default in the 2007-2009 downturn.

• FHA loans offer a 35 year (§223(f) or a 40 year (§221(d)(4) level payment loan amortization with no balloon ; versus a 16 to 18 year balloon on a private placement, Fannie or Freddie deal.

• FHA offers greater prepayment flexibility – e.g., closed for 2 years to 108% decreasing 1% per year thereafter to par versus a 16-18 year lock out (e.g., private placements) or yield maintenance of 12% or higher declining over a longer period (e.g., 15 years) for others (Fannie Mae, Freddie Mac).

26

________________________________*Note: One cannot avoid guarantees altogether; some guaranties will be required in connection with the 4% LIHTC on these financings.


27

• In the fall of 2008, the world was on the brink of a financial collapse which could have lead to an economic collapse rivaling that of the Great Depression – 25% unemployment, widespread bank foreclosures, bread lines, a decade of lost growth.

III. FUTURE HIGHER INTEREST RATES AND SPREADS?


• What did the Fed do in 2008?

• It slashed the Fed’s discount rate from 5.0% to virtually zero to aggressively promote borrowing and lending – a level which has held since 2008!

• It flooded the financial markets with cash by buying massive amounts – over $3 trillion – of U.S. Treasury securities and agency MBS Securities in the open market and has held these on its balance sheet since 2008.

• As shown below, the Fed’s balance sheet quintupled to 25% of GDP , the highest level since World War II.

1920 1930 1940 1950 1960 1970 1980 1990 2000 20100%

5%

10%

15%

20%

25%

30%

0%

5%

10%

15%

20%

25%

30%

Federal Reserve Assets as % of GDP1920 - 2014

Largest Fed balance sheet since WWII


• We are now more than eight years into a slow but steady recovery , with unemployment approaching the Fed’s target level.

• The Fed is finally beginning to tighten.

• What you know: the 10-year U.S. Treasury is still at a very low level – 2.20% – but the Fed has implemented two 25 basis point discount rate increases and most analysts project 1 or 2 more by the end of the year.

• Many analysts predict that the 10-year U.S. Treasury rates will also finally begin to move up.

• As of March 2017, the Bloomberg consensus forecast for the 10-year Treasury rate in the fall of 2018 was about 3.25% – 100 basis points higher than today.


• What you may not have known : The Fed may be about to undertake a 10-year, but dramatic, deleveraging of its balance sheet by selling the $3 trillion of Treasury and MBS holdings it so quickly acquired in 2008. In the view of one respected research firm, it will start by selling its holdings of about $1.6 trillion of MBS securities, or a sale of about $160 billion per year, over the next decade.

2004 2009 2014 2019 2024 20290

1

2

3

Projected Fed Holdings of Treasuries and Agency Bonds & MBS

Treasuries Agency Bonds & MBS

$Trillions


• How will the Fed do this? By allowing its MBS and agency holdings to prepay or mature without purchasing new MBSs or agencies in excess of the intended draw down rate.

• SIFMA data indicates the total volume of agency MBS in 2016 was about $1.6 trillion. This proposed deleveraging could thus eliminate 10% of the buy side for MBS securities over the next 10 years. MBS (PLC only) rates today are around 3.0%, one could estimate this drop in demand could raise MBS rates by an additional 30 basis points or more.


• On top of this, MBS spreads today , at around 100 basis points or less, are at historical lows versus most of the last two decades – they were much higher – as much as two to three times higher for general MBS spreads – for most of that period. If 10-year Treasury rates go up, one would expect the spreads to broaden once again as well.

• Taking this into account, together with the general Street consensus for a 100 basis point increase in the 10-year Treasury by the fall of 2018, borrowers need to understand that their all-in borrowing rates could be 100?, 150?, 200? basis points higher, not in 3 years, but perhaps only 18 months from now.

Which suggests that an affordable housing borrowershould seriously consider…


Today; Year 12, 13 or 14UST ≈ 2.20%

Year 15UST ≈ 3.5% to 4.5%?

IV. FORWARD REFINANCING FOR AFFORDABLE HOUSING PROJECTS

APPROACHING YEAR 15

R. WADE NORRIS, [email protected]

(202) 973-0103(202) 744-1888 (cell)

________________________________* Copyright © by R. Wade Norris, Esq. October 3, 2017 All rights reserved. This document may not be reproduced without the prior written permission of the author.

33

FACT PATTERN

• Affordable housing developer has a number of projects approaching Year 15 – 1,2 or 3 years left to run on original QPP; or developer has opportunity to purchase such a project.

• Believes rates are finally starting to move up.


FACT PATTERN

• Wants to: 1. Refinance at today’s rates – e.g., FHA 223(f) loan at all-in 3.50% rate, 35-year level

amortization.2. Do a transfer of physical assets (TPA) at no premium or fee and transfer project and

today’s “low rate” refi loan to new borrower affiliate in Year 15.3. Issue short-term tax-exempt cash-backed bonds in Year 15 to prime 50% test; and4. Syndicate 4% LIHTC and recapitalize the project in the hands of the new borrower.


DILEMMA

If too large a loan is transferred, cannot spend the amount of tax-exempt bond proceeds in Year 15

required to satisfy the 50% test.


YEAR 15Uses

Acquisition Cost $15.0mm

Rehabilitation & Other Costs $6.0mm

Total Development Costs (Yr. 15) $21.0mm → $11.0mm TE Bonds for 50% Test

Sources

4% LIHTC & Other Funds $8.0mm

Assumed 223(f) Refinancing Loan $13.0mm

Total Sources $21.0mm

Required Tax-Exempt Bond Proceeds Expenditure $11.0mm

Costs to be Paid from Tax-Exempt Bond Proceeds(4% LIHTC & Other Funds Flowed Through Tax-Exempt Bond Indenture)

$8.0mm

“Use of Tax-Exempt Bond Proceeds Gap” $3.0mm


2 SOLUTIONS

1. Orrick, Herington & Sutcliffe LLP “look through” theory.

• Take appropriate steps contemplating Year 15 bonds before taxable refi.

• Can effectively treat part of taxable refi loan as expenditure by new borrower of Year 15 tax-exempt bond proceeds to acquire project in Year 15.

• Uses 18-month reallocation rules; cannot close refi more than 18 months before new bonds are issued.

• Section 42 bar has yet to get comfortable with reallocation theory on Section 42 side, but several syndicators and Section 42 counsel considering.


2. Available now: Partially Prepayable Refi Loan + Supplemental Loan in Year 15.

• In above example, split 223(f) refi loan into two components: (i) $10.0mm component with standard prepayment lock out; (ii) $3.0mm component prepayable at par in Year 15 (sold at discount).

• Close $3.0mm Section 241(a) supplemental FHA loan for new borrower in Year 15. $3.0mm supplemental loan and $8.0mm of LIHTC (and perhaps other Year 15 funds) will collateralize the $11.0mm short-term cash-backed issue, freeing up $11.0mm in tax-exempt bond proceeds to acquire and rehab the project as the 50% Test requires.

• Permanent debt financing now consists of original $10.0mm standard 223(f) FHA loan and new $3.0mm supplemental 241(a) loan. “Use of tax exempt bond proceeds gap” disappears.

2 SOLUTIONS


• Disadvantages:• Difficult to lock pricing/rate on $3.0mm section 241(a) loan in advance of Year 15.• Must fit expenditures in Year 15 to be financed from Section 241(a) loan into permitted

categories.• Costs and funding sources in Year 15 may be difficult to predict.

ADVANTAGES AND DISADVANTAGES


• Advantages:• Have still locked today’s low rates on 70% to 80% of the loan.

ADVANTAGES AND DISADVANTAGES

• Refinance can occur > 18 months before new bonds are issued.• Tax analysis very straight forward; should not raise issues on tax-exempt debt or

syndication side.

• Substantial Interest Rate Savings

Assume 2.20% 10-Yr UST → 4.20% 10-Yr UST at Year 15 (200 basis point increase)

Annual Debt Service on $13.0mm of Debt

$13.0mm @ 5.50% ML Rate $715,000

$13.0mm @ Split ML Rate

($10.0mm @ 3.50%; $3.0mm @ 5.50%) 515,000

Annual DS Savings: $200,000 (28%)

Almost $7,000,000 debt service savings on $13,000,000 loan over 35 years!


RESULTS• Available mechanism for many projects to lock in today’s rates for

substantial part of debt needed to recapitalize project at Year 15.• Not all projects will work; careful analysis of projected sources and uses at

refi and Year 15 required.• But, the locked in future debt service savings may be 50% or more of the

refi loan amount and in a higher interest rate environment may become a major, transferable project asset.

42

The time to refinance is now!!!R. Wade Norris, Esq. [email protected] (202) 973-0110 (office) (202) 744-1888 (cell)

taxable gnma sale for affordable apartment …...2018/04/10 · short-term cash backed tax exempt...

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