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of bonds or - National Housing & Rehabilitation Association

National Housing & Rehabilitation Association’s

2013 Annual Meeting

Combining Tax Exempt, Short-Term Bonds

with Taxable GNMA Sale for Affordable

Apartment Financings

S&P Rated Unenhanced Affordable Housing Bonds

Speakers:

R. Wade Norris Esq.

wnorris@enbonds.com

(202) 973-0100

EICHNER NORRIS & NEUMANN PLLC

1225 19 th Street, N.W., 7 th Floor

Washington, D.C. 20036

website: www.ennbonds.com

John Rucker

johnr@merchantcapital.com

(334) 834-5100

MERCHANT CAPITAL, L.L.C.

2660 EastChase Lane, Suite 400

Montgomery, AL 36117

www.merchantcapital.com

March 6-9 | Loews Miami Beach Hotel | Miami Beach, FL


COMBINING TAXABLE GNMA SALES WITH TAX

EXEMPT BONDS AND 4% LIHTC

• Taxable GNMA Markets continue to deliver lower pricing than Long-Term Tax

Exempts

– 223(f) GNMA Sale 2.50% + 25 BPS GNMA/Svcg = 2.75% ML Rate + 45 BPS MIP =


3.20% All-in Rate

221(d)(4) GNMA Sale 3.00% + 25 BPS GNMA/Svcg = 3.25% Mortgage Loan Rate +

45 BPS MIP = 3.70% All-in Rate

– GNMA securities sold on “forward delivery” basis and thus no substantial negative

arbitrage

• Traditional Long-Term Tax Exempt Bond Financing

– Bond Coupon 3.90% + 25 BPS GNMA/Svcg + 45 BPS MIP + 15 BPS Bond Fees =

4.75% ML Rate

– Major Negative Arbitrage Deposit (5 - 10% of Loan Amount) on 221(d)(4) New Cons./

Sub Rehab Deal v. ~1% on Short-Term TE Bonds

• Advantages of Taxable GNMAs

– ~1.05 to 1.45% lower permanent borrowing rate (~8-10% additional loan proceeds

on DS constrained loan)

– Dramatic reduction in negative arbitrage deposits required for long-term tax exempt

bond execution (~1% v. 5-10%)

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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THE POST 2008 WORLD OF

UPSIDE DOWN RATES

• In the fall of 2008, numerous AAA-rated debt securities became

worthless or worth only pennies on the dollar – almost unprecedented

• The world of long-term debt investors fled to the safety of U.S. Treasury

bonds

• At the same time, yields on tax exempt municipals soared to new

heights as concerns about credit quality and liquidity mounted

• The following charts plot an amazing development – long-term AAA-rated

tax exempt municipal bond rates soaring above the rate on now much

lower yielding federally taxable U.S. Treasury Bonds

• We still live in that upside down world today, as continuing economic

uncertainty regarding Europe and the U.S. economy and worldwide financial

systems are joined by growing concerns about the tax exempt status of

municipal bonds

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

3


7.50%

6.50%

5.50%

4.50%

3.50%

2.50%

1.50%

Long Term Rate Comparison: 30-Year MMD (Tax Exempt)

Versus 10-Year Constant Maturity Treasury (Taxable)

30-Year MMD 10-Year CMT

Early 2008 – Taxable US Government Securities

Rates Fall Below Tax Exempt Municipal Rates

~400

bps

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

~127

bps

4


Traditional Taxable GNMA execution:

TAXABLE GNMA SALE

1 Funding Request

3 Funding Request

Borrower Lender

GNMA

2

Cash

Paper / Securities

Draw Funding

GNMA Proceeds

(as reimbursement

for draw funding)

Sale of GNMAs

GNMAs

(amt equal to funding request)

Problem: does not qualify for 4% low income housing tax credits

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

4

5

6

GNMA

Purchaser

5


TAX EXEMPT BONDS

Traditional FHA/GNMA Tax Exempt Bond Execution:

Bond

Purchaser

1

2

Cash

Paper / Securities

42‐Yr Bonds

Bond Proceeds

Sale of

GNMAs

Trustee

Bond Proceeds

(as reimbursement

for draw funding)

3 Funding Request

5 Funding Request

Borrower Lender

GNMA

4

7

Draw Funding

GNMAs

(amt equal to funding request)

Problems: High Mortgage Rate and large Negative Arbitrage deposit

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

8

6

6


COMBINED TAXABLE GNMA SALE WITH TAX EXEMPT BONDS AND 4% LIHTC

Bond

Purchaser

GNMA

Purchaser

3 Funding Request

5 Funding Request

Borrower Lender

GNMA

4

1

2‐Yr Bonds

Bond

Proceeds

2

Cash

Paper / Securities

Draw Funding

Bond

Proceeds

Account

Trustee

9

Bond Proceeds

(as reimbursement

for draw funding)

Escrow

Account

Bond Payoff

(after Project is placed

in service)

GNMA

Proceeds

(as reimbursement

for draw funding)

GNMAs

(amt equal to funding request)

Benefits: Qualifies for 4% LIHTC; Low Mortgage Rate and nominal Neg Arb deposit

6

10

7

8

Sale of GNMAs

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

7


Traditional Long-Term

Tax-Exempt GNMA

Backed Bonds

Short-Term Cash-

Collateralized Bonds with

Taxable GNMA Sale

FHA Loan Amount: $18,000,000 $20,000,000

FHA Loan Term/Tax-Exempt Bond Term: 42/42 Years 42/2 Years

All-in Borrowing Rate

Bonds 3.90% GNMA 3.00%

3 rd Party Fees 0.15% 3 rd Party Fees N/A

Servicing + GNMA

Fee

0.25%

Servicing +

GNMA Fee

0.25%

Total ML Rate 4.30% Total ML Rate 3.25%

FHA MIP 0.45% 0.45%

All-in Borrowing Rate 4.75% 3.70%

Result 1.05% ML Rate Savings (~8% of additional loan proceeds on debt service

constrained loan)

Negative Arbitrage (Deposit):

4.25% x 18,000,000 x 2 years

$1,530,000 (8.50% of ML)

1.00% x $13,000,000 (1) x 2 years

$260,000 (1.3% of ML)

Negative Arbitrage (Actual): $765,000 (4.3% of ML) $260,000 (1.3% of ML)

(1) $13 million is sized based on the 50% test ($25 million total cost)

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

8


Traditional Long-Term Tax-Exempt GNMA

Backed Bonds

Sources Sources

Short-Term Cash-Collateralized Bonds with

Taxable GNMA Sale

FHA Loan Funds $20.0 M

Bond Proceeds/FHA Loan $18.0 M Bond Proceeds (1) 13.0 M

4% Tax Credit Equity 5.5 M 4% Tax Credit Equity 5.5 M

Deferred Developer Fee 1.0 M Deferred Developer Fee 0.0 M

Subordinate Financing 0.5 M Subordinate Financing 0.0 M

Total Sources $25 M Total Sources $38.5 M

Uses Uses

Redemption of Bonds $13.0 M

Land $3.5 M Land 3.5 M

Building 15.0 M Building 15.7 M

Developer Fee 2.5 M Developer Fee 3.0 M

Financing Costs + Soft Costs +

Reserves

THE BIG PICTURE – OVERALL

SOURCES AND USES

4.0 M

Financing Costs + Soft Costs +

Reserves

Total Uses $25 M Total Uses $38.5 M

(1) $13 million is sized based on the 50% test ($25 million total cost)

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

3.3 M

9


Net Results – Borrower:

• Over 100 basis points of savings in permanent borrowing rate, resulting in a lower

cost of capital over the life of the loan

– Increased Loan Proceeds and/ or

– Increased Cash Flow

• Negative Arbitrage deposit reduced from ~8 - 10 points or more to ~1 points or

less

• Full syndication value of 4% LIHTC equity on affordable units achieved

Net Results – IRS:

RESULTS OF STRUCTURE

• $13.0 mil. of TE Bond proceeds used to fund Qualified Project Costs –

significantly lower TE Bond amount (by $5.0 million in example) than if $18.0 million

FHA loan had been funded with long-term tax exempt bond issue

• No arbitrage “artifice or device” - all TE Bond Proceeds (and replacement

proceeds) invested at far below TE Bond yield

• No “over issuance” of bonds or “overburdening” of market - only enough TE

Bonds to meet 50% test, much lower all-in borrowing rate (1.0% v. 4.25%) and

outstanding 2 years versus 42 years

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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CONCLUSION

• Well over a dozen major law firms have issued or agreed to issue

unqualified approving opinions on deals using this type of cash

collateralized structure for all or part of numerous tax exempt multi-family

housing bond issues

• Documents and rating agency criteria well developed

• This is THE NEW WAY to finance affordable housing projects backed

by FHA insured loans

• Highly unlikely market conditions will change in next 1-2 years to favor

traditional long-term tax exempt bond structure

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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S&P UNENHANCED AFFORDABLE HOUSING

BONDS

• S & P defines unenhanced affordable housing projects

(“AHP”) as public-purpose real estate supported by

below-market rents.

• While many affordable housing transactions are

structured with credit enhancement, AHP projects are

sized and rated based on the strength of the underlying

real estate.

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

12


S&P UNENHANCED AFFORDABLE HOUSING

BONDS

• The analysis of AHP projects focuses on the following

criteria:

– Real estate quality

– Legal structure

– Property performance

– Strength of Sponsor

– Construction risk (if any) and lease-up risk

• It usually takes 90-120 days to close ( with an

experienced team)

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

13


S&P UNENHANCED AFFORDABLE HOUSING

BONDS

• S & P will generally review independent third-party

reports as part of the rating process. These reports

include:

– Profile reports1 – Appraisal

– Market study

– Phase I

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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S&P UNENHANCED AFFORDABLE HOUSING

BONDS

– Physical Needs Assessment

– Financial audits (most recent three years)

– Original HAP contract and HAP assignment

– Current and historical rent rolls

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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S&P UNENHANCED AFFORDABLE HOUSING

BONDS

• While each AHP is different, Standard & Poor’s will

generally look for the following assumptions in the

financing:

– DSC of 1.20x1 – Underwriting is based on “stabilized” NOI

– Occupancy assumptions based on historical trends

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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S&P UNENHANCED AFFORDABLE HOUSING

BONDS

– Reserve fund funded with proceeds and sized at

50% maximum annual debt service

– Repair and replacement reserves

• $325 to $350 per unit for properties that are 15

to 20 years old

• S&P will also refer to the PNA report

– 35-year amortization

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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S&P UNENHANCED AFFORDABLE HOUSING

BONDS

Financing Observations Sources and Uses of Funds

• In Nov. 2012, Merchant Capital served as sole

manager on $4,925,000 of Biloxi Housing

Authority, Multifamily Housing Revenue Bonds,

Series 2012.

• Bond proceeds were used to finance the

acquisition and rehabilitation of an 150-unit rental

housing project

• The Project will be owned and operated by Agape

Beauvoir Manor, Inc., a 501(c)(3) organization.

• The Project is operating under a HAP contract

and was underwritten with a 1.20 DSC constraint.

• The Series 2013 bonds were rated “A-” by

Standard & Poor’s and were amortized over 35

years. The financing rate on the bonds was

4.82%.

Notes:

1 The 2017 maturity is a taxable tail that was issued to cover the 2% cost of issuance limitation

2 Tax-exempt yields are a spread to MMD. Taxable yields are a spread to US Treasury

Sources of Funds

Par Amount 4,925,000

Original Issue Premium (Discount) (141,950)

Reserve Funds on Hand 424,320

Total 5,207,370

Uses of Funds

Acquisition Fund 4,050,000

Construction Fund 656,750

Debt Service Reserve Fund 143,944

Cost of Issuance 356,676

Total 5,207,370

Pricing Observations 1,2

Par Spread

Maturity ($000) Coupon Yield (bps)

2034 1,895 4.25% 4.46% + 224

2047 2,740 4.75% 4.93% + 246

2017 290 4.50% 4.73% + 384

Total / Ave 4,925 4.54% 4.74%

Eichner Norris & Neumann PLLC Merchant Capital, L.L.C.

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