financing structures for 4% lihtc transactions with...

Financing Structures for 4% LIHTC Transactions with Taxable FHA Loans

Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190

[email protected]

Long Term Yield Curves (as of 08/20/19)

Source: Bloomberg. Thomson Reuters Reflects market conditions as of August 20, 2019Thomson Reuters Municipal Market Data (MMD) AAA curve is a proprietary yield curve that provides the offer-side of AAA rated state general obligation bonds

10-year UST versus 30-year MMD

2KENT NEUMANN | 202-973-0107 | [email protected]

Historical Average = 3.51%8/20/2019 = 1.56%

Historical Average = 4.06%8/20/2019 = 1.90%

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2.00

3.00

4.00

5.00

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7.00

8.00

10-YR UST 10-YR UST Average 30-YR MMD 30-YR MMD Average

Historically Flat Yield Curve (as of 08/20/19)



1-year UST = 1.72%

30-year UST = 2.04%

30-year MMD = 1.90%

1-year MMD = 0.96%0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049

MMD UST

1-yr vs 30-yr SpreadUST: 0.32MMD: 0.94

• Favorable Underwriting Terms for FHA loans include:• 35/40-year full term / amortization• No resizing at conversion• Non-recourse & integrated construction and perm• Most are structured as draw-down loans to avoid neg arb• FHA debt qualifies for 10-year hold exemption (for acquisition credits)• Rates below 4% plus MIP• Davis Bacon wages triggered for sub rehab / new construction deals

KENT NEUMANN | 202-973-0107 | [email protected]

Short Term Cash-Backed Bonds with Taxable Perm Loan

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• Project still need tax exempt bonds to qualify for 4% Low Income Housing Tax Credits

• At least 50% of aggregate basis (including building and land) must be financed with tax exempt bond proceeds

• Provides a significant (~30% or higher) additional source of funds for affordable housing transactions

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4% Low Income Housing Tax Credits: The 50% Test


Short Term Cash Backed Bonds

Borrower

LP Investor

PermLender

Debt service payments

Lenderfunds

Bond proceeds

Bond proceeds

Trustee

Bond Holders

Cashcollateral

KENT NEUMANN | 202-973-0107 | [email protected] 6

Bond Amount to meet 50% test < Taxable Loan Amount (see prior slide): No additional collateral needed!

Bond Amount to meet 50% test > Taxable Loan Amount: Need other collateral sources of funds including:

• Subordinate Loan Proceeds• Seller Note• Tax Credit Equity

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Short Term Cash Backed Bonds


Methods to reduce transaction costs and generate more proceeds:

• Pooled financings – multiple projects w/ one aggregate bond issuance

• No long-term bond related fees

• Potential for additional tax credit equity due to increased basis

• No net interest cost on bonds in current market

Other Cost Saving Features/Options


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Negative Arbitrage or Positive Arbitrage?

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1.50

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3.50

2-Year MMD (plus credit spread) 2-Year UST

Short Term Yield Curve (as of 08/20/19)



Pricing Indications

2-Year MMD + credit spread 1.36

Less: 2-year UST (1.51)

Net 2-year Bond Rate (0.15)

Bond RateAvg Investment Yield

1.51%

1.36%

15 BPS Positive Arbitrage

Bondholders are receiving (tax exempt) interest while bonds are outstanding

Cash collateral can be invested in treasury while held with the Trustee

Trustee

Bond HoldersTreasury Investment

(Needs to go back to IRS)

Negative/Positive Arbitrage


Issuer Fees*: 0.10% - 3.00%

Bond Counsel*: $35,000 - $100,000

Underwriter’s Fee: 0.50% - 1.00%

Underwriter’s Counsel:

Miscellaneous: $10,000 - $20,000

Negative Arbitrage*: ZERO

$35,000 - $50,000

KENT NEUMANN | 202-973-0107 | [email protected] 12

Costs of the Short Term Bond Deal

Bond Application/Volume Cap/Initial Approval• As soon as possibleDocument Preparations and Review• Around Submission of Taxable Loan ApplicationBond Pricing• ~2 weeks before ClosingPre-close/Close• Simultaneous with Taxable Loan closing

Timing of the Short Term Bond Deal


• Long-term tax-exempt rates are starting to trend lower thantaxable rates

• Newer “pass through” bond structure sold to certain buyersbased on historic average life has recently priced well in themarket while reducing certain traditional bond costs

• Negative arbitrage can still result in significant up-front depositfor new construction / sub rehab deals (we can help with this)

• Other factors for structure should be discussed well inadvance of starting documents

Long Term Bonds Backed by GNMAs


• Many 4% preservation deals include seller financing inthe form of a subordinate “take-back” note (common inRAD transactions)

• Due to the LIHTC 50% test, tax-exempt bonds inexcess of the permanent financing are often required inthese deals

• Several ways to address this issue with various bondstructures

Tax Exempt Seller “Take Back” Note & Bonds


GOALS: (1)Lock in today’s rates for future tax

credit deals and/or(2)Qualify for exemption for 10-year

hold rule (for acquisition credits)

FHA Refinancing to Re-syndication (R2R)


• NEW LOAN: FHA 223(f) loan to refinance existingdebt or purchase project. Keep rehab to a minimum.(We can structure the note for future prepayment flexibility)

When ready for Bonds/4% Credits• Step 1: TPA (transfer of physical asset) process• Step 2: Supplemental FHA 241(a) loan• Step 3: Use short term tax exempt bonds to qualify

for 4% tax credits

FHA Refinancing to Re-syndication (R2R)


Contact Information

Kent Neumann, Esq.Direct: (202) 973-0107Cell: (703) 568-0190

[email protected]

Allison King, Esq.Direct: (202) 973-0118

[email protected]

Lauren Marcus, Esq.Direct: (202) 973-0122

[email protected]

Alex Zeltser, Esq.Direct: (202) [email protected]

mailto:[email protected]




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