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FINANCING WITH TAX-EXEMPT BONDS. Why Tax-Exempt Bonds? Another financing source for affordable housing Bondholders are the lenders Benefit to Borrower:

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Presentation on theme: "FINANCING WITH TAX-EXEMPT BONDS. Why Tax-Exempt Bonds? Another financing source for affordable housing Bondholders are the lenders Benefit to Borrower:"— Presentation transcript:

1 FINANCING WITH TAX-EXEMPT BONDS

2 Why Tax-Exempt Bonds? Another financing source for affordable housing Bondholders are the lenders Benefit to Borrower: Loan interest rate is below commercial lending rate Benefit to Issuer: Can provide below market interest rate financing for affordable housing Benefit to Bondholders: Interest on bonds is exempt from federal income tax Interest on bonds is exempt from state income tax (for in-state purchasers)

3 What is a Bond? A contract between the issuer and the bondholder A debt instrument – A promise to pay

4 Basic Bond Structures Loan to Developer Bond proceeds ($)  Issuer  Developer  Project Loan to Lender Bond proceeds ($)  Issuer  Lender  Developer  Project

5 Parties to a Bond Transaction Issuer (state; political subdivision; or other governmental entity authorized to issue bonds) Trustee (holds assets securing Bonds; makes payment to Bondholders from mortgage loan payments: exercise remedies if a default) Project Owner (Borrower) Bond Counsel (drafts bond documents and delivers tax opinion)

6 Underwriter (Investment Banker markets the Bonds) Credit Enhancer (guarantees payment of the Bonds; bears ultimate project “risk”) Mortgage Banker (DUS Lender/Underwriter) – typically evaluates financial strength of project, dictates structure of Bonds and acts as mortgage loan servicer for GNMA transactions. Financial Advisor to Issuer (helps Issuer evaluate Bond transaction and negotiates with Underwriter)

7 Investment Agreement (“GIC”) Provider (guarantees specified rate of return on moneys invested to secure Bonds) Counsel to the Parties DTC (entity that holds Bonds in book-entry form) Rating Agency (provides credit rating for Bonds based on credit rating of Credit Enhancer or GIC)

8 BASIC BOND DOCUMENTS WHAT DO THEY DO? Bonds Indenture Loan Agreement/Note Regulatory Agreement Credit Enhancement Documents Credit Enhancement Agreement Reimbursement Agreement Deed of Trust/Mortgage

9 Preliminary Official Statement (“POS”) Official Statement (“OS”) Bond Purchase Agreement (“BPA”) Disclosure Agreement Investment Agreement (“GIC”) Closing Documents Certificates Opinions

10 Basic Credit Enhancements for Rated Bonds Letter of Credit (Direct Pay; Standby) Municipal Bond Insurance (MBIA; FSA; FGIC; AMBAC) Surety Bond FHA, GNMA, FNMA, FHLMC Insured/Guaranteed FHA-Insured/Risk Sharing

11 BONDHOLDERS TRUSTEE ISSUER PROJECT OWNER PROJECT Loan Agreement/Note/Mortgage $ Principal and Interest $ $ Bond Proceeds Loan Agreement/Note/ Mortgage (security for Bonds) $ Loan Payments $ Bond Proceeds $ Cash Flow LOAN TO DEVELOPER STRUCTURE (No Credit Enhancement)

12 BONDHOLDERS TRUSTEE ISSUER PROJECT OWNER PROJECT $ Principal and Interest $ Proceeds Mortgage/Note/ Loan Agreement $ Proceeds $ Cash Flow LOAN TO DEVELOPER STRUCTURE (Letter of Credit) LETTER OF CREDIT BANK Assignment of Mortgage/Note/ Loan Agreement Letter of Credit (Letter of Credit Bank bears bankruptcy risks) $ Reimbursement Agreement Trustee and Letter of Credit Bank are co-beneficiaries under the Mortgage, as their interests may appear Letter of Credit Bank bears bankruptcy risk Either a remarketing or mandatory redemption when Letter of Credit terminates

13 BONDHOLDERS TRUSTEE ISSUER PROJECT OWNER PROJECT $ Principal and Interest $ $ Proceeds Loan Agreement/ Note/Mortgage $ Proceeds $ Cash Flow LOAN TO DEVELOPER STRUCTURE (Municipal Bond Insurance) MUNICIPAL BOND POLICY Pursuant to Assignment Agreement, Issuer assigns its interest in Note, Loan Agreement and Mortgage to Trustee (Bond Insurer subrogated to rights of Bondholders and Trustee) Bond Insurer bears bankruptcy risk $ Loan Payments $ $ Pay in event Developer defaults (Policy insures Bondholders against bankruptcy risks)

14 BONDHOLDERS TRUSTEE ISSUER PROJECT OWNER PROJECT $ Principal and Interest $ Bond Proceeds Loan Agreement/ Note/Mortgage $ Bond Proceeds $ Cash Flow LOAN TO DEVELOPER STRUCTURE (GNMA-MBS or Pass-Through Certificate) GNMA LENDER (GNMA Mortgage Banker Servicer) Mortgage-backed Security (MBS or Pass-through Certificate) Mortgage/Note $ payments on MBS Pass-Through Certificate guarantees loan payments Mortgage/Note $ Loan Payments Mortgage/Note Bankruptcy risk is with GNMA. $ Bond Proceeds

15 BONDHOLDERS TRUSTEE ISSUER (Mortgagee) PROJECT OWNER PROJECT $ Principal and Interest $ Bond Proceeds $ Proceeds Mortgage/Note/ Regulatory Agreement $ Proceeds $ Cash Flow HUD RISK SHARING STRUCTURE HUD/FHA $ FHA Mortgage Insurance Payments if Borrower Defaults Note is insured under Section 542(c) of the Housing and Community Development Act of 1992 HUD and Issuer (state or local housing finance agency) share any net loss as agreed to in Risk- Sharing Agreement: 50% or more (Level 1 Participants); 10% or 25% (Level II Participants) Note payments include debt service on Bonds, servicing fee, trustee’s annual fee, Issuer’s annual fee, rating agency fee, rebate analyst fees (MIP, taxes and insurance are paid under Mortgage) $ Loan Payments SERVICER (may be the Issuer) $ Mortgage Loan Payments

16 Types of Bond Issues for Affordable Housing § 142(d) Multifamily Housing Bonds New construction Acquisition/rehabilitation of existing housing § 501(c)(3) Housing Bonds (Housing Bonds issued for the benefit of nonprofit project owners) New construction Acquisition/rehabilitation Acquisition Governmental Bonds (for Issuer-owned properties)

17 Current Refundings (i.e., issuance of Bonds to redeem within 90 days existing tax-exempt bonds issued to finance construction or acquisition of the property) § 103(b)(4)(A) Bonds (Pre-1986) § 142(d) Bonds Governmental Bonds § 501(c)(3) Bonds Advance Refundings (typically, proceeds of refunding bonds, together with other moneys as needed, are put into escrow to pay principal of and interest on old bonds as they become due until first call date when old bonds are redeemed in full) Governmental Bonds § 501(c)(3) Bonds

18 TAX LAW REQUIREMENTS FOR HOUSING BONDS General: residential rental project (no condos) project may include functionally related facilities (swimming pool, club house, tennis courts, parking) complete living unit (bathroom and kitchen with oven and cooking burners (or microwave), refrigerator, and sink)

19 available to members of the general public (maybe restricted to elderly for elderly housing) no transient housing no students (with some limited exceptions) significant limitations on assisted living low to moderate income tenant requirements Governmental Bonds for Housing no federal tax requirements: provision for “housing” must be within the statutory purpose and authority of Issuer

20 GENERAL LEGAL CONSIDERATIONS Issuer Statutory Bond Requirements statutory authorization to issue bonds (purpose and authority) form of bonds (e.g., information to appear on face of bond – limited liability language) bond authorizing resolution (information to be included) organic requirements (may impose requirements on how transaction can be structured)

21 applicable state property tax exemptions bond validation requirements (e.g., Florida/Georgia) state attorney general approval (e.g., Texas) low or moderate income tenant requirements and/or rent restrictions

22 Bankruptcy Issuer Developer Credit Enhancer

23 ISSUER POLICY CONSIDERATIONS New Bond Issues and Refundings Application Fee Issuer Fee: Up front (% of principal amount of Bonds issued) Issuer Fee: Ongoing compliance monitoring fee (percentage of principal amount of Bonds – original amount v. declining balance) Public purpose set aside requirements/rent requirements

24 Unrated bond issues (large denominations/definition of “big boy” investor/investor letters/restrictions on transferability/protection of “widows and orphans”) Purchase contract indemnification of Issuer from developer and underwriter (liability regarding OS and security laws) Loan agreement indemnification of issuer from developer (all liability associated with project/environmental/tax-exempt status of bonds)

25 BOND ISSUE TIMETABLE TEFRA Public Hearing Federal Publication Requirements State Publication Requirements Approval of Bond Issue by “Highest Elected Official” Validation (e.g., Georgia, Florida) State Attorney General Approval (e.g., Texas) HUD Process, if applicable (e.g., GNMA collateralized Bonds and HUD Risk-Sharing)

26 CLOSING IT ALL COMES TOGETHER

27 BOND “BUZZ WORDS” WIDOWS AND ORPHANS BIG BOYS TERM BONDS SERIALS FLOATERS SINKERS BPA

28 POS OS GIC REFUNDING TAXABLE TAIL BOOK-ENTRY DTC

29 UNDERWRITING HOUSING BONDS FOR LOCAL HOUSING AGENCIES Role of Underwriter Sells bonds Assists with structuring transaction/“runs numbers” Advises as to market conditions Coordinates with rating agencies/obtains rating letter Bids out guaranteed investment contract (“GIC”) Obtains CUSIP numbers Creates timetable

30 Underwriter Documents Bond Purchase Agreement (“BPA”) Preliminary Official Statement (“POS”) Official Statement (“OS”) Blue Sky Survey Underwriter’s Counsel 10(b)5 opinion

31 Underwriting Related Documents Continuing Disclosure Agreement Rule 15c2-12 Certificates DTC Letter of Representations Sophisticated Purchaser Investment Letters (“Big Boy” letters) for unrated bond issues

32 Issuer Business Issues with Underwriter Underwriter’s Fee (“Spread”) Service Indemnification Professional Representations

33 Factors for Selection of Underwriter Type of financing Regional vs. national Retail vs. institutional sales vs. private placement Prior history/recommendations negotiated underwriting competitive underwriting senior manager co-manager firm underwriting best efforts underwriting pricing the Bonds

34 Components of Pricing the Bonds Discounts and premiums Call protection “underwriting risk” “story bond”

35 Underwriting Related “Hot Topics” Rule 15c2-12 OS “deemed final” Continuing disclosure for secondary market MSRB Rule-32 (delivery of OS to customers) MSRB Rule G-37 (“political contributions” rule) MSRB Rule G-38 (“consultant” rule)

36 Underwriting “Buzz Words” BPA POS OS “story bond” GIC “Blue Sky” “Big Boy” letters DTC “book entry” CUSIP


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