Presentation on theme: "One Chase Manhattan Plaza | New York, NY | 60th Floor"— Presentation transcript:
1 One Chase Manhattan Plaza | New York, NY | 60th Floor Financing Affordable Housing with Tax-Exempt Bonds and Housing Tax Credits WorkshopThursday, October 23, 2014 | 10:00a.m. - 4 p.m. | Chase Manhattan Bank,One Chase Manhattan Plaza | New York, NY | 60th FloorNew Freddie Mac Tax Exempt Loan (“TEL”) Structure for Targeted Affordable HousingBy: Shaun K. SmithSenior DirectorTargeted Affordable ProductionMultifamily(o)(m)8100 Jones Branch Drive, MS B4SMcLean, VA 22102
2 New Freddie Mac Tax Exempt Loan (“TEL”) Structure for Targeted Affordable Housing Since the financial crisis in 2008, many banks have developed tax exempt loan versions of their tax exempt bond private placement structures to obtain “lending credit” as compared to “investment credit” for CRA purposes and loan accounting treatment under GAAP accounting guidelines. Within the past five years, this type of tax exempt loan structure has been used by more than 35 Governmental entities.Freddie Mac has recently unveiled a new financing execution for multifamily housing pursuant to which it purchases from its qualified seller/servicers tax exempt notes (“Governmental Notes”) issued by state and local governmental entities (“Governmental Entities”) evidencing loans made by the seller/servicers (“Funding Loans”) to the Governmental Entities for the purpose of financing affordable multifamily rental housing. The Governmental Entities loan the proceeds of the Funding Loans to multifamily developers/owners (“Project Loans”) to finance the acquisition and/or moderate rehabilitation of affordable multifamily housing properties.
3 New Freddie Mac Tax Exempt Loan (“TEL”) Structure for Targeted Affordable Housing Governmental Note$Governmental Lenderand Fiscal Agent(same function as trustee)Seller/Servicer as“Initial Funding Lender”Funding Loan toGovernmental Lenderpursuant toFunding Loan AgreementAssignment of GovernmentalNote evidencingFunding Loanand ContinuingCovenantAgreementProject Loanto Borrowerpursuant toAgreementProjectNoteandMortgage$$ContinuingCovenantAgreement*Freddie Mac as“Funding Lender”Borrower*Contains project specific covenants consistent with Freddie Mac CME requirements.
4 New Freddie Mac Tax Exempt Loan (“TEL”) Structure for Targeted Affordable Housing The Project Loans meet the requirements for the issuance of tax exempt obligations under Section 142(d) of the Internal Revenue Code of 1986, as amended (the Code”) and for the syndication of 4% LIHTC under Section 42 of the Code. Once Freddie Mac has acquired approximately $300MM in Governmental Notes evidencing the Funding Loans, it will securitize the Governmental Notes using its M-Class execution.Freddie Mac’s new “TEL” execution offers loan terms of up to 18 years, a 35-year loan amortization, 1.15 debt service coverage and a 90% maximum LTV. It is priced at very competitive spreads to the 10-year U.S. Treasury Bond.Freddie Mac believes up front costs of issuance associated with private purchase of tax exempt affordable housing loans may be as much as 40% less than that associated with a public offering of rated, credit enhanced bonds. There are fewer documents (e.g. no offering statement, reimbursement agreement, credit enhancement agreement, etc.) and fewer parties involved (e.g. no underwriter, no rating agency).Freddie Mac anticipates that for many transactions, a rate lock can be achieved within three months of commencement of loan processing, and the closing can be achieved within 30 to 45 days thereafter.
5 Sample Timeline: Quote to Purchase Pre-Day 1:Production and Seller size loanDay 1:Quote acceptedDay 30:Seller delivers full underwriting packageDay 31-84:UnderwritingDay 85:Commitment issuedSeller completes/ uploads LST and requests quoteProduction determines eligibility and sizes loanProduction requests quote from PricingPricing prices loan and provides to ProductionProduction communicates quote to Seller/BorrowerSeller/Borrower accepts quoteProduction creates file in Document Management System (DMS)10bps application fee collectedThird-party reports receivedUnderwriting performs due diligenceProduction requests loan spread from Pricing and finalizes structureUnderwriting performs site inspectionUnderwriting prepares final investment briefUnderwriting approves loanSeller/Borrower accepts final pricing and structure
6 Sample Timeline: Quote to Purchase (cont’d) Day 90:Rate/spread lockDay 120:Seller makes loanDay 135:Freddie Mac purchases loanCommitment countersigned and delivered to UnderwritingSeller, Underwriting and Pricing perform rate/spread lockPurchase and Legal review closing documents and authorize disbursements to purchase loan from SellerDay 125:Seller delivers loan toFreddie MacSeller delivers final delivery package to Freddie Mac
7 New Freddie Mac Tax Exempt Loan (“TEL”) Structure for Targeted Affordable Housing Freddie Mac closed its first TEL transaction with the Ohio Housing Finance Agency in August 2014, and anticipates moving forward on multiple transactions this fall, with a number of Governmental Entities, many of whom are already familiar with the Freddie Mac TEL execution. Freddie Mac expects to issue its first TEL M-Class security in the next 6 to 12 months.At this time, the TEL execution is available only for immediate fundings, primarily for acquisition/moderate rehabilitation transactions. Within the next year Freddie Mac expects to expand the TEL execution to include forward commitments for new construction and substantial rehabilitation transactions.With the Freddie Mac TEL execution, Freddie Mac benefits from structuring the financings as loans, as opposed to bonds, because purchasing the Governmental Notes evidencing the Funding Loans originated by its seller/servicers is more consistent with Freddie Mac’s internal processing systems and it provides economies of scale and a more efficient execution. Securitizing the TEL loans will afford a more favorable secondary market execution and thus provide even more competitive interest rates.