Alternative Tax Exempt Multifamily Housing Bond Executions in the - - PowerPoint PPT Presentation

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Alternative Tax Exempt Multifamily Housing Bond Executions in the Current Market

National Housing & Rehabilitation Association

2009 Annual Meeting March 11-14, 2009 Key Largo, Florida

• R. Wade Norris, Esq.

Eichner & Norris PLLC 1225 19th Street, N.W., 7th Floor Washington, D.C. 20036 Phone: (202)973-0100 Fax: (202)296-6990 email: wnorris@enbonds.com website: www.enbonds.com

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SIX PRINCIPAL TAX EXEMPT MULTIFAMILY HOUSING BOND STRUCTURES

1.

VR Bank L/C (if available)

2.

VR Fannie/Freddie Capped (effectively unavailable)

3.

VR Freddie Swapped

4.

18-Yr FR Fannie/Freddie

5.

42-Yr FR FHA/GNMA

6.

Bank Private Placement (if available)

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TAX EXEMPT MULTIFAMILY HOUSING BONDS - SIX DIFFERENT STRUCTURING SCENARIOS†

1.

Variable Rate Bonds Secured by Bank Letter of Credit

• Bank looks to real estate and Developer’s guarantee of non-recourse carve-
• uts or top tier risk, for reimbursement.
• Need real estate underwriting and caps or swaps if Bonds variable rate.
• No fee maintenance requirements.
• Lower costs of issuance.
• Generally limited term 4-8 years.
• Very limited availability in current market.

Borrowing Rate Fees (est.)* SIFMA 0.55% Bank Origination 1.50% L/C Fee 2.50 Bond Cost of Issuance 1.0-2.0 Interest Rate Cap Escrow Fee 0.20 TOTAL UP FRONT FEES 2.5-3.5% Remarketing 0.15 Trustee 0.025 Issuer 0.125 Total Fee Stack 3.00 Borrowing Rate** 3.550%

* Front end fee estimates assume Bond size of $20-30 million or higher; may vary greatly depending on issuer and other factors. Upfront fees on smaller deals would be slightly higher. ** Underwriting rate and other underwriting criteria will vary.

† Cautionary Note: The interest rates and other data set forth in this analysis are estimates only. These interest rates can vary

dramatically depending on state, timing, often thin market conditions and other factors, and the other variables may vary significantly depending on project, developer and other factors. Developers should check with their investment banker or financial advisor before conducting a detailed assessment of any of these structures or programs.

Eichner & Norris PLLC 4 3/10/2009 Underwriting* Cap Strike Rate 6.00% Guarantee 0.93** Servicing 0.44 Liquidity Fee 1.00*** Interest Rate Cap Escrow Fee 0.20 Trustee Fee 0.025 Issuer Fee 0.125 Remarketing Fee 0.15 Total Fee Stack 2.87 Underwriting Rate 8.87%**** Actual Borrowing Rate - Current SIFMA 0.55% Fee Stack 2.87 Total Current Actual Borrowing Rate 3.42% Fees (est.) DUS Lender Origination 1.0% Construction Lender Origination 1.5 Bond Costs of Issuance 1.0 - 2.0 5-yr. Cap @ 6.0% 1.00 4.50% - 5.50%

• 2. Freddie Mac/Fannie Mae Variable Rate Capped Real Estate-

Backed Bond Financing Structure

* Analysis below is Freddie Mac, which underwrites to a 1.05 DSCR. Fannie, before exiting VR deals, used a 6.0% rate plus the fee stack and underwrote to a 1.0 DSCR ** 93 basis points for Freddie “forward” execution; immediate funding about 25 bps less, or 68 bps. Fannie Mae was 58 bps Gty/47 bps Svcg or 105 bps total before exit in Nov/Dec ‘08. *** Fannie Mae charged 91 - 96 basis points before exiting VR deals – v – 100 bps now for Freddie deals. For Freddie Mac deals, add an additional non-refundable up front charge of 1.0% for liquidity. **** Equivalent of 7.71% rate at 1.15 DSCR or 7.39% rate at 1.20 DSCR

TAX EXEMPT MULTIFAMILY HOUSING BONDS - SIX DIFFERENT STRUCTURING SCENARIOS

Eichner & Norris PLLC 5 3/10/2009 Underwriting* Spot Starting, 15-Year SIFMA Based Swap + spread 3.50% Guarantee 0.93 Servicing 0.44 Liquidity Fee 1.00* Swap Credit Enhancement Fee 0.25** Trustee Fee 0.025 Issuer Fee 0.125 Remarketing Fee 0.15 Total Fee Stack 2.92 Actual Borrowing Rate 6.42%*** Underwriting Cushion 0.00*** Underwriting Rate 6.42%***

• 3. Freddie Mac/Fannie Mae Variable Rate Swapped to Fixed Real

Estate-Backed Bond Financing Structure

* Freddie Mac. See prior page for Freddie/Fannie charges. ** Fannie Mae = 23 bps (before exiting VR deals) ***Swap rate used as underwriting rate Fees (est.) DUS Lender Origination 1.0% Construction Lender Origination 1.5 Bond Costs of Issuance 1.0 - 2.0 3.50% - 4.50%

TAX EXEMPT MULTIFAMILY HOUSING BONDS - SIX DIFFERENT STRUCTURING SCENARIOS

* The current spot starting 15-year SIFMA based swap is about 3.20, but due to extremely small number of Freddie acceptable swap providers, bids may be 30 basis points or a bit more above “mid- market.”

Eichner & Norris PLLC 6 3/10/2009 Underwriting 18-Year Bond Interest Rate* 5.25% Credit Enhancement 0.93 Servicing 0.44 Liquidity Fee 0.0 Remarketing Agent 0.0 Issuer 0.125 Trustee 0.03 Total Fee Stack 1.525 Total Mortgage Rate (Underwriting Rate and Actual Borrowing Rate) 6.775%

• 4. Fannie Mae/Freddie 18-year Fixed Rate Bond Financing Structure

Fees (est.) DUS Lender Origination 1.0% Construction Lender Origination 1.5 Bond Costs of Issuance 1.0 - 2.0 3.50% - 4.50% * Estimated 18-Year Fixed Rate as of 03/10/09; 30 or 35-year loan amortization; 1.20 DSCR; 80% LTV

TAX EXEMPT MULTIFAMILY HOUSING BONDS - SIX DIFFERENT STRUCTURING SCENARIOS

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• 5. FHA/GNMA 42-year Fixed Rate Bond Financing Structure

Underwriting Bond Interest Rate* 5.80% FHA Mortgage Insurance Premium 0.45 GNMA/Servicer Fees 0.25 Remarketing Agent 0.0 Issuer 0.125 Trustee 0.03 Total Fee Stack 0.855 Total Mortgage Rate (Underwriting Rate and Actual Borrowing Rate) 6.655% * Estimated 40-Year Fixed Rate as of 03/10/09; 40-year loan amort.; 1.11 DSCR; 95%+ Loan-to-Cost

TAX EXEMPT MULTIFAMILY HOUSING BONDS - SIX DIFFERENT STRUCTURING SCENARIOS

Fees (est.) Lender Origination 1.0% HUD App. 0.3 Bond Costs of Issuance 1.0 - 2.0 2.30 – 3.30%

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• 6. Tax Exempt 35-year Fixed Rate Private Placement Bond Financing

Structure – Primarily Available Only in Bank CRA Deficient Footprint

Underwriting Bond Interest Rate 6.50% Credit enhancement N/A Servicing Fees 0.15 Remarketing Agent N/A Issuer 0.125 Trustee 0.025 Total Fee Stack 0.30 Total Mortgage Rate (Underwriting Rate and Actual Borrowing Rate) 6.80%* * If not in a part of Bank CRA footprint where the Bank has a CRA deficiency, product probably unavailable

• r only available at fixed bond rates of 7.0% or above. Estimated 30-Year Fixed Rates as of 03/10/09; 35-

year loan amort.; 1.15 DSCR; 85% LTV

TAX EXEMPT MULTIFAMILY HOUSING BONDS - SIX DIFFERENT STRUCTURING SCENARIOS

Fees (est.) Origination 1.5% App. 0.25 Bond Costs of Issuance 0.75 – 1.50 2.50 – 3.25%

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SUMMARY OF BORROWING/UNDERWRITING RATES

• Estd. Actual

All-In Borrowing Rate Underwriting Rate

• 1. VR Bank L/C (if available)

3.55% Varies; negotiable

• 2. VR Fannie/Freddie Capped

3.42% 7.50%+

• 3. VR Freddie Swapped

6.42% 6.42%

• 4. 18-Yr FR Fannie/Freddie

6.795% 6.775%

• 5. 42-Yr FR FHA/GNMA

6.655% 6.655%

• 6. Bank Private Placement
• In CRA deficient

footprint (if available) 6.80% 6.80%

• Outside CRA deficient

footprint (if available) 7.50%+ 7.50%

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NEGATIVE ARBITRAGE CONSIDERATIONS ON FIXED RATE DEALS

Fixed rate new construction and substantial rehabilitation deals

may also incur a major adverse impact in today’s market from negative arbitrage on uninvested bond proceeds. This will be much more substantial on a new construction or substantial rehabilitation deal than on an acquisition deal involving relatively modest amounts of

• rehab. It will also depend on the length of the construction/rehab period.
• Negative arbitrage now runs as much as 400 basis points. Was about 50

basis points or less two years ago.

Tax Exempt Bond Yield: 5.25% Reinvestment Rate on Project Fund GIC: 1.50% Total Negative Arbitrage 3.75%

• Assume even draw down over 18 months:

3.75% x 1.5 (18 mos.) x 0.5 (even draw down) = about 2.8% today. On a Fannie Mae or Freddie Mac deal this increases the capitalized interest which must be funded in the loan, decreasing loan proceeds available for other development costs.

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• On a fixed rate FHA/GNMA deal, one has to fund, at closing, total potential negative

arbitrage, consisting of the actual projected negative arbitrage as well as potential back-end negative arbitrage generated under very conservative rating agency criteria

• S&P and Moody’s require an assumed reinvestment rate ranging from the lower of 0.50% or

the actual investment rate. Today this would be about 50 basis points. On deals above $5- 10 million, GICs may be available at current rates of about 1.5% for even draws over an 18- month construction period.

Tax Exempt Bond Yield: 5.75% Reinvestment Rate on GIC: 1.50% Potential Negative Arbitrage 4.25%

• Potential projected negative arbitrage - assume no construction draws over 18

months:

4.25% x 1.5 (18 mos.) = about 6.4% today

• Actual projected negative arbitrage - assume even draws: 6.4% x 0.5 = 3.2%*

Fund with cash or L/C expected to be drawn.

• Back-end potential negative arbitrage: 6.4% - 3.2% = 3.2%*

Fund with L/C not expected to be drawn.

* Some borrowers will be unwilling or unable to meet these requirements, although for those who have the cash and/or letter of credit capacity, the long term all-in fixed rate may be competitive (about 6.6% for the 42-year GNMA deal due to lower credit enhancement and servicing fees versus about 6.8% for the 18-yr Fannie or Freddie execution), the overall result may be better. The actual negative arbitrage is roughly the same under the two alternatives. FHA financing provides construction as well as permanent financing, but may trigger Davis-Bacon prevailing wage requirements, takes a very long time to process and may involve other advantages and disadvantages, versus a Fannie or Freddie fixed rate deal.

NEGATIVE ARBITRAGE CONSIDERATIONS ON FIXED RATE DEALS