Private Activity Bond (PAB) Financing August 11, 2020 1 Your - - PowerPoint PPT Presentation

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Private Activity Bond (PAB) Financing

August 11, 2020

Your presenters

2 Wayne McClary Housing Development Specialist, DOLA/Division of Housing Shannon Friel Private Activity Bond Manager, CHFA Finance Department Frederic H. Marienthal, Esq. Partner, Kutak Rock John H.T. Bales, Esq. Attorney, Kutak Rock

Private Activity Bonds (PAB) Allocation Process

PAB Financing Webinar August 11, 2020

What are PABs?

• NOT CASH
• Tax-exempt bonds issued for privately developed projects.
• IRS allows a limited amount, also know as PAB “Cap”.
• Municipalities (or Authorities) issue the bonds, but have no obligation to repay

investors.

• Investors buy the bonds.
• Underwriters use the investors’ $$, or “bond proceeds,” to make a loan to the

project.

• The project pays back the loan & investors get repaid + interest.
• PABs make rental housing eligible for 4% LIHTC.

Initial PAB Allocation Process

$105 per person in the state = the “Volume Capacity” $598,034,220 in 2019, $604,667,280 50% of Allocation 50% of Allocation Statewide Authorities

• Colorado Housing and Finance

Authority (CHFA)

• CO Agriculture Development

Authority (CADA) Local Governments

• 20,000 Persons or more
• $52.50 per capita

Statewide Balance Remaining cap administered by CO – DOLA/DOH

January 2020 PAB Allocation

56 Local Issuers - $286,404,693 CHFA - $292,333,640 CADA - $10,000,000 SWB - $15,928,947

• List of all direct allocations available:

https://www.colorado.gov/pacific/dola/ private-activity-bonds

Locals 47% SWB 3% CHFA 48% CADA 2%

Local Issuers & Statewide Authorities

• Receive allocation by January 15th
• Establish priorities & act by September 15th

➢Bond issuance requires an inducement resolution and closing by December 23rd; OR ➢Carry-Forward bond cap for eligible purpose to close within a 3 year period – requires

filing with IRS; OR

➢Relinquish to Statewide Balance; OR ➢Assign to another issuer for an eligible purpose ➢If you Receive an Assignment – issue it or carry it forward, or it will also relinquish on

9/15.

September 2019 PAB Allocation Locals 14% SWB 14% CHFA 71%

Denver - $37,565,325 Colorado Springs - $24,866,520 16 Other Locals - $77,644,496 CHFA - $408,945,191 CADA - $1,064,805.50 SWB - $40,947,882.50

Developers - How to Assemble PABs

• Identify your issuer
• Talk with your local governments – City, County & neighbors

➢Assignments of “fresh” or current year cap – act by 9/15 ➢Delegations of cap they have carried forward

• Talk with CHFA (especially if they will be the issuer)
• Talk with DOH & Apply to the Statewide Balance (with issuer)

❖Also, save some cap for the rest of us – only use 55% or less of Aggregate Basis (CHFA is using 52-55%)

Locals - How to Deal w/ Developers

• Connect with local housing or economic development organizations – could they

use it?

• Reach out to neighboring cities, towns and counties – are there any projects in your

region that could use it?

• If there is a project in your area, assign to its issuer
• If not, relinquish to DOLA’s Statewide Balance
• OR assign to CHFA

❖Again, only use 55% or less of Aggregate Basis

Statewide Balance Applications

• DOLA receives allocation by January 15th & relinquished bond cap on Sept. 15th
• Three application rounds. Applications are due:

➢March 1, 2020, June 1, 2020, and November 1, 2020. ➢$750 application fee. ➢March and June Rounds - Only issuers that did not receive a direct allocation or

issuers that have exhausted their direct allocations may apply.

➢Review criteria are similar to DOH’s Grant/Loan reviews. ➢8 week process, incl. PAB Allocation Committee & award letter ➢Relinquished bond cap distributed through November round.

Statewide Balance Applications

• All close by December 23rd (OR re-award for carry forward)

➢0.128% issuance fee on Statewide Balance Awards ➢0.009% issuance fee on bonds issued from direct allocations

• Demonstrated local need & support:

➢Certified copy of an inducement resolution from the local government/issuer. ➢Local financial commitment of PAB allocation or other local financial subsidies. ➢Market study demonstrating need. ➢Housing Affordability – going beyond IRS requirements.

Statewide Balance Applications

• Feasibility:

➢Reasonable costs for development & operation. ➢Readiness to proceed – site under control, local planning & zoning approved, credit

enhancement secured, tax credits reserved.

➢Financially sound – income/expense estimates reasonable, good underwriting ratios,

sources & uses balance.

➢Development team experience, capacity.

• Typical bond issue size is $6 – $30 million

➢For rental, TDC of $12MM - $60MM, or 50 - 200 units

2019-20 Statewide Balance Awards

Date Allocation Project or Program 07/19 7,600,000 Madison & Woodlands/Boulder Housing Partners 12/19 6,201,000 Meadows Townhomes/Housing Catalyst 12/19 19,498,000 Unison Housing Partners Pipeline 12/19 7,117,002 City of Denver Housing Pipeline 2019 Total 40,416,002 07/20 5,700,000 Madison & Woodlands/Boulder Housing Partners 07/20 299,000 Meadows Townhomes/Housing Catalyst 07/20 2,610,000 Swallow Road Rehabilitation/Housing Catalyst 07/20 4,256,088 San Juan Apartments/Montrose Housing Authority 2020 Total 12,865,088

Andrew Paredes Director of Housing Finance and Sustainability 303-864-7822 andrew.paredes@state.co.us Wayne McClary Housing Development Specialist 303-864-7819 wayne.mcclary@state.co.us Department of Local Affairs Division of Housing https://www.colorado.gov/pacific/dola/division-housing

multifamily housing revenue bonds

Shannon Friel PAB Manager, CHFA August 11, 2020

Mission: We strengthen Colorado by investing in affordable housing and community development.

CHFA uses private activity bond volume cap to support our three pronged mission.

◼ Single Family ◼ Multifamily ◼ Business Finance / Economic Development

multifamily housing bonds

◼ Private activity bonds used to finance affordable

privately owned 4% LIHTC multifamily rental housing

◼ Project Types: ◼ New construction ◼ Acquisition ◼ Acquisition/Rehabilitation

two types of federal LIHTC

◼ 70% present value credit (9% LIHTC)

◼ Competitive award process ◼ Population-based allocation ◼ Deep subsidy

◼ 30% present value credit (4% LIHTC)

◼ Non-competitive award process ◼ Year-round allocation process ◼ Shallower subsidy ◼ 50% test with PAB

colorado state AHTC

◼ State AHTC available for 5 years ◼ $10 million in annual state AHTC available per year ◼ CHFA is using state AHTC to help fill financing gaps in 4%

transactions that have tax exempt financing

◼ Both new construction and rehab transactions are eligible

for state AHTC

◼ Competitive Round II (State AHTC + 4% LIHTC) with award

announcement in November 2020

◼ After awards are announced, CHFA will contact local

issuers to partner and support awardees with cap

bond transactions and structures

Transaction Types

◼ Construction Only ◼ Construction/Perm ◼ Permanent Only

Bond Structures

◼ Conduit Financing

◼ Publicly Offered ◼ Privately Placed

◼ Issuer serving as lender

chfa response to pab demand

◼ Limit PAB to 52% - 55% of the aggregate basis ◼ Continue recycling SF and MF PAB ◼ Reserved $125 million to assist in supporting awardees

in the State AHTC + 4% LIHTC (Round II)

◼ After awards are announced, CHFA will contact local

issuers to partner and support awardees with cap.

◼ Support and lobby for changes to PAB requirements for

4% LIHTC projects (reducing 50% test to 25%)

◼ Support fixing the 4% LIHTC at 4%

◼ In January 2021, CHFA will announce PAB priorities for

the year.

2020 pab direct allocations

$604M pab

CHFA $292M PAB

LOCAL GOVERNMENTS $286M PAB CDOH $16M PAB

CADA $10M PAB

chfa pab issuance summary

$262,828,700 $267,027,250 $284,375,585 $267,745,056 $380,281,294 $244,678,115 $178,258,068 $152,422,171 $123,370,514 $3,059,000 NA NA $292,333,640 $272,239,094 $201,750,428 NA

chfa pab usage

$180 $159 $178 $152 $123 $202 $21 $23 $95 $268 $388 $245 $301 $157

$ $100 $200 $300 $400 $500 $600

2014 2015 2016 2017 2018 2019 2020

SF Issued MF Issued

keep in mind if you are a municipality

◼ In the event you want to assign volume cap to CHFA

to support a specific project or to promote first time

• wnership investment in your community, the

deadline to assign to CHFA is September 13th.

◼ If you’d like a summary report of PAB investment in

your community, please contact CHFA.

◼ If you’d like to have a presentation on PAB 101 and

investment in your community, please contact CHFA.

units supported with tax credits

for more info:

Shannon Friel sfriel@chfainfo.com 303.297.7387

Private Activity Bonds for Local Officials

Issuing Private Activity Bonds

Fred Marienthal John Bales Kutak Rock LLP August 2020

Tax-Exempt Bond Market

____________________ *2020 = January-July, 2020 Source: The Bond Buyer

Annual Bond Sales (USD Millions)

50 100 150 200 250 300 350 400 450 500

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

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Tax-Exempt Bond Market

____________________ *2020 = January-July, 2020 Source: The Bond Buyer

Year to Date (USD Millions)

10 20 30 40 50 60

January February March April May June July

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Tax-Exempt Bond Market (USD Millions)

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Interest Rates – 20-Bond Buyer Index

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Interest Rates – 20-Bond Buyer Index vs. 20 Year Treasuries

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Interest Rates – Credit Spreads by Rating

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Types of Private Activity Bonds

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Types of Private Activity Bonds (Continued)

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National Private Activity Bond Issuance

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National Volume Cap Trends

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101% 48% 39% 48% 41% 36% 27% 34% 37% 58% 70% 65% 58% 27% 20% 21% 15% 14% 10% 13% 14% 21% 28% 27% 0% 20% 40% 60% 80% 100% 120%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Allocation Capacity Linear (Allocation)

Tax-Exempt Multifamily Bond Requirements

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Steps for a Typical Bond Issuance

Step 1 - Issuer analyzes proposed issue with Borrower, Bond Counsel and Financial Advisor. Underwriter selected if public offering or Lender and Investor selected if private placement. Step 2 - Issuer adopts Inducement Resolution. If required, Issuer applies for State Volume Cap Allocation. Step 3 - Drafting is begun on the bond documents and offering documents (Preliminary Official Statement). Cash flows and documents are sent to rating agencies. Rating agency discussions or investor meetings take place. Step 4 - Financing structure and documents are finalized. State Volume Cap Allocation is received and TEFRA hearing is held by Issuer. Parameter Bond Resolution is adopted by Issuer. Step 5 - Preliminary Official Statement is mailed; Bond issue terms are discussed among the Issuer, Borrower, Financial Advisor, Investors and the Underwriters (if applicable). Step 6 - Bonds are offered by the Underwriters to investor. Bonds are underwritten at interest rates and terms agreed to by the Issuer and Borrower. Bond Purchase Agreement is executed among the Issuer, Borrower and Underwriters. Step 7 - Bond issue is closed. Underwriters wire bond purchase price to Trustee and take delivery of Bonds. Step 8 - Bond proceeds are available to be spent by Borrower.

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Bond Issue (Simple Fixed Rate)

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Low Income Housing Tax Credit (“LIHTC”) Financing

Investo r Investo r Investo r Investment Partnership

General Partner

Operating Partnership

(Project Owner/ Borrower)

$ L.P. $ L.P. $ L.P.

99.99% of Credits, Losses (Limited Partnership) $$$ Equity Installments 1, 2, 3, 4

Syndicator

(General Partner) Develope r Property Manager Affordabl e Housing Project

State & Local Lenders (e.g. CHFA)

(Subordinate Lenders)

Senior Lenders

(Banks, Public Lenders)

$ - First Mortgage Loan $ - Subordinate Loans G.P. .01% Developer Fee G.P. .01%

Project Sponsor

C-Corporation, Bank, Insurance Companies

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LIHTC Financing

I. Mechanics for Calculating and Obtaining Credits. The amount of Annual Credit equals product of the “Applicable Percentage” times the “Qualified Basis” where: A. The “Applicable Percentage” is 4% (bond transactions) or 9% (no bonds). B. The “Qualified Basis” generally equals the percentage of “Low Income Units” in the Project times the cost of the Project (net of grants, etc.) II. The Typical LIHTC Structure A. Borrower is typically a limited partnership or LLC. B. The tax credit investor must be a partner or member of the Borrower.

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LIHTC Financing (Continued)

• III. Ongoing Compliance
• A. The “Compliance Period” for maintaining low-income set-aside is 15 years,

during which the IRS has enforcement powers.

• i. If a Project falls out of compliance, all or a portion of the credit may be recaptured.
• B. There is also an “Extended Use Period” of an additional 15 years (or

more), during which the allocating/administering State Agency has enforcement powers.

• i. Extended Use period terminates upon foreclosure or State’s inability to find buyer

willing to present a “qualified contract” to purchase the Project and maintain low- income and rent restrictions.

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HUD Programs Often Present in Bond Transactions

I. Section 8 – HAP Contracts. Provide guaranteed rents for units housing income qualifying tenants. Payments under HAP contracts are pledged as security for Borrower’s loan obligations. II. Sections 221(d)(3), 221(d)(4) and 223(f): most popular long term financing vehicles for multifamily construction and acquisition/rehabilitation. These programs provide a federal guaranty of Borrower payments on the underlying loan. Insured loans usually purchased by Ginnie Mae.

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Bond Proceeds Are Not Enough Most Multifamily Transactions; Use One or More of the Following Subordinate Financing

• HOME Funds
• State and Local Affordable Housing Loans
• Seller Take-Back Financing
• Equity
• Deferred Fees
• CDBG Funds
• State Tax Credits
• Opportunity Zone Investments

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PAB Advocacy

• IDBs
• Expand the definition of manufacturing to include both tangible and intangible production
• Eliminate the restrictions on “Functionally Related and Subordinate Facilities”
• Increase the maximum bond size limitation from $10 million to $30 million and increase the

capital expenditure limitation from $20 million to $40 million

• Establish a mechanism for unused PAB cap to be redistributed to states that have used up their

PAB cap

• Housing
• Increase the Cap on Private Activity Bonds
• Enhance Low Income Housing Tax Credits (Affordable Housing Credit Improvement Act of 2019

S.1703 and H.R. 3077)

• Protect HFA Down Payment Assistance Programs
• Restore and Increase HUD Funding

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Questions or Comments?

Contact: Fred Marienthal John Bales Kutak Rock LLP Suite 3000 1801 California Street Denver, CO 80202 Telephone: (303) 297-2400 Frederic.Marienthal@KutakRock.com John.Bales@KutakRock.com

51 4847-7831-3370