TAXEXEMPT BONDS Why TaxExempt 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 ID: 227302
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Slide1
FINANCING WITH
TAX-EXEMPT BONDSSlide2
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)Slide3
What is a Bond?
A contract between the issuer and the bondholder
A debt instrument – A promise to paySlide4
Basic Bond Structures
Loan to Developer
Bond proceeds ($)
Issuer
Developer
Project
Loan to Lender
Bond proceeds ($)
Issuer
Lender
Developer
ProjectSlide5
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)Slide6
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)Slide7
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)Slide8
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/MortgageSlide9
Preliminary Official Statement (“POS”)
Official Statement (“OS”)
Bond Purchase Agreement (“BPA”)
Disclosure Agreement
Investment Agreement (“GIC”)
Closing Documents
Certificates
OpinionsSlide10
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 SharingSlide11
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)Slide12
BONDHOLDERS
TRUSTEE
ISSUER
PROJECT OWNER
PROJECT
$
Principal and
Interest
$
Proceeds
$
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
Slide13
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)Slide14
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
ProceedsSlide15
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
PaymentsSlide16
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)Slide17
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) BondsSlide18
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)Slide19
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 IssuerSlide20
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)Slide21
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 restrictionsSlide22
Bankruptcy
Issuer
Developer
Credit EnhancerSlide23
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 requirementsSlide24
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)Slide25
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)Slide26
CLOSING
IT ALL COMES TOGETHERSlide27
BOND “BUZZ WORDS”
WIDOWS AND ORPHANS
BIG BOYS
TERM BONDS
SERIALS
FLOATERS
SINKERS
BPASlide28
POS
OS
GIC
REFUNDING
TAXABLE TAIL
BOOK-ENTRY
DTCSlide29
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 timetableSlide30
Underwriter Documents
Bond Purchase Agreement (“BPA”)
Preliminary Official Statement (“POS”)
Official Statement (“OS”)
Blue Sky Survey
Underwriter’s Counsel 10(b)5 opinionSlide31
Underwriting Related Documents
Continuing Disclosure Agreement
Rule 15c2-12 Certificates
DTC Letter of Representations
Sophisticated Purchaser Investment Letters (“Big Boy” letters) for unrated bond issuesSlide32
Issuer Business Issues with Underwriter
Underwriter’s Fee (“Spread”)
Service
Indemnification
Professional RepresentationsSlide33
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
Slide34
Components of Pricing the Bonds
Discounts and premiums
Call protection
“underwriting risk”
“story bond”Slide35
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)Slide36
Underwriting “Buzz Words
”
BPA
POS
OS
“story bond”
GIC
“Blue Sky”
“Big Boy” letters
DTC
“book entry”
CUSIP