Mississippi Home Corporation
Annual Affordable Housing Conference
February 21, 2013
AFFORDABLE HOUSING BOND ISSUES MAKE A COMEBACK
John B. Rucker, III
Merchant Capital, LLC
Jon Killough
Rockport Mortgage
Alysse E. Hollis
Peck, Shaffer & Williams LLP
AFFORDABLE HOUSING BOND ISSUES
MAKE A COMEBACK
IMPORTANCE OF TAX-EXEMPT BONDS AND TAX CREDITS IN
AFFORDABLE RENTAL HOUSING
— In the period from 2000 - 2008, the United States produced 200,000 –
250,000 units of new multifamily annually. Estimated rehabbed units at 50,000
– 150,000, with total of 250,000 – 400,000 units per year.
— Prior to 2008, approximately 130,000 affordable rental housing units were
produced each year under two programs:
— The “9%” Low Income Housing Tax Credit Program produced (roughly 70,000 units
in each of 2006 and 2007).
— Tax-Exempt Bonds combined with “4%” produced (roughly 60,000 units in each of
2006 and 2007).
— Over the past decade, these two programs have accounted for approximately
one-third of the Country’s total rental housing production and the vast
majority of affordable rental housing production
Mississippi Home Corporation Annual Affordable Housing Conference
TAX CREDIT PRICING AND DEBT FINANCING AFTER THE
FINANCIAL CRISIS
— The financial crisis wiped out 65% of the market for LIHTC
— Fannie Mae and Freddie Mac had previously been about 40% of
the buy side of the LIHTC market, with major banks (due in part
to CRA needs) and other financial institutions accounting for an
additional 20-30%.
— With these buyers gone after 2008, annual tax credit volume fell
from about $10 billion to approximately $5 billion.
— Tax credit pricing fell from $1.00 – $1.20 to $0.70 – $0.80 or less
— The market for new construction period credit enhancement
dried up almost completely, making bond financing extremely
difficult.
Mississippi Home Corporation Annual Affordable Housing Conference
PRODUCTION AFTER THE FINANCIAL CRISIS
— Following the financial crisis, new multifamily rental housing
production, dropped precipitously.
— New multifamily rental starts fell more than 50% to
approximately 90,000 in 2009 and approximately 100,000 in
2010.
— It is likely given the steep fall-off in pricing for LIHTC and the
virtual disappearance of construction lending in this sector that
the production of affordable housing units suffered a similar or
greater percentage decline.
Mississippi Home Corporation Annual Affordable Housing Conference
MARKET RECOVERY – CONTINUED
— “Preservation” of first-generation LIHTC deals are now exiting
their 15 year compliance period
— The debt markets have become largely fixed rate, as the
availability of liquidity for variable rate financings has
dramatically declined (Fannie Mae is out and only Freddie Mac
remains a substantial player) and pricing has risen
— Innovative debt structures are further supporting financing
activity in the affordable multifamily space.
Mississippi Home Corporation Annual Affordable Housing Conference
General Overview of the LIHTC & Current Market
Conditions
■
Overall Statistics since inception of LIHTC Program for Region IV
HUD Region IV
LIHTCs Allocated
1
Alabama
$
2,200,000,000
2
Florida
$
6,800,000,000
3
Georgia
$
3,210,000,000
4
Kentucky
$
1,000,000,000
5
Mississippi
$
2,000,000,000
6
North Carolina
$
3,000,000,000
7
Puerto Rico
$
2,000,000,000
8
South Carolina
$
1,600,000,000
9
Tennessee
$
2,400,000,000
10
U.S. Virgin Islands
Included in PR
$
24,210,000,000
Mississippi Home Corporation Annual Affordable Housing Conference
Number of Units Delivered
Jobs Created
41,059
47,628
152,175
176,523
138,475
160,631
28,280
34,804
45,454
52,726
59,701
69,253
12,972
15,047
30,679
35,587
54,334
Included in PR
60,027
Included in PR
563,129
652,226
Trends
■ The following are new trends in the multifamily housing sector:
— Developers creating 4% deal when they fail to get a 9%
allocation
— Rural development pools
— FHA becoming more of a factor
— Rated (but unenhanced) multifamily financing
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 8
How do we get these deal done
■ Financing Options
— Private Placements
— Freddie Mac / Fannie Mae
— FHA Programs
— Standard & Poor’s Unenhanced Bond Program
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 9
Private Placements
■ The Issuer sells bonds directly to one investor (or a limited number
of sophisticated investors) without a public offering.
■ Financing observations include:
— Lower issuance costs; higher interest rates
— Less financial disclosure
— No credit rating or credit enhancement required
— Depending on investor, 90 days for bond closing
— Longer call date (typically 15 years to 18 years)
— Debt service coverage of 1.15x – 1.20x
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 10
FNMA / Freddie Mac
Mississippi Home Corporation Annual Affordable Housing Conference
Freddie Mac / Fannie Mae
■ Freddie Mac and Fannie Mae, through their approved lenders,
continue to play a major role in credit enhanced bond deals.
■ Financing observations include:
— Majority of executions are fixed rate
—18-year hard maturity
—18-year bond interest rate is approximately 3.35%
— Freddie Mac offers variable rate execution1
—Swap counterparty may be an issue
— Due to scarcity of construction LOC, most executions are
acquisition/rehab that are tenant-in-place rehabs
— 6-8 months for bond closing2
Notes:
1
As of this writing, Fannie Mae doesn’t offer a variable rate execution
2
Assumes new construction or acquisition/rehabilitation
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 12
Standard & Poor’s Unenhanced Bond Program
■
While many affordable housing projects (AHP) are structured with credit
enhancements, unenhanced AHP are rated based on the underlying real estate.
■
Standard & Poor’s currently rates unenhanced AHP in the investment grade category
(typically in the “A” category).
■
Financing observations include:
— No credit enhancement
— Third party reports include audit, appraisal, market study, phase I and capital
needs assessment reports
— Typical projects include acquisition/rehabilitation
— New construction is available, but more complex
— Execution can be used on 4% bond deals
— 35-year rate is 5% or less1
Notes:
1
Reflects market conditions as of November 16, 2012 and assumes bonds are rated in the “A” category
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 13
Standard & Poor’s Unenhanced Bond Program (cont’d)
Financing Observations
■
In November 2012, Merchant Capital served as
sole manager on $4,925,000 of Biloxi Housing
Authority, Multifamily Housing Revenue Bonds,
Series 2012.
■
Bond proceeds were used to finance the
acquisition and rehabilitation of an 150-unit
multifamily rental housing project known as
Beauvoir Manor Apartments, located in Biloxi,
Mississippi (the “Project”).
■
■
■
Sources and Uses of Funds
Sources of Funds
Par Amount
Original Issue Premium (Discount)
Reserve Funds on Hand
Total
4,925,000
(141,950)
424,320
5,207,370
Uses of Funds
Acquisition Fund
Construction Fund
Debt Service Reserve Fund
Cost of Issuance
Total
4,050,000
656,750
143,944
356,676
5,207,370
The Project will be owned and operated by Agape
Beauvoir Manor, Inc., a 501(c)(3) organization.
The Project is operating under a Section 8 HAP
contract and was underwritten with a 1.20 DSC
constraint.
The Series 2013 bonds were rated “A-” by
Standard & Poor’s and will be amortized over 35
years. The financing rate on the bonds was
4.82%.
Pricing Observations1,2
Maturity
2034
2047
2017
Total / Ave
Par
($000)
1,895
2,740
290
4,925
Coupon
4.25%
4.75%
4.50%
4.54%
Yield
4.46%
4.93%
4.73%
4.74%
Spread
(bps)
+ 224
+ 246
+ 384
Notes:
1
The 2017 maturity is a taxable tail that was issued to cover the 2% cost of issuance limitation
2
Tax-exempt yields are a spread to MMD. Taxable yields are a spread to US Treasury
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 14
FHA / GNMA Execution
Mississippi Home Corporation Annual Affordable Housing Conference
FHA Programs
Section 221(d)(4) Loan combined with Short-term Tax-exempt Bonds
■
Rates on taxable GNMA MBS are well below rates on comparable tax-exempt
GNMA-collateralized bonds
■
With the rebound in equity pricing on 4% LIHTC deals, borrowers can take advantage
of the market dislocation by issuing short-term tax-exempt bonds with conventional
FHA loans.
■
The borrower issues short-term tax-exempt bonds to meet the 50% test under LIHTC
requirements. The bonds are collateralized with proceeds from a conventional FHA
mortgage loan.
■
After the project is placed in service, the tax-exempt bonds are retired with proceeds
from the FHA mortgage loan.
■
Benefits include:
— Permanent borrowing costs are reduced by over 100 bps
— Negative arbitrage greatly reduced
— Full syndication value of 4% LIHTC equity
Mississippi Home Corporation Annual Affordable Housing Conference
Slide 16
FHA Programs (cont’d)
Section 221(d)(4) Loan combined with Short-term Tax-exempt Bonds
Current market dynamics allow the FHA loan/Short-term tax-exempt bond structure to work
Municipal Yield Curve
Tax-exempt Yields vs. Taxable Yields
5.00%
5.50%
4.50%
5.00%
4.00%
4.50%
3.50%
143 bps
4.00%
3.00%
3.50%
2.50%
3.00%
2.00%
165 bps
2.50%
1.50%
2.00%
1.00%
Borrowers can take advantage of the
steep yield curve by issuing short-term
bonds
0.50%
0.00%
1
3
5
7
9 11 13 15 17 19 21 23 25 27 29
2/1/2013
2/1/2008
Mississippi Home Corporation Annual Affordable Housing Conference
1.50%
Currently, there is a dislocation
between taxable yields and tax-exempt
yields
1.00%
Feb-06
Feb-08
10-Year AAA GO
Feb-10
Feb-12
10-Year US Treasury
Slide 17
FHA Programs (cont’d)
Section 221(d)(4) Loan combined with Short-term Tax-exempt Bonds
Short-term Tax-exempt Bond Execution
Underwriter
Bonds Proceeds
Investor
Proceeds
Section 221 (d)(4) Loan
Trustee
Lender
Proceeds
Proceeds from GNMA investor
Project Fund
Construction Draw
Developer
Builds Project
Mississippi Home Corporation Annual Affordable Housing Conference
Proceeds
Collateral Fund
These amounts will equal each other
so the bond investor is always 100%
secured by cash.
After the project is placed in service,
the tax-exempt bonds will be retired
with proceeds from the FHA mortgage
loan.
Slide 18
Piecing It All Together:
Case Study of Garden Oaks Apartments
■ Previously Section 202 property with 100% HAP contract
■ The project was HUD-held due to foreclosure following damage from Hurricane
Katrina
■ Experienced developer purchased the project from HUD
■ Developer utilized 4% LIHTC to generate equity
■ Short term TE bond issue during construction
■ HUD’s focus was on the “conventional” 221(d)(4)
■ Continued bond compliance period after redemption of bonds
Mississippi Home Corporation Annual Affordable Housing Conference
Sources and Uses
First Mortgage
LIHTC Equity
FHLB Funds
LOC
Total Sources
$ 9,000,000
$ 3,455,400
$ 500,200
$ 878,400
$13,834,000
Development Costs
Operating Deficit
Working Capital
Other Costs
Total Uses
$ 10,544,700
$
472,800
$
360,000
$ 2,456,500
$ 13,834,000
Piecing It All Together:
Case Study of Garden Oaks Apartments
Before Rehabilitation:
Mississippi Home Corporation Annual Affordable Housing Conference
Piecing It All Together:
Case Study of Garden Oaks Apartments
During Rehabilitation:
Mississippi Home Corporation Annual Affordable Housing Conference
In Closing…
Mississippi Home Corporation Annual Affordable Housing Conference