How to make 4% LIHTC
deal work:
Case Study from Fairfax
County
Presented by:
Aseem Nigam, Director, Real Estate Finance & Grants Management
Division,
Fairfax County Department of Housing & Community Development
Common Challenges
• Common challenges facing 4% transactions:
• Transactions costs, particularly acquisition
costs, remain high in Fairfax County
• Interest rates have been rising
Addressing the Challenges
• Use of local funds to bridge financing gaps
• Fairfax County makes annual allocation of local dollars to help
bridge financing gaps
• For 2014, anticipate providing approximately $8M in local funding
• Low interest rate, flexible repayment terms (cash flow, deferred)
• Example: Mount Vernon House- preservation of 130 units,
structured with TE bonds, 4% and HBF gap financing
Addressing the Challenges
• Reduce transaction costs by reducing/eliminating acquisition
cost
• Fairfax County encourages development on County/FCRHA
owned land through public-private partnerships
• County enters into a long-term ground lease with the developer
• Ground lease payments are well below market
• Eliminates cost of acquisition through this structure
• Example: Residences at Government Center
• Developer has a ground lease for 8.1 acres of land adjacent to the
Fairfax County Government Center complex
• 100 year lease for $100
• Land valued at $13.5M
• More details about this transaction to come
Addressing the Challenges
• Use of taxable-tax-exempt structure to help leverage 4%
credits and garner lower rates
• Financing structure calls for the issuance of tax-exempt bonds
during construction/rehabilitation
• Allows transaction to realize lower interest rate of the taxable GNMA
execution while leveraging the value of the 4% LIHTC equity
• Bonds are 100% cash collateralized by the GNMA loan eliminating
risk to the issuer and bond holder
• Tax-exempt bonds are retired at after PIS, taxable loan through
permanent period
Addressing the Challenges
• Hybrid 4%-9% transaction
• Financing large transaction by splitting the property into separate
financing components- one financed using 9% credits and the
other using 4% credits
• Allows for cost allocation method that can shift some additional
costs to the 9% portion of the transaction since the value of the
credit is greater, helps to “reduce” the transactional cost on the
4% portion and make the property financially feasible
Case Study: Residences at
Government Center
• This transaction is utilizing several of the components
discussed previously to “make the deal work”
• Fairfax County Board of Supervisors owner of 86.6 acre parcel
of land that comprises the Government Center campus
• County Issued an RFP under Virginia’s Public-Private
Educational Facilities and Infrastructure Act of 2002 (PPEA) to
solicit proposals for the development of 8.1 acres on the
Government Center campus
Case Study: Residences at
Government Center
• The Board entered into a Contract to Ground Lease with JPI to
develop 270-unit affordable, multifamily complex
•
•
•
•
Unsubordinated ground lease
99-term
One time payment of $100
Affordability is guaranteed for long-term (project must be
maintained as affordable through ground lease term)
• JPI subsequently transferred their interests to Jefferson Apartment
Group (JAG)
• Using the PPEA model, the County effectively eliminated the
cost of acquisition
• Appraised value of the 8.1 acres is approximately $13.5M
Case Study: Residences at
Government Center
• Though ground lease, eliminated acquisition costs, the Project
was unable to close on 4% tax-exempt transaction last year.
• Restructured to utilize value of both 4% and 9% LIHTC
• Created condominium regime to legally divide property for
ownership & financing
• Condo A consists of 150 units (Buildings 1, 2, 3 and cellar spaces of
Buildings 4 and 5)
• Applied for and allocated 9% LIHTC
• Condo B consists of 120 units (Building 4 and 5)
• 4% LIHTC & Tax-Exempt Bonds
• Ground lease will need to be severed, or split, and each Condo
entity will then execute a ground lease with the County.
Case Study: Residences at
Government Center
• Using taxable-tax exempt financing structure
• Tax-exempt bonds are issued allowing project to leverage 4%
LIHTC equity
• Bonds are outstanding only through the end of the construction
period (approximately 24 months)
• Condo B will be financed using tax-exempt bonds that are fully
cash collateralized by the proceeds of a 221(d)(4) FHA loan.
Case Study: Residences at
Government Center
• At the same time as the bonds are issued, the borrower will
also secure FHA insured 221(d)(4) mortgage
• Bond proceeds are drawn upon from the construction account,
an equal amount of proceeds of the FHA Loan derived from the
sale of GNMA Securities will be issued and deposited into the
collateral account held by the bond trustee under the bond
indenture.
• The bond proceeds construction account and the collateral account
combined will always equal the amount of bonds issued.
• This financing structure allows the bonds to be 100 percent cash
collateralized ensuring that the bond holders will never be at risk.
Case Study: Residences at
Government Center
• The bonds will be redeemed at the time the project is
placed in service.
• Keeping the bonds outstanding until the project is placed
in service tax credit equity through 4 percent LIHTC.
• Current interest rate environment, the taxable rates of
FHA Loans are lower than the tax-exempt rates, the
proposed
• Bonds will have a short term interest estimated to be 40BP
• FHA loan is anticipated to have an interest rate of 4.90%
(including MIP)
Questions?