FINANCING WITH
TAX-EXEMPT BONDS
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)
What is a Bond?
• A contract between the issuer and the
bondholder
• A debt instrument – A promise to pay
Basic Bond Structures
• Loan to Developer
• Bond proceeds ($)  Issuer Developer  Project
• Loan to Lender
• Bond proceeds ($)  Issuer  Lender  Developer  Project
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)
• 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)
• 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)
BASIC BOND DOCUMENTS
WHAT DO THEY DO?
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Bonds
Indenture
Loan Agreement/Note
Regulatory Agreement
Credit Enhancement Documents
• Credit Enhancement Agreement
• Reimbursement Agreement
• Deed of Trust/Mortgage
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Preliminary Official Statement (“POS”)
Official Statement (“OS”)
Bond Purchase Agreement (“BPA”)
Disclosure Agreement
Investment Agreement (“GIC”)
Closing Documents
• Certificates
• Opinions
• 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 Sharing
LOAN TO DEVELOPER STRUCTURE
(No Credit Enhancement)
$
Principal and
BONDHOLDERS
Interest
$
Loan Agreement/Note/Mortgage
ISSUER
$ Bond
Proceeds
Loan Agreement/Note/
Mortgage (security for Bonds)
PROJECT OWNER
$ Bond
Proceeds
$
Cash Flow
PROJECT
$ Loan Payments
TRUSTEE
LOAN TO DEVELOPER STRUCTURE
(Letter of Credit)
$
Principal and
BONDHOLDERS
TRUSTEE
Interest
$
Proceeds
Letter of Credit
(Letter of Credit
Bank bears
bankruptcy risks)
Assignment of
ISSUER
$
Proceeds
Mortgage/Note/
Loan Agreement
LETTER OF
CREDIT BANK
Mortgage/Note/
Loan Agreement
$
PROJECT OWNER
Reimbursement
Agreement
$
Proceeds
$
Cash Flow
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PROJECT
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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
LOAN TO DEVELOPER STRUCTURE
(Municipal Bond Insurance)
$
Principal and
BONDHOLDERS
TRUSTEE
Interest
$
ISSUER
$
Proceeds
$
Pay in
event
Developer
defaults
(Policy
insures
Bondholders
against
bankruptcy
risks)
$
Loan Agreement/
Note/Mortgage
$ Loan Payments
PROJECT OWNER
$
Proceeds
$
Cash Flow
PROJECT
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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 TO DEVELOPER STRUCTURE
(GNMA-MBS or Pass-Through Certificate)
$
Principal and
BONDHOLDERS
$ Bond
Proceeds
Mortgage-backed
Security (MBS
or Pass-through
Certificate)
ISSUER
$
Bond
Proceeds
TRUSTEE
Interest
Mortgage/Note
Loan Agreement/
Note/Mortgage
$
PROJECT OWNER
Loan Payments
Mortgage/Note
$ Bond
Proceeds
$
Cash Flow
$
payments on
MBS
Pass-Through
Certificate
guarantees
loan payments
LENDER
(GNMA Mortgage
Banker Servicer)
Mortgage/Note
GNMA
PROJECT
Bankruptcy risk is with GNMA.
HUD RISK SHARING STRUCTURE
$
Principal and
BONDHOLDERS
$ Bond
Proceeds
$
ISSUER
(Mortgagee)
$
Proceeds
TRUSTEE
Interest
FHA Mortgage Insurance
Payments if Borrower Defaults
HUD/FHA
$ Mortgage Loan
Payments
Mortgage/Note/
Regulatory Agreement
PROJECT OWNER
$
Proceeds
$ Loan
Payments
SERVICER
(may be the Issuer)
$
Cash Flow
PROJECT
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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 RiskSharing 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)
• Types of Bond Issues for Affordable Housing
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§ 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)
• 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) Bonds
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)
• 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 Issuer
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)
• 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 restrictions
• Bankruptcy
• Issuer
• Developer
• Credit Enhancer
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
requirements
• 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)
BOND ISSUE TIMETABLE
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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)
CLOSING
IT ALL COMES TOGETHER
BOND “BUZZ WORDS”
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WIDOWS AND ORPHANS
BIG BOYS
TERM BONDS
SERIALS
FLOATERS
SINKERS
BPA
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POS
OS
GIC
REFUNDING
TAXABLE TAIL
BOOK-ENTRY
DTC
UNDERWRITING HOUSING BONDS
FOR LOCAL HOUSING AGENCIES
• Role of Underwriter
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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 timetable
• Underwriter Documents
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Bond Purchase Agreement (“BPA”)
Preliminary Official Statement (“POS”)
Official Statement (“OS”)
Blue Sky Survey
Underwriter’s Counsel 10(b)5 opinion
• Underwriting Related Documents
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Continuing Disclosure Agreement
Rule 15c2-12 Certificates
DTC Letter of Representations
Sophisticated Purchaser Investment Letters
(“Big Boy” letters) for unrated bond issues
• Issuer Business Issues with Underwriter
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Underwriter’s Fee (“Spread”)
Service
Indemnification
Professional Representations
• Factors for Selection of Underwriter
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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
• Components of Pricing the Bonds
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Discounts and premiums
Call protection
“underwriting risk”
“story bond”
• 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)
• Underwriting “Buzz Words”
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BPA
POS
OS
“story bond”
GIC
“Blue Sky”
“Big Boy” letters
DTC
“book entry”
CUSIP