Integrating FHA & LIHTC,
along other Federal, State and
Local Financing Opportunities
Presented by:
David Pinson
Oppenheimer & Co.
Jennifer Doran Massey
Highland Commercial Mortgage
John Rucker
Merchant Capital
Jon Killough
Rockport Mortgage Corporation
“I went to see a fight and a tax-credit deal broke out”
Definition of Affordable Housing
Mortgagee Letter- 2010-21
• “Affordable” is defined as:
 Projects that have a recorded regulatory agreement in effect at least 15
years after final endorsement

Projects that meet at least the minimum Low Income Housing Tax Credit
(LIHTC) restrictions of :
– 20% of units at 50% of the Area Median Income(AMI)
– 40% of units at 60% of AMI with economic rents (i.e. the portion paid by
the tenants) on those units no greater than Low Income Tax Credit
rents, and
– mixed income projects if the minimum low income unit rent and
occupancy restrictions and regulatory agreement meet the above
criteria.
2010/2011 Underwriting Changes
• Debt Coverage & LTV Ratios
• Properties with 90% HAP units, or rent restrictions on
100% of the units and rents at least 20% below market,
can continue to be underwritten up to a 95% occupancy;
all others have a 93% maximum.
• Minimum Replacement Reserve deposit is
$250/unit/year. A new PCNA is required every 10 years,
along with a recalculation of the annual deposit.
• REO Schedules
• ODE & WC Changes
Low Income Housing Tax Credits
• 9% (9% of total eligible mortgageable costs
annual allocation for 10 years with compliance
period for 15 years.
 Competitive process; strict time frames
 Maybe 1 in 5 applications get selected particularly in
popular markets.
 Outlying markets and rural counties are less
competitive
 Biggest benefit in equity contribution from investment
market.
LIHTC’s (cont.)
 4% (4% of total eligible mortgageable costs annual
allocation for 10 years with compliance period for 15
years.
 Non competitive (except if duplicated in certain market areas).
Just meet the allocation plan and application requirements.
 Coupled with Tax Exempt Private Activity Bonds
 Market pricing may not be as competitive as 9%’s but still are
well accepted.
 Equity benefit not as great as 9% but compliance is less
stringent. (e.g. all or at least the minimum number of units may
be at 60% of the AMI.
Key Multifamily Programs – Outside of
FHA/LIHTC
•
•
Multifamily HOME Programs (Administered by most State HFAs)
The HOME Investment Partnerships Program helps expand the supply of
decent, affordable housing for low and very low income families by
providing grants to local governments and nonprofit and for profit
developers for housing purposes. The Multifamily HOME activities include
rental production for Community Housing Development Organizations
(CHDOs) and other applicants, as well as operating expenses for CHDOs.
Housing Tax Credit Program
The Housing Tax Credit (HTC) Program receives authority from the U.S.
Treasury Department to provide tax credits to nonprofits, for-profit
developers, and syndicators (or investors). The targeted beneficiaries of the
program are low income families at or below 60% AMFI. The program's
purpose is to encourage the development and preservation of rental
housing for low income families, provide for the participation of for-profit and
nonprofit organizations in the program, maximize the number of units added
to the state's housing supply, and prevent losses in the state's supply of
affordable housing.
Key Multifamily Programs – Outside of
FHA/LIHTC (continued)
• Multifamily Bond Program
The Multifamily Bond Program issues taxable and tax-exempt
mortgage revenue bonds (MRBs) to fund loans to nonprofit and forprofit developers. The proceeds of the bonds are used to finance the
construction, acquisition, or rehabilitation of multifamily properties,
with the targeted beneficiaries being low income households.
Property owners are also required to offer a variety of services to
benefit the residents of the development.
• Multifamily Preservation
Preservation of existing affordable and subsidized housing stock is a
critical element to achieving the Department's mission to provide
safe, decent and affordable housing.
Where FHA Financing works with LIHTCs
• 221(d)(4) NC & Sub-Rehab
– HFAs Permitting (i.e. what constitutes a commitment), and timing
constraints
– Insurance Upon Completion
• 223(f) & 223(f) Pilot Program
– Increase FHA’s Affordable Housing Production
– Implement HERA’s Pilot Program Mandate Through Accelerated
Processing Compatible with Tax Credit Program Requirements
– Outcome: Complete FHA Loan Processing in 120 Days, from
Application to Closing
General Overview of the LIHTC & Current
Market Conditions
•
General Overview and Industry Position
– The LIHTC has a successful track record - The LIHTC program has low
rates of foreclosure (less than 0.1%) and noncompliance with program
rules and is maintaining affordable rental housing stock over the longterm. Attributed to the involvement of third party for-profit partners, the
placement of construction, lease-up and occupancy risk on the
sponsors and investors instead of the federal government, the delivery
of LIHTC benefits over time, and state and federal oversight.
– The LIHTC program can be used to enhance other government housing
programs - Combining the LIHTC program with other affordable rental
housing programs strengthens those other programs and enables the
LIHTC to serve even lower income families and seniors and/or provide
more services to residents.
– Annual Investment is $8 to $10 Billion, producing 85,000+/- of
affordable/workforce housing annually per NHBA.
General Overview of the LIHTC & Current
Market Conditions
•
Reasons for Successful Track Record of LIHTC - There are several
components that contribute to the successful track record of the LIHTC:
– 1. Large dollar investments from third-party investors (non-federal
sources)
– 2. Screening of properties before development by third-party investors
– 3. Economies of scale and uniform practices
– 4. Construction and/or reconstruction risk and lease-up risk borne by
investors and developers
– 5. Tax credits received for performance over time
– 6. State level allocation, customization and oversight
– 7. Regulatory guidance from the IRS and enforcement by IRS auditors
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
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
General Overview of the LIHTC & Current
Market Conditions
• Programmatic Hurdles and legislative focus of the
industry
– H.R. 3661 and S. 1989.
• Making permanent and expanding the temporary
minimum credit rate for the low-income housing tax
credit program (9% LIHTCs).
– Yield driven investors exiting the market, given that
IRRs are approaching 6.00%+/-; larger syndicators
are painting the picture for lower pricing for the
remainder of 2012.
– CRA still a focus of the money center banks that are
still purchasing LIHTCs.
General Overview & Hot Topics in Tax-Exempt
Bond Financing
• Combining Tax Exempt, Short-Term Bonds with Taxable GNMA
Sale for Affordable Apartment Financings
 In the fall of 2008 the world of long-term debt investors fled to the
safety of U.S. Treasury bonds.
 At the same time, yields on tax exempt municipals soared to new
heights as concerns about credit quality and liquidity mounted.
 Long-term AAA rated bonds rates soared above the rates of
federally taxable US Treasury Bonds
 We are in an upside down world today with continuing economic
uncertainty in Europe
 And with the uncertain future of municipal bonds
General Overview & Hot Topics in Tax-Exempt
Bond Financing (continued)
Long Term Rate Comparison: 30-Year MMD (Tax Exempt)
(Green Line)
versus 10-Year Constant Maturity Treasury (Taxable)
(Yellow Line):
Jan 1, 2008 - Present
General Overview & Hot Topics in Tax-Exempt
Bond Financing (continued)
General Overview & Hot Topics in Tax-Exempt
Bond Financing
Result:
–TE Bond proceeds spent on qualified Project costs as
contemplated by Section 142(d) of Internal Revenue Code
–Bonds rated same high investment grade rating as GIC Provider –
AA or AAA, with no separate credit enhancement
Net Results – Borrower:
–100+ BPS Savings in Permanent Borrowing Rate, resulting in a
lower cost of capital over the life of the loan
–Negative Arb. reduced from 6-8 points or more to 1-2 points
–Full syndication value of 4% LIHTC equity on affordable units
achieved
General Overview & Hot Topics in Tax-Exempt
Bond Financing
Net Results – IRS:
– Tax-Exempt Bond proceeds used to fund Qualified Project Costs
– significantly lower TE Bond amount than if FHA loan had been
funded with long-term tax exempt bond issue
– No arbitrage “artifice or device” - all TE Bond Proceeds (and
replacement proceeds in GIC B) invested at far below TE Bond
yield
– No “over issuance” of bonds or “overburdening” of market - only
enough TE Bonds to meet 50% test, and outstanding 2 yrs.
versus 42.5 yrs.
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
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:
Piecing It All Together:
Case Study of Garden Oaks Apartments
During Rehabilitation:
What the Next Year Holds – as the programs
continue to mesh together
• RAD
– Number of Units to be addressed – 60k
– FHA financing will be key to program success
– 9% cycles will be difficult given timing
• PILOT Program
– Permanent 3-year rule waiver for affordable housing
– Expanding Field of PILOT Lenders & Participating Offices
In Closing…