17 th ANNUAL WESTERN HUD LENDERS’ CONFERENCE September 7 th – 9 th , 2016 Parc 55 A Hilton Hotel, Cyril Magnin Ballroom San Francisco, California
Combining Tax-Exempt, Short-Term Bonds with Taxable GNMA SALE for Affordable Apartment Financings Presented by: R. WADE NORRIS, ESQ. wnorris@ennbonds.com (202) 973-0100 EICHNER NORRIS & NEUMANN PLLC 1225 19th Street, N.W., Suite 750 Washington, D.C. 20036 Fax: (202) 296-6990 Website: www.ennbonds.com 2
Apartment Construction in the United States Historic and Projected Multifamily Housing Starts (Thousands) (For Rent) 1986 – 2015 *2014 & 2015 Historical Data from The State of the Nation's Housing, 2014 & 2015, Joint Center for Housing Studies of Harvard University. According to Harvard Studies, 2000-2008 yearly multifamily rental housing starts averaged 230,000 units per year. Harvard Source: JCHS tabulations of US Census Bureau, Surveys of Construction. 3
Very Favorable Past Year and Future Prospects for Rental Housing • Demographics and other factors continue to support strong continued growth in rental housing – Projected growth in household formations: $4.0 million in ten years, starting about six years ago. • Post WWII “Baby Boom Echo”, or “Millennial” generation entering workforce and seeking housing, 4 or 5 years yet to run . • Continued net immigration (immigrants rent for 10 years before buying). Continuing Decline in Single Family Home Ownership – Dramatic tightening in lending • standards for single family home loans post-2008 and less borrower equity for down payments – U.S. homeownership down from 69% at peak in 2007 to 63.7% today. Urban Institute projects just over 61% in 2030. 4
*Data from The State of the Nation's Housing, 2015, Joint Center for Housing Studies of Harvard University Harvard Source: JCHS tabulations of US Census Bureau, Surveys of Construction. 5
Historic and Projected Multifamily Housing Starts (Thousands) (For Rent) 1986 – 2025 Harvard Studies estimate that “pent up demand,” if satisfied, would *2014 & 2015 Historical Data from The State of the Nation's Housing, 2014 drive total multifamily rental housing demand as high as 400,000 to & 2015, Joint Center for Housing Studies of Harvard University 470,000 units per year for the next decade. According to Harvard Studies, 2000-2008 yearly multifamily rental housing starts averaged 230,000 units per year. Harvard Source: JCHS tabulations of US Census Bureau, Surveys of Construction. 6
The Harvard projections for multifamily rental starts may look optimistic, until one looks at all U.S. housing starts – single family and multifamily – for the years 2004- 2006 – at close to 2.0 million, versus 800,000 to 1.0 million in recent years. 7
Affordable Versus Market Rate U.S. Rental Housing • Last year ( 2015 ), the United States had approximately 400,000 new apartment starts , up from a low of 90,000 in 2009 (the “nuclear winter” of real estate finance). • Of the total multifamily rental apartment starts each year, roughly one-third, or 130,000, are affordable , i.e., 100% of the units rented to tenants with income ≤ 100% at 60% of AMI (for a family of 4, adjusted for family size).* • These units come from the two major Low Income Housing Tax Credit (“LIHTC”) programs : – 9% LIHTC . Roughly 70,000 units . Very powerful subsidy – Borrower can syndicate to cover ≈ 70% of Total Development Costs (“TDC”); Borrower gets a small bank loan, and that’s it. 9% LIHTC accounts for roughly one half of all affordable units. Over subscribed 4 or 5:1 . – 4% LIHTC . Roughly 60,000 units. Borrower can syndicate to cover approximately 25-45% of TDC. Larger loan → more attractive to FHA lenders . – 50% Rule : 4% LIHTC requires at least 50% of eligible basis in the buildings and land to be funded with tax exempt private activity bonds. Private activity volume still widely available (outside of NY and a small number of other states). ________________________________ *Tax exempt bonds may also be used on projects where 20% of the rents are set aside for persons at 50% of AMI; usually large urban projects which often use different debt financing structures. 8
Affordable Versus Market Rate U.S. Rental Housing • Development of affordable rental housing under these two programs is very different from development of market rate apartments. – Developer gets substantial up-front development fee (5-10% or more); plus construction contract if Developer has a related contractor, plus annual management fees , assuming Developer has related management company. – Developer gives up a lot of the “ups” – gain on sale or refi after stabilized occupancy in 3-5 years – Project must remain an affordable rental project, generally for 30-55 years . – Restricted rents plus low income occupancy reduces NOI , but tax credits fund 25-45% of total development cost . – Major Industry – perhaps 50,000 units per year presently for 4% LIHTC plus tax-exempt bonds. 9
REMEMBER! The 50% Rule → No Tax-Exempt Private Activity Bonds = No 4% LIHTC = No Deal! 10
Long-Term Tax-Exempt Municipal Bonds – How we Financed Affordable Multifamily Housing in the Pre-2008 “Right-Side Up” Interest Rate World • Before the financial crisis in 2008, it was axiomatic that funding the debt side of these deals with long-term tax-exempt bonds produced lower interest rates (by 50-100 basis points or more) than taxable financings backed by the same credit (e.g., FHA/GNMA). • Why? Because the buyers of tax-exempt muni bonds don’t pay federal (and often state) income tax on municipal bonds, and thus they will accept lower coupons . 11
Pre-Financial Crisis Long-Term Tax-Exempt and Taxable Rates Bond Buyer 20-Bond GO Index vs. 30-Year U.S. Treasury 20-Bond GO Index 30-Year Tresury Bond Yield 16 14 30-Yr. Treasury 9/13/07 12 (4.75%) 10 8 6 4 Sep-83 Sep-85 Sep-87 Sep-89 Sep-91 Sep-93 Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 20 Bond GO 9/13/07 (4.46%) 12
• The preceding chart shows that over the 25-year period prior to the 2008 financial crisis, long-term tax-exempt rates were consistently lower than long-term taxable rates. • Typical pre-2008 long-term interest rates: AAA Rated Taxable Bond – 6.0 % AAA Rated Tax-Exempt bond – 5.0 % ( ∼ 85% of taxable) Savings – 1.0 % or 100 basis points!!! • In these “normal” interest rate markets, this reduction in rates through financing with low-rate long-term fixed rate tax-exempt bonds often increased loan proceeds by 4% to 8% over those achievable on a taxable fixed rate loan backed by the same credit, including GNMAs. 13
TRADITIONAL LONG-TERM TAX-EXEMPT MUNI BONDS BACKED BY GNMAs – How We Structured 9 Bonds paid-off Issuer 35 or 42-Yr Bonds 1 over 35 or 42 years from payments on the GNMAs Underwriter/ Project Bond Trustee Bond Purchase Price 2 Bond Fund Fund Purchaser Trustee pays purchase price of GNMA which reimburses FHA 8 Delivery of GNMAs to Lender’s warehouse Bond Trustee as collateral credit-line draw 7 for the Bonds GNMA Guarantee Request 5 FHA Loan Draw Request 3 FHA Borrower GNMA Lender GNMA Issued 6 FHA Lender Funds FHA Loan 4 (Amount equal to FHA Loan advance) advance from warehouse credit-line draw Cash Paper / Securities 14
Long-term Tax-Exempt Muni Bonds – Major Benefits and Disadvantages Two Major Benefits : • – 1. Qualified for 4% LIHTC ; – 2. Before 2008, Lower Mortgage Rate (50-100 basis points) than taxable GNMA. Two Major Disadvantages : • – 1. Large (4 – 8%) negative arbitrage deposit for new construction/sub rehab (e.g., §221(d)(4)) deals; – 2. Ongoing issuer, trustee, and rebate fees (8 – 10 to 40 or 50 basis points!) for 35 or 42 years . • This structure using long-term municipal bonds backed by GNMAs wrapping FHA insured loans was used to provide financing for hundreds if not thousands of projects for almost three decades through 2008. 15
This relationship between tax-exempt and taxable rates lasted for decades: ‘60s ‘90s Early ‘00s ‘50s ‘80s ‘70s 16
It’s just the way it was, until… 17
It wasn’t!!! 2008 – The Extinction Event 18
The Post-2008 World of Upside Down Rates • In the fall of 2008, numerous AAA-rated debt securities became worthless or worth only pennies on the dollar – almost unprecedented destruction of trust in the long-term debt markets. • Result: Long-term debt investors all over the world fled to the safety of U.S. Treasury bonds versus any other long-term credit in the debt markets. • At the same time, yields on tax exempt municipals soared to new heights as concerns about credit quality and liquidity mounted. The following charts plot an amazing development – long-term rates • on federally taxable U.S. Treasury Bonds fell to levels substantially below those on all other credits , including rates on long-term tax exempt municipal bonds . 19
Long-Term Rate Comparison: 30-Year MMD (Tax-Exempt) Versus 10-Year Constant Maturity Treasury (Taxable) 9.00% 8.00% Early 2008 – Taxable US Government Securities Rates Fall Below Tax Exempt Municipal Rates 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 30-Year MMD 10-Year UST 20
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