Partners in InnovationRural Roundtable

Overcoming Challenges, Leveraging RD Resources, and Implementing Solutions

Tax Exempt Bonds – Case Study

Conduit Bonds – Private Placement Institution Holds Mortgage Not Enhanced (No Rating) Greater Cost of Issuance (Case Study: 8.4% avg)

Risk Share Bonds – Agency Program OHCS Holds Mortgage ( with RD Mortgage) HUD – FHA Enhanced Bonds (AAA Rating) Limited Cost of Issuance @ 2.0% or less

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Tax Exempt Bond – Case Study

• 4 Family Properties 145 subsidized units

• Original construction: 1970 to 1983

• Rehab per Unit (Average): $ 29,700 per unit 10 ADA units added

MAP OF MONTANA WITH PROPERTIES IDENTIFIED

Portfolio Details.

Tax Exempt Bond – Case Study

Property Type Units Acquisition Cost

Rehab-Hard Cost

Elderly Independent

30 $ 1,690,000 $ 638,207

Family 26 $ 1,460,000 $ 858,997

Family 39 $ 1,820,000 $ 1,208,661

Family 50 $ 1,840,000 $ 1,594,754

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Tax Exempt Bond – Conduit

Amortization & Term of Loans: Bank: 30 years – early call 15 – 18 years RD: 40 years – re-amortized over 40 years

Debt Coverage Ratio: Bank: 1.20 USDA-RD: 1.15

Limits on Loan Amount: (lesser of…) Loan to Value: 75% - 85% Acquisition plus rehab costs

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Tax Exempt Bond – Risk Share

Amortization & Term of Loans: OHCS: 40 years – fully amortized RD: 40 years – existing loan re-amortized

Debt Coverage Ratio: Bank: 1.10 – 1.15 USDA-RD: 1.10 – 1.15

Limits on Loan Amount: (lesser of…) Loan to Value: 85% Acquisition plus rehab costs

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Tax Exempt Bond – Interest Rates

Conduit TEB Mortgages Market Bond Rates – Based on Bank/Term Case Study: 7.5% OAHTC Reduces Loan Rate by 4.0% = 3.5%

Risk Share Mortgages OHCS Quotes Rate Case Study: 5.75%

RD 515 Program Interest Rates: 1.0% (subsidized)

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Tax Exempt Bond – Other Terms

Equity Pricing Assumption: 4% 1602 Exchange Program Case Study: 0.85 Equity Factor Syndication: 0.55 Equity Factor (if available)

RD 515 Program Assume $250,000 Existing Loan No Loan Origination Fees No Debt Service Reserves

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Tax Exempt Bonds - Sources

SOURCES CONDUIT No OAHTC

RISK SHARE

 

TEB Loans (Conduit: $8,067,121) $ 6,855,000$ 6,855,000 $ 8,010,000$ 8,010,000

LIHTC Equity $ 3,606,150$ 3,606,150 $ 3,524,836$ 3,524,836

Preservation Grants & Wx Funds $ 3,385,000$ 3,385,000 $ 1,575,000$ 1,575,000

RD 515 Existing Loans $ 1,000,000$ 1,000,000 $ 1,000,000$ 1,000,000

Owner Contributions $ 290,000$ 290,000 $ 480,000$ 480,000

Total Sources: $ 15,136,200$ 15,136,200 $ 14,589,836$ 14,589,836

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Tax Exempt Bonds - Uses

USES CONDUIT No OAHTC

RISK SHARE

Acquisition Costs $ 6,810,000$ 6,810,000 $ 6,810,000$ 6,810,000

Constr & Dev Costs $ 4,613,950$ 4,613,950 $ 4,613,950$ 4,613,950

General Fees (Incl Dev Fees) $ 1,931,152 $ 1,859,887

All Loan Fees $ 45,319 $ 45,319

Bond Cost of Issuance (COI) $ 744,559 $ 160,200

Tax Credit Fees $ 585,415 $ 585,415

Interest Costs $ 197,599 $ 232,567

Reserves & Soft Contingency $ 282,500 $ 282,500

Total Uses of Funds: 15,136,200 14,589,836

Tax Exempt Bonds - Benefits

Portfolio of Properties for Preservation Capture Subsidized Properties Before Opt Out Larger Scale Draws Lenders/Investors

Scattered Sites Across the State

Economies of Scale for Financing Costs Negotiate costs with similar project financing Conduit: Interim TEB Option – Reduces COI

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Tax Exempt Bonds - Drawbacks

Complex Financing Bond Tests Land Test: < 25% of acquisition costs Bond Test: > 50% of eligible project costs COI Limits: < 2% on bad costs (e.g. attorneys)

Greater Financing Costs Asset Management Fees COI – Legal and Trustee Fees Risk Share Requires Bank Construction Loan

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Tax Exempt Bonds - Drawbacks

Limited Investor Pool Tax Credits versus Losses Small, Rural Projects Unlimited Guarantees

Added Reporting Requirements Bond Certification Arbitrage Rebate Report 4% Tax Credit ARRA Reporting (Case Study)

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Tax Exempt Bonds - Drawbacks

RD 515 Program Considerations RD Loans – Parity or Subordination Extensive Rehab for 30-year Economic Life Regulatory Obstacles – Multiple Agencies Timing to Close Multiple Properties

Market Considerations Market rents in Trending Down Sellers Expectations of Value

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Tax Exempt Bond – Partners

OHCS: TEB Bonds, 4% LIHTC, Grants, Weatherization

USDA-RD: Existing Financing HUD – Risk Share – FHA enhanced bonds Investor – or 1602 Exchange Funds Other Lending/Grant Sources Bond Counsel Borrowers Counsel Other Finance Partners’ Attorneys Tax Credit Accountant

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