2016 Vegas LIHTC thurs_130p_affordable_housing_debt_solutions ...

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Transcript of 2016 Vegas LIHTC thurs_130p_affordable_housing_debt_solutions ...

Affordable Housing Debt Solutions MODERATOR PANELISTS

Matt Zarlengo The Community Development Trust

Paul Charron Novogradac & Company LLP

Helen Feinberg RBC Capital Markets

Rob Hoskins The NuRock Companies

Tammy Ofek CapM Funding

Matthew Wambua Richmac Funding

Visit www.crowdmics.online/novocolihtc to send questions to the moderator

CapM Funding Disclaimer

CapM Funding (“CapM”) is providing the information contained in this document for discussion purposes only and not in connection with CapM serving as municipal (derivatives) advisor or fiduciary to a financial transaction participant or any other person or entity. CapM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate. This presentation was prepared exclusively for the benefit of and internal use by the recipient. This presentation is confidential and proprietary to CapM and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without CapM’s express written consent. By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, CapM and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by CapM. The information and any analyses in these materials reflect prevailing conditions and CapM’s views as of this date, all of which are subject to change. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it. IRS Circular 230 Disclosure: CapM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.

Representative Transaction Thessalonica & Brookhaven Apartments, Bronx, NY Floating Rate Bridge Refinancing To Re-Syndication For Projects

Within Their 15-year Initial Tax Credit Compliance Period

$30,250,000 Freddie Mac 7-year

Variable-Rate, Years 6 & 7 open

to Prepayment w/o Penalty

185bps + LIBOR

Thessalonica

$14,225,000

Freddie Mac 7-year Variable-Rate

Years 6 & 7 open to Prepayment w/o Penalty

190bps + LIBOR

Brookhaven

The Community Development Trust (CDT) – Is there another way?

• Private REIT formed in 1998 for the purpose of investing in the creation and preservation of affordable housing

• Has provided $1.2 billion in debt and equity capital to create or preserve over 40,000 affordable housing units in 43 states

• $870 million in assets under management as of 12/31/15 • Own 6,000 units through joint venture partnerships and loan on 18,500 units

in the debt portfolio

Equity Program - Overview

• CDT’s Equity Program focuses on preserving existing affordability as a long-term cash flow investor – Expiring (Year 15) LIHTC properties – HUD-subsidized (Project-based Section 8, RAD, etc.) properties – Other state/locally-subsidized and/or mixed-income properties

• We form joint venture partnerships with leading operators of affordable housing throughout the country – For-profit/Not-for-profit – National/Regional/Local

Debt Business - Overview

• CDT is a national lender and portfolio purchaser supporting the permanent lending needs of affordable housing communities.

• Unfunded Forward Commitments Program: This is CDT’s primary originations program, which primarily is LIHTC focused. Originally structured as a secondary market program with approved correspondent lenders, our forward business is now a direct lending platform.

• Immediate funding requests: This includes both refinance and acquisition financing for existing, stabilized projects. In this program, CDT often sees smaller balance requests and other immediate loans that may not meet GSE program standards.

• Portfolio Acquisitions: CDT purchases portfolios of closed, seasoned perm loans on affordable rental projects from banks, CDFIs and other community lenders. Portfolios can range in size from at small as $5 million to $100 million or greater. 7

2016 Interest Rate Overview

SIFMA 1mo LIBOR 10yr UST

• Nov 2016: .55% .59% 2.391% • June 2016: .40% .45% 1.64% • Nov 2015: .01% .21% 2.26% • Nov 2006: 3.56% 5.35% 4.60%

Sources: Bloomberg, SIFMA, Fedprimerate.com (some #s are monthly averages)

10yr UST Source: Bloomberg

SIFMA Variable Rate vs MMD 17 Year Fixed Rate Source: Municipal Market Data (“MMD”) and Security Industry and Financial Markets Association (“SIFMA”)

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2%

4%

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10%

MMD 17 YR SIFMA

SIFMA vs. 1mo LIBOR source: Bloomberg

Disclaimer RBC Capital Markets, LLC (“RBC CM”) is providing the information contained in this document for discussion purposes only and not in connection with RBC CM serving as Underwriter, Investment Banker, municipal advisor, financial advisor or fiduciary to a financial transaction participant or any other person or entity. RBC CM will not have any duties or liability to any person or entity in connection with the information being provided herein. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934. The financial transaction participants should consult with its own legal, accounting, tax, financial and other advisors, as applicable, to the extent it deems appropriate.

This presentation was prepared exclusively for the benefit of and internal use by the recipient. This presentation is confidential and proprietary to RBC Capital Markets, LLC (“RBC CM”) and may not be disclosed, reproduced, distributed or used for any other purpose by the recipient without RBCCM’s express written consent.

By acceptance of these materials, and notwithstanding any other express or implied agreement, arrangement, or understanding to the contrary, RBC CM, its affiliates and the recipient agree that the recipient (and its employees, representatives, and other agents) may disclose to any and all persons, without limitation of any kind from the commencement of discussions, the tax treatment, structure or strategy of the transaction and any fact that may be relevant to understanding such treatment, structure or strategy, and all materials of any kind (including opinions or other tax analyses) that are provided to the recipient relating to such tax treatment, structure, or strategy.

The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the recipient or from publicly available sources, the completeness and accuracy of which has not been independently verified, and cannot be assured by RBC CM. The information and any analyses in these materials reflect prevailing conditions and RBC CM’s views as of this date, all of which are subject to change.

To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by or in consultation with the recipient and are intended only to suggest reasonable ranges of results. The printed presentation is incomplete without reference to the oral presentation or other written materials that supplement it.

IRS Circular 230 Disclosure: RBC CM and its affiliates do not provide tax advice and nothing contained herein should be construed as tax advice. Any discussion of U.S. tax matters contained herein (including any attachments) (i) was not intended or written to be used, and cannot be used, by you for the purpose of avoiding tax penalties; and (ii) was written in connection with the promotion or marketing of the matters addressed herein. Accordingly, you should seek advice based upon your particular circumstances from an independent tax advisor.

Impact of Election on Market

• With a Republican lead House, Senate and Presidency – Tax Reform may result. Possibility of reduction in Corporate tax to 15% is creating uncertainty among equity investors.

• Post election WSJ survey of economists suggested 96.5% likelihood of a rate increase by Fed policy makers at December 13-14 meeting. * WSJ 11/25/16 “Fed Sees Signs of Economic Strength”

Impact of Election on Market

• Selective repeal of Dodd-Frank – rumored policy positions: – May target repeal of items such as ability of Financial Stability Oversight Council to

designate large nonbanks as systemically important and subject to tougher regulation from the Federal Reserve;

– May keep aspects focused on boosting credit rating transparency and regulation of derivatives;

– Certain policy comments overlap with Jeb Hensarling (R., TX) who is rumored to be considered for Treasury secretary position;

– May keep element of Dodd Frank that creates a new position: “Vice Chairman of the Federal Reserve”, a supervision chief responsible for Fed Regulations (replacing Fed Governor Tarullo, the unofficial supervisor who has imposed annual stress tests and strict capital rules on banks).

Market Reaction to Post-Election Policies

• 10 Year Treasury rate has increased approximately .62% since election; • Credit spreads on lower rated credits (Bonds rated “A” and below) have

widened; • MMD rates have increased more than corresponding US Treasury rates since

the election; • Equity pricing and tax credit investor appetite have declined based on

speculation of reduction in corporate tax rates and increased yields; • Still absolute bond rates remain low in comparison to historical levels.

15 Year MMD vs 10 Year US Treasury Source: Municipal Market Data (“MMD”) and U.S. Department of the Treasury

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AAA MMD 10 Yr. TSY

Choosing Debt Programs in Light of Market Conditions

• MBS Security (e.g. Fannie Mae, GNMA) pricing remains strong – while rates have increased similar to 10 year Treasury, spreads have remained solid;

• Cash Collateralized Bond Rates have increased significantly in the last year, however, the corresponding investment rates have also increased – therefore the net interest cost has not been as impacted;

• Variable rates (SIFMA and LIBOR) have increased in the last year, however remain very attractive.

Fannie Mae MBS as Tax Exempt Bond Collateral (M.TEB)

Pricing Execution and Program Advantages

Inaugural Fannie Mae Multifamily M.TEB

The Fannie Mae M.TEB structure was created to avoid a dual transaction structure (Conventional MBS paired with Short Term Bonds). The Inaugural structure was similar to prior Fannie Mae MBS backed bond structure with several modifications:

• MBS to be purchased shortly after bond closing; • Simple single maturity monthly pay bond structure • Rate on MBS same as Bond Rate • Traditional rating agency cash flows not required due to match of MBS payments to bond payments • MBS payments passed through to bondholders the next business day following receipt by Trustee • Disclosure benefits for bond purchasers as information on Fannie Mae MBS pool accessible on Fannie Mae

website and Bloomberg • Structure attracted “cross-over” buyers from MBS market as well as traditional tax exempt bond and CRA

investors • Pricing expected to more closely track spreads to 10 Year Treasury similar to conventional MBS pricing

Inaugural Fannie Mae Multifamily M.TEB

The Fannie Mae M.TEB structure was created to avoid a dual transaction structure (Conventional MBS paired with Short Term Bonds). The Inaugural structure was similar to prior Fannie Mae MBS backed bond structure with several modifications: • MBS to be purchased shortly after bond closing; • Simple single maturity monthly pay bond structure • Rate on MBS same as Bond Rate • Traditional rating agency cash flows not required due to match of MBS

payments to bond payments

Inaugural Fannie Mae Multifamily M.TEB

The Fannie Mae M.TEB structure was created to avoid a dual transaction structure (Conventional MBS paired with Short Term Bonds). The Inaugural structure was similar to prior Fannie Mae MBS backed bond structure with several modifications: • MBS payments passed through to bondholders the next business day following

receipt by Trustee • Disclosure benefits for bond purchasers as information on Fannie Mae MBS

pool accessible on Fannie Mae website and Bloomberg • Structure attracted “cross-over” buyers from MBS market as well as traditional

tax exempt bond and CRA investors • Pricing expected to more closely track spreads to 10 Year Treasury similar to

conventional MBS pricing

Skyline Place – TDHCA – MTEB Pricing

Case Study $18,750,000 Texas Department of Housing and Community Affairs Multifamily Housing Revenue Bonds (Pass-Through – Skyline Place Apartments) Series 2016 Pricing Date: September 9, 2016 Delivery Date: September 15, 2016 Bond Rating: Moody’s: “Aaa” Term: Single 16 year maturity (14.4 year Weighted Avg Mty) Bond Rate: 2.60% 10 Year Treasury at Pricing: 1.67% Amortization: 35 Year Mortgage Rate: 3.51% Optional Prepayment: 6 months prior to maturity RBC Role: Sole Manager

Fannie Mae MTEB Historical Pricing RBC Capital Markets (sources: Official Statements for Bond Issues)

Fannie Mae MTEB Issuance Crossings of East

Ravenwood Woodland Towers Williamsburg Fullerton Skyline Place Gates Manor

Par Amount $18,750,000 $8,600,000 $19,500,000 $7,400,000 $23,150,000 $21,750,000 Bond Rate/ Pass Through Rate 2.60% 2.6250% 2.80% 2.85% 3.45% 3.00% Fannie Mae Mortgage Loan Rate 3.51% 3.325% 3.50% 3.55% 4.46% 3.97% Bond Price 100.00% 100% 100% 100% 101% 100% Maturity 10/01/2032 09/01/2032 07/01/2032 07/01/2032 01/01/2032 02/01/2031 Term 16 Years 16 Years 16 Years 16 Years 16 Years 16 Years Interest Only 1 Year None None None 1 Year 2 Years Dated Date 09/01/2016 08/01/2016 06/01/2016 06/01/2016 12/01/2015 01/01/2015 Settlement/Closing Date 09/21/2016 08/18/2016 06/24/2016 06/14/2016 12/09/2015 01/26/2015 Spread to 10 Year Treasury 0.93% 1.0750% 1.11% 1.17% 1.15% 1.13% Spread to 15 Year MMD 0.77% 0.8350% 1.01% 0.94% 0.80% 0.80%

Yield Maintenance 15.5 Years 10 Yrs,

then par call 10 Yrs,

then par call 10 Yrs,

then par call 15.5 Years 10 Yrs,

then par call Project Location Texas Illinois Illinois Illinois Texas Illinois

Fannie Mae MTEB Advantages

• Certainty of Execution with Delegated Underwriting and Streamlined Processing

• Increased Investor Base – Attracts traditional tax exempt buyers, taxable MBS buyers, CRA buyers, Financials institutions, Insurance companies

• Pricing Process allows multiple institutions to participate – With increased participation, rate may be reduced

• Tax Exempt Debt remains outstanding and can be refunded at a later date • Structure is flexible and can accommodate premium pricing to generate

additional proceeds, varied amortization, varied prepayment structures

Flexible Application of M.TEB Structure

Initial Fannie Mae M.TEB financed an “in-place” rehabilitation transaction. The following are other variations that may be applied to the structure: Fannie Mae – Reduced Occupancy Affordable Rehab (ROAR) • Minimum occupancy of 50% and minimum DSC of 1.0% (interest-only) • No Construction loan needed; rehab costs of $40,000 - 120,000 per unit and

rehab period of 12-18 months • MBS Structure modified to provide Fannie Mae direct credit enhancement during

rehab phase converting to MBS at conversion • Proceeds are fully funded at closing; amounts required for rehab are escrowed • Increased leverage opportunities when underwritten to as-improved rents • Interest rate savings similar to full MBS Tax Exempt Pass Through Bond execution

Flexible Application of M.TEB Structure

Initial Fannie Mae M.TEB financed an “in-place” rehabilitation transaction. The following are other variations that may be applied to the structure: Fannie Mae – New Construction • Construction loan or letter of credit required • Permanent bond pricing locked at issuance • Monthly payment of interest during construction phase • Upon Conversion, MBS will be delivered to the Trustee and secure the Bonds • During the Construction phase, Borrower will pay debt service on the bonds and

construction loan or letter of credit • Fannie Mae enhancement will be structured as a direct pay credit facility until

conversion when the MBS is delivered

Fannie Mae SIFMA Floating Rate Notes

Product Features and Pricing Considerations

SIFMA Fannie Mae Credit Floating Rate Notes

• Pricing for Initial Acquisition/Rehab Fannie Mae 10 year SIFMA Floating Rate Note (“FRN”) in April, 2015 was SIFMA + 100 basis points.

• Currently investor demand is greatest for 5-7 year terms. • Pricing of Floating Rate Notes is structured as a “spread” to the SIFMA or

LIBOR index • Pricing spreads change over time similar to the way credit spreads change • Current pricing is estimated at SIFMA + 100 basis points • Tax exempt FRNs issued in states with income tax are generally exempt from

the tax making them more valuable. The following are examples of high demand states:

• New York – California – Connecticut - New Jersey – Maryland – Virginia - North Carolina - Georgia

Short Term Cash Collateralized Bond Structure

Product Features and Pricing Considerations

Cash Collateralized Tax Exempt Bond Structure

• Typically structured with maturity of 12 months to 2 years • Bonds may qualify for the rating of the underlying investments – Where US

Treasuries are the underlying investment – the bond rating is AA+ (S&P) or Aaa (Moody’s)

• Maturity is set to a conservative date by which units will be completed and “placed in service”

• Bonds may be structured with a shorter term and a feature that allows a mandatory tender and remarketing

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Cash Collateralized Tax Exempt Bond Structure

• Optional redemption provisions may be incorporated to call the bonds once units are completed – If bonds are called early, capitalized interest may be refunded to the borrower

• To the extent bonds are not callable – interest rate may be reduced. In addition, negative arbitrage may be reduced by investing proceeds for a longer time.

• Interest Rates generally range from 1.00% - 1.50% under current market conditions for 1 to 2 year maturities.

• Issuer Fees may need to be re-examined to ensure the differential between bond yield and loan yield does not exceed 1.50%.

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Sample Cash Collateralized Bond Issue

Tax Exempt Bond Features • Bond Term: 2 Years with No Optional Call • Estimated Interest Rate: 1.40% • Reinvestment Rate - U.S. Treasuries: 1.10% • Par Amount of Bonds: $10,000,000 • Bond Capitalized Interest: $280,000 less Interest Earned of $220,000 =

$60,000 Net Interest Paid • Estimated Bond Cost of Issuance: 2% or $200,000

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Sample Cash Collateralized Bond Issue

• Paired with Taxable Permanent Loan Financing Acquisition Rehab or New Construction Development:

• Fannie Mae Conventional Loan • Freddie Mac Conventional Loan • FHA 223(f) Pilot Program • FHA 221 (d)(4) • RD Loan • Other Taxable Loan

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Affordable Housing Debt Solutions MODERATOR PANELISTS

Matt Zarlengo The Community Development Trust

Paul Charron Novogradac & Company LLP

Helen Feinberg RBC Capital Markets

Rob Hoskins The NuRock Companies

Tammy Ofek CapM Funding

Matthew Wambua Richmac Funding

Visit www.crowdmics.online/novocolihtc to send questions to the moderator