Mississippi Home Corporation Annual Affordable Housing Conference February 21, 2013 AFFORDABLE...

Mississippi Home CorporationAnnual Affordable Housing ConferenceFebruary 21, 2013

AFFORDABLE HOUSING BOND ISSUES MAKE A COMEBACK

John B. Rucker, III Jon Killough Alysse E. Hollis Merchant Capital, LLC Rockport Mortgage Peck, Shaffer & Williams LLP

AFFORDABLE HOUSING BOND ISSUES MAKE A COMEBACK

Mississippi Home Corporation Annual Affordable Housing Conference

IMPORTANCE OF TAX-EXEMPT BONDS AND TAX CREDITS IN AFFORDABLE RENTAL HOUSING

— In the period from 2000 - 2008, the United States produced 200,000 – 250,000 units of new multifamily annually. Estimated rehabbed units at 50,000 – 150,000, with total of 250,000 – 400,000 units per year.

— Prior to 2008, approximately 130,000 affordable rental housing units were produced each year under two programs:

— The “9%” Low Income Housing Tax Credit Program produced (roughly 70,000 units in each of 2006 and 2007).

— Tax-Exempt Bonds combined with “4%” produced (roughly 60,000 units in each of 2006 and 2007).

— Over the past decade, these two programs have accounted for approximately one-third of the Country’s total rental housing production and the vast majority of affordable rental housing production


TAX CREDIT PRICING AND DEBT FINANCING AFTER THE FINANCIAL CRISIS

— The financial crisis wiped out 65% of the market for LIHTC— Fannie Mae and Freddie Mac had previously been about 40% of

the buy side of the LIHTC market, with major banks (due in part to CRA needs) and other financial institutions accounting for an additional 20-30%.

— With these buyers gone after 2008, annual tax credit volume fell from about $10 billion to approximately $5 billion.

— Tax credit pricing fell from $1.00 – $1.20 to $0.70 – $0.80 or less— The market for new construction period credit enhancement

dried up almost completely, making bond financing extremely difficult.


PRODUCTION AFTER THE FINANCIAL CRISIS

—Following the financial crisis, new multifamily rental housing production, dropped precipitously.

—New multifamily rental starts fell more than 50% to approximately 90,000 in 2009 and approximately 100,000 in 2010.

— It is likely given the steep fall-off in pricing for LIHTC and the virtual disappearance of construction lending in this sector that the production of affordable housing units suffered a similar or greater percentage decline.


MARKET RECOVERY – CONTINUED

—“Preservation” of first-generation LIHTC deals are now exiting their 15 year compliance period

—The debt markets have become largely fixed rate, as the availability of liquidity for variable rate financings has dramatically declined (Fannie Mae is out and only Freddie Mac remains a substantial player) and pricing has risen

—Innovative debt structures are further supporting financing activity in the affordable multifamily space.


General Overview of the LIHTC & Current Market Conditions

■ Overall Statistics since inception of LIHTC Program for Region IV

HUD Region IV LIHTCs Allocated Number of Units Delivered Jobs Created

1 Alabama $ 2,200,000,000

41,059

47,628

2 Florida $ 6,800,000,000

152,175

176,523

3 Georgia $ 3,210,000,000

138,475

160,631

4 Kentucky $ 1,000,000,000

28,280

34,804

5 Mississippi $ 2,000,000,000

45,454

52,726

6 North Carolina $ 3,000,000,000

59,701

69,253

7 Puerto Rico $ 2,000,000,000

12,972

15,047

8 South Carolina $ 1,600,000,000

30,679

35,587

9 Tennessee $ 2,400,000,000

54,334

60,027 10 U.S. Virgin Islands Included in PR Included in PR Included in PR

$ 24,210,000,000

563,129

652,226


Trends

■ The following are new trends in the multifamily housing sector:

— Developers creating 4% deal when they fail to get a 9% allocation

—Rural development pools

—FHA becoming more of a factor

—Rated (but unenhanced) multifamily financing

Slide 8


How do we get these deal done

■ Financing Options

—Private Placements

—Freddie Mac / Fannie Mae

—FHA Programs

—Standard & Poor’s Unenhanced Bond Program

Slide 9


Private Placements

■ The Issuer sells bonds directly to one investor (or a limited number of sophisticated investors) without a public offering.

■ Financing observations include:

—Lower issuance costs; higher interest rates

—Less financial disclosure

—No credit rating or credit enhancement required

—Depending on investor, 90 days for bond closing

—Longer call date (typically 15 years to 18 years)

—Debt service coverage of 1.15x – 1.20x

Slide 10


FNMA / Freddie Mac


Freddie Mac / Fannie Mae

■ Freddie Mac and Fannie Mae, through their approved lenders, continue to play a major role in credit enhanced bond deals.


—Majority of executions are fixed rate

—18-year hard maturity

—18-year bond interest rate is approximately 3.35%

—Freddie Mac offers variable rate execution1

—Swap counterparty may be an issue

—Due to scarcity of construction LOC, most executions are acquisition/rehab that are tenant-in-place rehabs

—6-8 months for bond closing2

Slide 12

Notes:1 As of this writing, Fannie Mae doesn’t offer a variable rate execution2 Assumes new construction or acquisition/rehabilitation


Standard & Poor’s Unenhanced Bond Program

■ While many affordable housing projects (AHP) are structured with credit enhancements, unenhanced AHP are rated based on the underlying real estate.

■ Standard & Poor’s currently rates unenhanced AHP in the investment grade category (typically in the “A” category).


— No credit enhancement

— Third party reports include audit, appraisal, market study, phase I and capital needs assessment reports

— Typical projects include acquisition/rehabilitation

— New construction is available, but more complex

— Execution can be used on 4% bond deals

— 35-year rate is 5% or less1

Slide 13

Notes:1 Reflects market conditions as of November 16, 2012 and assumes bonds are rated in the “A” category


Standard & Poor’s Unenhanced Bond Program (cont’d)

■ In November 2012, Merchant Capital served as sole manager on $4,925,000 of Biloxi Housing Authority, Multifamily Housing Revenue Bonds, Series 2012.

■ Bond proceeds were used to finance the acquisition and rehabilitation of an 150-unit multifamily rental housing project known as Beauvoir Manor Apartments, located in Biloxi, Mississippi (the “Project”).

■ The Project will be owned and operated by Agape Beauvoir Manor, Inc., a 501(c)(3) organization.

■ The Project is operating under a Section 8 HAP contract and was underwritten with a 1.20 DSC constraint.

■ The Series 2013 bonds were rated “A-” by Standard & Poor’s and will be amortized over 35 years. The financing rate on the bonds was 4.82%.

Slide 14

Financing Observations Sources and Uses of Funds

Sources of FundsPar Amount 4,925,000 Original Issue Premium (Discount) (141,950) Reserve Funds on Hand 424,320 Total 5,207,370

Uses of FundsAcquisition Fund 4,050,000 Construction Fund 656,750 Debt Service Reserve Fund 143,944 Cost of Issuance 356,676 Total 5,207,370

Pricing Observations1,2

Notes:1 The 2017 maturity is a taxable tail that was issued to cover the 2% cost of issuance limitation2 Tax-exempt yields are a spread to MMD. Taxable yields are a spread to US Treasury

Par SpreadMaturity ($000) Coupon Yield (bps)

2034 1,895 4.25% 4.46% + 2242047 2,740 4.75% 4.93% + 2462017 290 4.50% 4.73% + 384

Total / Ave 4,925 4.54% 4.74%


FHA / GNMA Execution


FHA ProgramsSection 221(d)(4) Loan combined with Short-term Tax-exempt Bonds

■ Rates on taxable GNMA MBS are well below rates on comparable tax-exempt GNMA-collateralized bonds

■ With the rebound in equity pricing on 4% LIHTC deals, borrowers can take advantage of the market dislocation by issuing short-term tax-exempt bonds with conventional FHA loans.

■ The borrower issues short-term tax-exempt bonds to meet the 50% test under LIHTC requirements. The bonds are collateralized with proceeds from a conventional FHA mortgage loan.

■ After the project is placed in service, the tax-exempt bonds are retired with proceeds from the FHA mortgage loan.

■ Benefits include:

— Permanent borrowing costs are reduced by over 100 bps

— Negative arbitrage greatly reduced

— Full syndication value of 4% LIHTC equity

Slide 16


1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

Feb-06 Feb-08 Feb-10 Feb-12

10-Year AAA GO 10-Year US Treasury

FHA Programs (cont’d)Section 221(d)(4) Loan combined with Short-term Tax-exempt Bonds

Slide 17

Municipal Yield Curve Tax-exempt Yields vs. Taxable Yields

Current market dynamics allow the FHA loan/Short-term tax-exempt bond structure to work

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

2/1/2013 2/1/2008

143 bps

165 bps

Borrowers can take advantage of the steep yield curve by issuing short-term bonds

Currently, there is a dislocation between taxable yields and tax-exempt yields


FHA Programs (cont’d)Section 221(d)(4) Loan combined with Short-term Tax-exempt Bonds

Slide 18

Short-term Tax-exempt Bond Execution Section 221 (d)(4) Loan

Bonds Proceeds

Proceeds

Investor

Underwriter Trustee

Project Fund

Proceeds

Construction Draw

Developer

Builds Project

Collateral FundProceeds

These amounts will equal each other so the bond investor is always 100% secured by cash.

After the project is placed in service, the tax-exempt bonds will be retired with proceeds from the FHA mortgage loan.

Proceeds from GNMA investor

Lender


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 $ 9,000,000

LIHTC Equity $ 3,455,400

FHLB Funds $ 500,200

LOC $ 878,400

Total Sources $13,834,000

Development Costs $ 10,544,700

Operating Deficit $ 472,800

Working Capital $ 360,000

Other Costs $ 2,456,500

Total Uses $ 13,834,000



Before Rehabilitation:



During Rehabilitation:


In Closing…

Mississippi Home Corporation Annual Affordable Housing Conference February 21, 2013 AFFORDABLE...

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