New Developments in Multifamily Housing Finance

National Association of Local Housing Finance Agencies2012 Annual Educational Conference

April 26, 2012

Matthew BissonetteDirector

matthew.bissonette@citi.com

Bond Financed Projects Make a Comeback

1. Recent Developments and Trends

2. Challenges Still Facing Deals

3. How Are Deals Getting Done? Bond Structure Review

4. Prospects For Improvement

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Bonds Are Back

1. Recent Developments and Trends

2. Challenges Still Facing Deals

3. How Are Deals Getting Done? Bond Structure Review

4. Prospects For Improvement

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Capital Market Market Revival

Bank Capital Ratios Have Improved / Leverage Reduced

Capital Markets Have Stabilized

Interest Rates are at Historically Low Levels

CRA Mandate is as Significant as Ever

Multifamily Sector Fundamentals Solid

9% LIHTC Yields are Very Low

The Good News – Banks Interested in Lending and Investing in LIHTC Again

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Floating Rates Very Low After Extreme Shock

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Oct-01 Apr-03 Oct-04 Apr-06 Oct-07 Apr-09 Oct-10 Apr-120.00

1.00

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SIFMA Rates (10/11/2001 - Present)R

ate

(%)

“SIFMA Index” means, on any date, a rate determined on the basis of the seven-day high grade market index of tax-exempt variable rate demand obligations, as produced by Municipal Market Data and published or made available by the Securities Industry & Financial Markets Association (formerly the Bond Market Association) (“SIFMA”) or any Person acting in cooperation with or under the sponsorship of SIFMA and acceptable to the Trustee and effective from such date.

Tax Exempt Variable Rates – 52 Week Average is

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“SIFMA Index” means, on any date, a rate determined on the basis of the seven-day high grade market index  of tax-exempt variable rate demand obligations, as produced by Municipal Market Data and    published or made available by the Securities Industry & Financial Markets Association    (formerly the Bond Market Association) (“SIFMA”) or any Person acting in cooperation    with or under the sponsorship of SIFMA and acceptable to the Trustee and effective from such date.  

39603.0039610.0039617.0039624.0039631.0039638.0039645.0039652.0039659.0039666.0039673.0039680.0039687.0039694.0039701.0039708.0039715.0039722.0039729.0039736.0039743.0039750.0039757.0039764.0039771.0039778.0039785.0039792.0039799.0039806.0039813.0039820.0039827.0039834.0039841.0039848.0039855.0039862.0039869.0039876.0039883.0039890.0039897.0039904.0039911.0039918.0039925.0039932.0039939.0039946.0039953.0039960.0039967.0039974.0039981.0039988.0039995.0040002.0040009.0040016.0040023.0040030.0040037.0040044.0040051.0040058.0040065.0040072.0040079.0040086.0040093.0040100.0040107.0040114.0040121.0040128.0040135.0040142.0040149.0040156.0040163.0040170.0040177.0040184.0040191.0040198.0040205.0040212.0040219.0040226.0040233.0040240.0040247.0040254.0040261.0040268.0040275.0040282.0040289.0040296.0040303.0040310.0040317.0040324.0040331.0040338.0040345.0040352.0040359.0040366.0040373.0040380.0040387.0040394.0040401.0040408.0040415.0040422.0040429.0040436.0040443.0040450.0040457.0040464.0040471.0040478.0040485.0040492.0040499.0040506.0040513.0040520.0040527.0040534.0040541.0040548.0040555.0040562.0040569.0040576.0040583.0040590.0040597.0040604.0040611.0040618.0040625.0040632.0040639.0040646.0040653.0040660.0040667.0040674.0040681.0040688.0040695.0040702.0040709.0040716.0040723.0040730.0040737.0040744.0040751.0040758.0040765.0040772.0040779.0040786.0040793.0040800.0040807.0040814.0040821.0040828.0040835.0040842.0040849.0040856.0040863.0040870.0040877.0040884.0040891.0040898.0040905.0040912.0040919.0040926.0040933.0040940.0040947.0040954.0040961.0040968.0040975.0040982.0040989.0040996.0041003.0041010.0041017.000.00

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SIFMA Rates (6/4/2008 - Present) R

ate

(%)

MMD Near Historic Lows

0 3 6 9 12 15 18 21 24 27 300.00

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2.00

3.00

4.00

5.00

6.00

AAA MMD Curve Comparison

MMD (12/9/2008) MMD (9/9/2010) MMD (4/20/2012)

Years

Rat

e (%

)

MMD (9/9/2010)

MMD (4/20/2012)

MMD (12/9/2008)

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Recent Developments

Costs of Multifamily Development and Acquisitions are High

Financial Institutions Have Less Risk Appetite Than Pre-Crisis

High Unemployment

The Not-As-Good News

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Recent Developments

Coastal Regions & Major Metro Areas Are Very Active– Rent Differential– Availability of Soft Money– CRA Demand

Other Parts of Country, Improving Outlook, but Many Challenges Keep Transaction Volume Low

What About Bond and LIHTC Deals? - Significant Differences Across The Country

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Still Facing Challenges

1. What’s Happened In a Year?

2. Biggest Challenges Facing Deals

3. How Are Deals Getting Done? Bond Structure Review

4. Prospects For Improvement

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Biggest Challenges Facing Bond/LIHTC Deals

Lack of LIHTC Investor Interest in 4% LIHTC Remains Biggest Challenge

Acquisition Prices Relatively High – Low Cap Rates– LIHTC Investor Bias Against Acq/Rehab Deals

Limited Soft Money Sources for 4% LIHTC/Bond Deals

Substantial Negative Arbitrage – Unless Private Placement

Bottom Line: Still Difficult to Balance Sources and Uses

Increase in Deal Flow – But Still Limited

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Biggest Challenges Facing Bond/LIHTC Deals

Development of properties that are considered higher risk are less desirable by investors and will struggle to find an investor– High rent – market rate component and commercial space– Acquisition/rehab light– Weak markets – not >10% differential in market/LIHTC rents– Markets with limited CRA investment focus

Investor community lost appetite for high leverage and high losses (namely 4% properties) – losses used to be good

Syndicators won’t close without investor lined up and committed. Can create timing and certainty of funding issues

Limited Appetite For 4% Tax Credits

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Where Are We Now?

1. What’s Happened In a Year?

2. Biggest Challenges Facing Deals

3. How Are Deals Getting Done? Bond Structure Review

4. Prospects For Improvement

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† Note: The interest rates and other data set forth in this analysis are estimates only. All markets today – for bonds, tax credits, caps, GICs and other products – are often thin and volatile. These interest rates, fees and other variables can vary dramatically depending on state, timing, market conditions and other factors, and the other variables may vary significantly depending on project, developer and other factors. Developers should check with their investment banker or financial advisor before conducting a detailed assessment of any of these structures or programs.

Six Principal Tax Exempt Multifamily Housing Bond Structures †

Active Programs

1. 18-Yr Fixed Rate Freddie/(Fannie)

2. Bank Private Placement

3. Long Term Fixed Rate FHA/GNMA

Limited Availability

4. Variable Rate Freddie Capped (probably unavailable on tax credit deals)

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Tax Exempt Multifamily Housing Bond Structures – Active Programs

Underwriting

18-Year Bond Interest Rate* 3.75%

Credit Enhancement 1.25

Servicing 0.20

Liquidity Fee 0.0

Remarketing Agent 0.0

Issuer 0.13

Trustee 0.03

Total Fee Stack 1.61All-In Mortgage Rate 5.36%

Upfront Fees (est.)

Lender Origination 1.0%

Construction Lender Origination 1.0

Bond Costs of Issuance 2.5

4.5%

* Estimated 18-Year Fixed Rate AAA, TE Non-AMT Bond as of 4/23/12; 30 or 35-year loan amortization; 1.15 DSCR; 85% LTV

1. Freddie Mac 18-year Fixed Rate Structure

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Tax Exempt Multifamily Housing Bond Structures – Active Programs

Underwriting

18-Year Bond Interest Rate*(Perm Loan)

5.25%-6.25%

Credit Enhancement 0.0

Issuer 0.13

Trustee 0.03

Total Fee Stack 0.16All-In Mortgage Rate 5.41 - 6.41%

Construction Period Interest Rate(Drawdown Bond)

SIFMA + 2.25% - 3.25%

Upfront Fees (est.)

Loan Origination 1.0% - 1.5%

Bond Costs of Issuance 1.5%

2.5% - 3.0%

* Estimated 18-Year Fixed Rate AAA, TE Non-AMT Bond as of 4/23/12; 30 or 35-year loan amortization; 1.15 DSCR; 85% LTV High CRA Areas, seeing Bond Interest Rate as low as 4.65%, but normal more around 5.00%

2. Bank Private Placement – Floating to Fixed

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Upfront Fees (est.)**

LenderOrigination 1.0%

HUD App. 0.3

Bond Costs ofIssuance 2.0

3.30%

UnderwritingBond Interest Rate* 4.30%Remarketing Agent 0.0

Issuer 0.13

Trustee 0.03

Bond Fee Stack 0.16Stated Rate on GNMA 4.46%GNMA Guaranty/Servicing Fee 0.25Stated Mortgage Rate on GNMA(s) 4.71%FHA Mortgage Insurance Premium 0.45Effective Actual Borrowing Rate 5.16%

* Estimated 40-Year TE;Non-AMT Fixed Rate as of 4/23/12; 40-year loan amort.; 1.11 DSCR; 95%+ Loan-to-Cost** Does not include all FHA related fees and certain loan-side warehousing and extension fees.

Tax Exempt Multifamily Housing Bond Structures – Active Programs

3. FHA/GNMA 42-year Fixed Rate Bond Financing Structure

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Evolution on Bond/LIHTC Financing Terms

Mid 2007

Typical Fixed Rate Terms

18 Yr. Fixed Bond Rate (incl. enhancement)

Issuer FeeTrustee

All-In Borrowing Rate

AmortizationDSCR

LIHTC Pricing

5.65%

0.1250.0250.15

5.80%

35 years1.15X

$0.98

6.75%

0.1250.0250.15

6.90%

35 years1.20X

$0.82

5.65%

0.1250.0250.15

5.80%

35 years1.15X

$0.75

Fall 2008 Fall 2010Fall 2009

6.35%

0.1250.0250.15

6.50%

35 years1.15-1.20X

$0.62

5.16%

0.1250.0250.15

5.31%

35 years1.15X

$1.00

Today

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Signs of Life

1. What’s Happened In a Year?

2. Biggest Challenges Facing Deals

3. How Are Deals Getting Done? Bond Structure Review

4. Prospects For Improvement

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Affordable Housing Prospects

As Yields on 9% LIHTC Have Plummeted, More Investor Interest in 4% LIHTC

Lots of PAB Cap

Historically Low Rates

New Sources of Subsidy/Programs– $25B National Mortgage Settlement– HUD 223(f) LIHTC Pilot Program

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