Question regarding debt financing on 4% LIHTC

egold70's picture
Rank: Orangutan | banana points 352

Wanted to make sure I understood from a high level.

Let's say the project was put in service in 2005 initially. So 15 year compliance period is up next year, and the existing developer wants to reapply for a fresh batch of 4% credits and do another rehab next year.

The property currently has a Fannie Mae loan in place, so in order for the project to go through another rehab, does that mean that when the tax credits are awarded, the developer needs to pay off the Fannie debt with tax exempt bond financing? And then after that, they can go out and pay off the bond using convention Fannie/Freddie/HUD financing to carry them through the 15 year period?

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Comments (26)

Feb 4, 2019

The bonds need to fund at least 50% of total eligible basis costs plus land. Eligible costs are generally depreciable hard costs. Then there is another test called the 95-5 test. 95% of your bonds need to go to cover "good" costs directly related to the rehab. Basically, the point of the bonds being tax exempt is to encourage low income housing development risk. Pragmatically you probably may just want your new entity to assume the debt, maybe they'd modify it to IO forward commitment during construction assuming your guarantors remain the same. More debt (sellers note is possible) and equity will take out the bonds. Or you could upsize and pay off old debt and bonds with new perm. Are you a developer, lender or investor? Hope this makes sense.

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Feb 4, 2019

I am looking at this from a lender's perspective.

So if a developer is awarded an allocation of tax credits, and then gets bond financing to cover the rest of the cap stack (i.e. assume no soft debt etc is required to make the numbers work), does that bond/debt stay in place for the entire construction period and 15 year compliance period? Or does it need to be repaid and refinanced with "traditional" debt, i.e. getting a Fannie or Freddie conventional loan similar to market rate product?

Feb 4, 2019

The bonds are for construction and are drawn down during that period then paid off at stabilization with a perm debt/tax credit equity/construction period cash flow takeout. Sources and uses get interesting on these deals. Another rule to keep in mind as a lender is issuance costs can't be more than 2% of bond proceeds. What market are you in?

Feb 4, 2019

Let me take a step back, provide some color so it's easier to follow:

Have been talking to a firm that has specialized in tax credit syndication for about 25 years. They aren't developers, but they handle all the actual syndications between developers and their rolodex of institutional clients looking to buy the credits. They have done some investing for their own account and some other lines of business, but LIHTC syndication is the bulk of their business.

Their most recent business segment is to private-label lend (using multiple banking relationships) construction and/or perm financing for LIHTC deals. They started a year ago and did a decent amount of lending volume, now they are looking to ramp up. What I was told, was that the benefit to their debt product vs Fannie/Freddie/HUD, is that the GSE's take longer to fund, which for a LIHTC deal may be a deal breaker, the admin front end costs are higher, and amortization typically maxes out at 30 years. They can lend money at rates in between HUD (cheapest) and Fannie/Freddie, do a 40 year amort, only charge an app fee of $10k upfront, and fund in under 60 days (vs 90-120 using the GSEs).

Does this sound legit, I am not active in LIHTC but I would imagine if there is consistent resyndication happening each year, then there would be a market for more efficient debt executions, but since I am not in that sector, I am unsure how much of a benefit this debt strategy is compared to GSE, that is what I am looking to figure out.

Feb 5, 2019

How can they lend cheaper than Freddie/Fannie and still make money without securitizing the loans?

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Feb 4, 2019

Would making the loans provide CRA credit for the bank/lender?

Feb 5, 2019

I will just add that it depends on the issuing agency. Some only use the TEB as a construction loan while others bifurcate the bond and have a portion that converts to a long term instrument.

Feb 4, 2019

Great point, thanks for adding.

Feb 6, 2019
Danielplainview:

Great point, thanks for adding.

To add on to that, some agencies actually prefer that you take those bonds out for a few reasons. One, you can recycle your bond cap at will as long as there are no LIHTCs attached, which effectively means unlimited bond cap for agencies. Second, and this is dependent on the agency and question and is more a recent phenomenon, agencies are increasingly looking to issue out of their open resolutions and not through conduit issues, as they can charge higher rates and actually make some profit on the OR bonds. This doesn't really matter for extant issues and doesn't necessarily address your question directly, but you do see a some bond issuing agencies looking to tie out earlier issues and consolidate future ones into their open resolutions, so depending on how the bonds were originally issued you may see more or less enthusiasm for paying it down.

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Feb 4, 2019

So in order to apply/receive tax credits, developer first must receive a bond allocation correct? Does the bond simply need to be awarded, sorta like when you write an offer on a property and show the seller a letter from a lender guaranteeing they will provide a certain amount of loan proceeds?

So technically does the developer have to actually use the bond, or can it be a placeholder prior to construction just to process the tax credits and then swap out with a loan from say Fannie Mae?

Most Helpful
Feb 5, 2019

Some states never come close to using the bond cap so you just need to show up with a project that meets the minimum standards. Others have a competitive process. Once you get the bonds and meet all of the various tests you get the LIHTCs automatically based on your eligible basis and the credit rate you locked in at (floating rate published by treasury every month).

You MUST use the bonds to finance 50% of basis (construction) and acquisition otherwise you don't get the credits. It is common practice to use the bond as a CL and then take it out with another long term debt instrument.

You would not use bonds on a 9% transactions where you were applying for credits.

Feb 4, 2019

Ok, so on 4% deals, you get the bonds first, then you apply for credits based on all the various tests and get awarded those, then you gap it with other sources depending on what the shortfall is. So when people talk about the GSEs financing LIHTC deals, these are typically done after construction to pay off the bonds and get a perm loan to carry you through the next 15 years?

Feb 4, 2019

Yes, GSE's are generally the perm debt providers.

Feb 5, 2019

Yes. I'm being a bit pedantic here but you don't need to apply for 4% credits. They are automatic. You probably need to apply for some other form of subsidy though, and the HFA considers the project as a whole when allocating those other forms of subsidy.

Feb 6, 2019
maineiac42:

Yes. I'm being a bit pedantic here but you don't need to apply for 4% credits. They are automatic. You probably need to apply for some other form of subsidy though, and the HFA considers the project as a whole when allocating those other forms of subsidy.

Well you could say that you have to apply to the housing finance agency in question in order to be allocated the volume cap in the first place, but yeah - once you have the bonds you have the 4% credits.

Feb 4, 2019

Got it. And for a 9% deal, no bonds are required? Developer could use conventional construction debt to finance?

Feb 5, 2019

Correct and yes.

Feb 6, 2019

The bond is not a letter of credit/commitment or an insurance product such as bonding around a GC contract to ensure the GC/subs are paid. This is a bond that is issued by the agency (city) and sold to retail investors, the proceeds of which are then credited to the project company for the actual construction. And no state agency issuer would ever gaurantee the bonds to be issued, as they depend on market conditions and the ability of the underwriter/broker to go out and sell the bonds to investors.

Feb 4, 2019

Solid points. Good to see some LIHTC nerds on this forum.

Feb 5, 2019

Which side of the business are you on? I'm personally in syndication.

Feb 4, 2019

I work for a direct investor in asset management from closing through construction and exit. I'm relatively new to this business but worked in commercial brokerage and multifamily debt previously.

Feb 5, 2019

BoA eh? I work in acquisitions. We stay involved until construction completion.

Feb 4, 2019

Lol. What region are you in?

Feb 5, 2019

A market small enough that BoA doesn't bother going direct... haha

Feb 4, 2019
Feb 9, 2019
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