1. National Housing & Rehabilitation Association Summer Institute
July 18-21, Martha’s Vineyard, MA
Recent Developments:
Short-Term Tax Exempt Cash Backed Bonds
Fannie Mae M.TEBs
Bank Draw Down Private Placements and Freddie TEL
R. Wade Norris, Esq.
(202) (direct)
(202) (cell)
Sponsors:

2. 1. Short-Term TAXABLE RATES Have Risen Above Tax Exempt Cash Backed Bond Rates
This has resulted in positive, not negative, arbitrage on tax exempt, short-term cash backed bond issues.
2-Yr
UST Yield
Actual TE Bond Coupons
*Sample from 53 actual recent tax exempt short term cash backed bond issues in past 18 months.
R. Wade Norris, Esq.

3. NO NEGATIVE ARBITRAGE!!! ON DEALS INVOLVING §223(f) AND ALMOST ALL §221(d)(4) LOANS
Example: §223(f)
Expected Placed in Service Date
12 Months
18 Months
Recommended Tax Exempt Bond Maturity
36 Months
Mandatory Tender Date*
N/A
24 Months
Invest Collateral Fund in 18/24-Month U.S. Treasury
2.50%
2.60%
Tax Exempt Bond Coupon (18/24-Months)
2.10%
2.15%
POSITIVE!!! (Not Negative) Arbitrage
+0.40%
+0.45%
* Bonds will be priced to the mandatory tender date and redeemed on that date if the project has been placed in service; otherwise, will be remarketed on that date for 6-12 months, as needed.
R. Wade Norris, Esq.

4. The Key to No Negative Arbitrage on Bond Issues with §221(d)(4) Loans: A Clean Bond Counsel “Reallocation Opinion.”
We have now persuaded almost all bond counsel firms to allow us to invest moneys in Project Fund and Collateral Fund – i.e., an amount equal to the Bond issue – in 24 month U.S. Treasuries.*
As the FHA Lender presents monthly FHA Lender advances to Trustee for deposit to Collateral Fund against disbursement of an equal amount of tax exempt Bond proceeds from the Project Fund to the Borrower/FHA Lender to cover project costs, they will allow us to reallocate ownership of this fixed portfolio of Treasuries from the Project Fund to the Collateral Fund – without liquidating the investments.
We call this a “Reallocation with No Liquidation” opinion, or, for short, a “Reallocation Opinion.”**
This allows us to lock in the rate on our investments at a rate higher than the Bond coupon. Avoids investing Project Fund in Taxable Government backed money market funds at a yield of about 0.30% → avoids $100,000’s of negative arbitrage.
*Or invest in SLGS issued by the U.S. Treasury equal to the bond yield, which has the same effect.
**This relates to the “approving opinion” of bond counsel – that the bonds are legal valid and binding obligations of the issuer and that interest on the Bonds is tax exempt, not the opinion which bond counsel gives to HUD regarding consistency with HUD requirements.
R. Wade Norris, Esq.

5. Conclusion: On a §221(d)(4) financing, especially new construction, at the very outset of the financing (i.e., before selecting the issuer and applying for bond volume), one must confirm that bond counsel will give a clean reallocation opinion. If the answer is no, and if the Borrower has a choice of Issuers and Bond Counsel (there are often 2 or more choices), it should discuss any alternative Issuers and Bond Counsel carefully with the bank or investment bank structuring the tax-exempt debt and with the bond purchaser’s or underwriter’s counsel.
Again, the savings from getting a clean Bond Counsel reallocation opinion on financings with Section 221(d)(4) FHA insured loans can be hundreds of thousands of dollars.
R. Wade Norris, Esq.

6. THREE OTHER DEBT STRUCTURING TECHNIQUES TO FILL GAPS AND MEET THE 50% TEST
Three debt structuring techniques can make FHA loans more competitive with these other executions:
Taxable and Tax Exempt Tax Credit Equity Backed Bridge Loans
Taxable and Tax Exempt Seller Take Back Debt
Tax Exempt Cash Surplus Backed Bonds
R. Wade Norris, Esq.

7. 2. Fannie Mae M.TEBs
Fannie Mae M.TEBs product attempts to lower long-term borrowing rates in two major ways:
Monthly, tax-exempt, next business day pass-through of an MBS payment lowers bond coupon by basis points (versus traditional semi-annual pay bonds). Very attractive bond rates – e.g. 10-year Treasury (2.90%) + 70 bps = 3.60%.
Very competitive guaranty/servicing spread – e.g. 100 bps – versus more usual basis points.
Produces a combined savings of basis points: → All-in borrowing rate ≈ 4.60%.
Very attractive loan terms – 35-year loan amortization to balloon 15 to 16 years after placed-in-service/1.15 DSCR/90% LTV.
R. Wade Norris, Esq.

8. Borrowing Rates for M.TEBs
Both versions of M.TEBs (mod rehab and “forwards”) combine very low all- in borrowing rates:
Moderate Rehab Loan
“Forwards” M.TEB
(New Construction/Sub Rehab)
10-Year Treasury
2.90%
Spread
.70
.80
Tax-Exempt Bond Coupon/MBS Pass-Through Rate
3.60%
3.70%
Guaranty/Servicing
1.00
All-in Borrowing Rate*
4.60%
4.70%
*Excluding ongoing issuer, trustee, rebate fees and about 2 to 2.5 points of construction period negative arbitrage in the “Forwards” M.TEBS structure. Taking into account 2.5 points of negative arbitrage, the equivalent permanent rate would be comparable to about a 5.00% permanent rate on the “Forwards” structure when compared to other draw down executions.
R. Wade Norris, Esq.

9. Since Early 2017 Taxable Long-Term Rates Have Risen About 60 Basis Points; Whereas Long-Term Tax Exempt Rates Are Almost Flat
20-Year LIBOR Swap – ≈ 2.50% → ≈ 3.10% = +60 Basis Points
20-Year AAA MMD – ≈ 2.90% → ≈ 2.90% = Flat
R. Wade Norris, Esq.

10. Effects on Different Executions
The 20-Year LIBOR Swap has gone up about 60 basis points, the 20-Year AAA MMD is basically flat.
In January 2017, 20-Year AAA MMD was about 40 basis points higher than the 20-Year LIBOR Swap – it is now about 20 basis points lower.
This has restored some of the traditional interest rate advantage tax exempt long-term executions had over taxable prior to the financial downturn in 2008.
This may have made publically offered tax exempt long-term bonds – such as Fannie Mae M.TEBs and tax exempt bonds such as those used in the American Tobacco project financing – more competitive over the past year, versus other executions such as bank private placements and Freddie Mac’s TEL program, where permanent lending rates are more dependent upon taxable indexes.
R. Wade Norris, Esq.

11. 3. Bank and Freddie Mac TEL Draw Down Private Placements
In the past year, both the Pre-Conversion (“Construction”) and Post-Conversion (“Permanent”) interest rates on private placements have generally moved up, with the general increase in short-term and long- term rates.
Pre-Conversion (“Construction”) Borrowing Rates
January 2017
July-Nov. 2017
June 2018
0.80%
1.20%
2.00%
Up about 120 Basis Points since early 2017
1-Mo. LIBOR Spread
(typically )
2.30
2.30*
All-in Rate
3.10%
3.50%
4.30%
Post-Conversion (“Permanent”) Borrowing Rates
October 2017
18-Yr LIBOR
2.50%
2.10%
3.15%
Up about 95 Basis Points from Fall 2017
18-Yr LIBOR Spread
(typically )
2.00 – 2.40
1.80 – 2.20*
4.50 – 4.90%
4.10 – 4.50%
4.95 – 5.35%
R. Wade Norris, Esq.

12. There are some emerging signs that private placement funding sources may be narrowing spreads to remain competitive.
On some recent California financings (a huge, competitive CRA-driven market), pre-conversion spreads have fallen from the 230 basis points shown in the previous slide to as low as 120 to 160 basis points.
Permanent loan spreads have been steadier at 180 to 220 basis points, but may also now be falling a bit.
R. Wade Norris, Esq.