1. FINANCING WITH TAX-EXEMPT BONDS

2. Why Tax-Exempt Bonds? Another financing source for affordable housing
Bondholders are the lenders
Benefit to Borrower: Loan interest rate is below commercial lending rate
Benefit to Issuer: Can provide below market interest rate financing for affordable housing
Benefit to Bondholders:
Interest on bonds is exempt from federal income tax
Interest on bonds is exempt from state income tax (for in-state purchasers)

3. What is a Bond? A contract between the issuer and the bondholder
A debt instrument – A promise to pay

4. Basic Bond Structures Loan to Developer Loan to Lender
Bond proceeds ($)  Issuer Developer  Project
Loan to Lender
Bond proceeds ($)  Issuer  Lender  Developer  Project

5. Parties to a Bond Transaction
Issuer (state; political subdivision; or other governmental entity authorized to issue bonds)
Trustee (holds assets securing Bonds; makes payment to Bondholders from mortgage loan payments: exercise remedies if a default)
Project Owner (Borrower)
Bond Counsel (drafts bond documents and delivers tax opinion)

6. Underwriter (Investment Banker markets the Bonds)
Credit Enhancer (guarantees payment of the Bonds; bears ultimate project “risk”)
Mortgage Banker (DUS Lender/Underwriter) – typically evaluates financial strength of project, dictates structure of Bonds and acts as mortgage loan servicer for GNMA transactions.
Financial Advisor to Issuer (helps Issuer evaluate Bond transaction and negotiates with Underwriter)

7. Investment Agreement (“GIC”) Provider (guarantees specified rate of return on moneys invested to secure Bonds)
Counsel to the Parties
DTC (entity that holds Bonds in book-entry form)
Rating Agency (provides credit rating for Bonds based on credit rating of Credit Enhancer or GIC)

8. BASIC BOND DOCUMENTS WHAT DO THEY DO?
Bonds
Indenture
Loan Agreement/Note
Regulatory Agreement
Credit Enhancement Documents
Credit Enhancement Agreement
Reimbursement Agreement
Deed of Trust/Mortgage

9. Preliminary Official Statement (“POS”) Official Statement (“OS”)
Bond Purchase Agreement (“BPA”)
Disclosure Agreement
Investment Agreement (“GIC”)
Closing Documents
Certificates
Opinions

10. Basic Credit Enhancements for Rated Bonds
Letter of Credit (Direct Pay; Standby)
Municipal Bond Insurance (MBIA; FSA; FGIC; AMBAC)
Surety Bond
FHA, GNMA, FNMA, FHLMC Insured/Guaranteed
FHA-Insured/Risk Sharing

11. LOAN TO DEVELOPER STRUCTURE (No Credit Enhancement)
$ Principal and Interest
BONDHOLDERS
TRUSTEE $
Loan Agreement/Note/Mortgage
ISSUER
$ Bond Proceeds
Loan Agreement/Note/ Mortgage (security for Bonds)
PROJECT OWNER
$ Loan Payments
$ Bond Proceeds
$ Cash Flow
PROJECT

12. LOAN TO DEVELOPER STRUCTURE (Letter of Credit)
$ Principal and Interest
BONDHOLDERS
TRUSTEE
(Letter of Credit Bank bears bankruptcy risks)
$ Proceeds
Letter of Credit
Assignment of Mortgage/Note/ Loan Agreement
ISSUER
LETTER OF CREDIT BANK
$ Proceeds
Mortgage/Note/ Loan Agreement
$ Reimbursement Agreement
PROJECT OWNER
$ Proceeds
$ Cash Flow
Trustee and Letter of Credit Bank are co-beneficiaries under the Mortgage, as their interests may appear
Letter of Credit Bank bears bankruptcy risk
Either a remarketing or mandatory redemption when Letter of Credit terminates
PROJECT

13. LOAN TO DEVELOPER STRUCTURE (Municipal Bond Insurance)
$ Principal and Interest
BONDHOLDERS
TRUSTEE $
ISSUER $
$ Pay in event Developer defaults (Policy insures Bondholders against bankruptcy risks)
$ Proceeds
Loan Agreement/ Note/Mortgage
$ Loan Payments
PROJECT OWNER
$ Proceeds
$ Cash Flow
MUNICIPAL BOND POLICY
PROJECT
Pursuant to Assignment Agreement, Issuer assigns its interest in Note, Loan Agreement and Mortgage to Trustee (Bond Insurer subrogated to rights of Bondholders and Trustee)
Bond Insurer bears bankruptcy risk

14. LOAN TO DEVELOPER STRUCTURE (GNMA-MBS or Pass-Through Certificate)
$ Principal and Interest
BONDHOLDERS
TRUSTEE
$ Bond
Proceeds
Mortgage-backed Security (MBS or Pass-through Certificate)
$ payments on MBS
ISSUER
Pass-Through Certificate guarantees loan payments
$ Bond Proceeds
Loan Agreement/ Note/Mortgage
Mortgage/Note
$ Loan Payments Mortgage/Note
LENDER (GNMA Mortgage Banker Servicer)
PROJECT OWNER
$ Bond Proceeds
$ Cash Flow
Mortgage/Note
GNMA
PROJECT
Bankruptcy risk is with GNMA.

15. HUD RISK SHARING STRUCTURE
$ Principal and Interest
BONDHOLDERS
TRUSTEE
$ Bond Proceeds
FHA Mortgage Insurance Payments if Borrower Defaults $
ISSUER (Mortgagee)
HUD/FHA
$ Proceeds
Mortgage/Note/ Regulatory Agreement
$ Mortgage Loan Payments
SERVICER (may be the Issuer)
PROJECT OWNER
$ Loan Payments
$ Proceeds
$ Cash Flow
Note is insured under Section 542(c) of the Housing and Community Development Act of 1992
HUD and Issuer (state or local housing finance agency) share any net loss as agreed to in Risk Sharing Agreement: 50% or more (Level 1 Participants); 10% or 25% (Level II Participants)
Note payments include debt service on Bonds, servicing fee, trustee’s annual fee, Issuer’s annual fee, rating agency fee, rebate analyst fees (MIP, taxes and insurance are paid under Mortgage)
PROJECT

16. Types of Bond Issues for Affordable Housing
§ 142(d) Multifamily Housing Bonds
New construction
Acquisition/rehabilitation of existing housing
§ 501(c)(3) Housing Bonds (Housing Bonds issued for the benefit of nonprofit project owners)
Acquisition/rehabilitation
Acquisition
Governmental Bonds (for Issuer-owned properties)

17. Current Refundings (i. e
Current Refundings (i.e., issuance of Bonds to redeem within 90 days existing tax-exempt bonds issued to finance construction or acquisition of the property)
§ 103(b)(4)(A) Bonds (Pre-1986)
§ 142(d) Bonds
Governmental Bonds
§ 501(c)(3) Bonds
Advance Refundings (typically, proceeds of refunding bonds, together with other moneys as needed, are put into escrow to pay principal of and interest on old bonds as they become due until first call date when old bonds are redeemed in full)

18. TAX LAW REQUIREMENTS FOR HOUSING BONDS
General:
residential rental project (no condos)
project may include functionally related facilities (swimming pool, club house, tennis courts, parking)
complete living unit (bathroom and kitchen with oven and cooking burners (or microwave), refrigerator, and sink)

19. available to members of the general public (maybe restricted to elderly for elderly housing)
no transient housing
no students (with some limited exceptions)
significant limitations on assisted living
low to moderate income tenant requirements
Governmental Bonds for Housing
no federal tax requirements: provision for “housing” must be within the statutory purpose and authority of Issuer

20. GENERAL LEGAL CONSIDERATIONS
Issuer Statutory Bond Requirements
statutory authorization to issue bonds (purpose and authority)
form of bonds (e.g., information to appear on face of bond – limited liability language)
bond authorizing resolution (information to be included)
organic requirements (may impose requirements on how transaction can be structured)

21. applicable state property tax exemptions
bond validation requirements (e.g., Florida/Georgia)
state attorney general approval (e.g., Texas)
low or moderate income tenant requirements and/or rent restrictions

22. Bankruptcy
Issuer
Developer
Credit Enhancer

23. ISSUER POLICY CONSIDERATIONS
New Bond Issues and Refundings
Application Fee
Issuer Fee: Up front (% of principal amount of Bonds issued)
Issuer Fee: Ongoing compliance monitoring fee (percentage of principal amount of Bonds – original amount v. declining balance)
Public purpose set aside requirements/rent requirements

24. Unrated bond issues (large denominations/definition of “big boy” investor/investor letters/restrictions on transferability/protection of “widows and orphans”)
Purchase contract indemnification of Issuer from developer and underwriter (liability regarding OS and security laws)
Loan agreement indemnification of issuer from developer (all liability associated with project/environmental/tax-exempt status of bonds)

25. BOND ISSUE TIMETABLE TEFRA Public Hearing
Federal Publication Requirements
State Publication Requirements
Approval of Bond Issue by “Highest Elected Official”
Validation (e.g., Georgia, Florida)
State Attorney General Approval (e.g., Texas)
HUD Process, if applicable (e.g., GNMA collateralized Bonds and HUD Risk-Sharing)

26. CLOSING IT ALL COMES TOGETHER

27. BOND “BUZZ WORDS” WIDOWS AND ORPHANS BIG BOYS TERM BONDS SERIALS
FLOATERS
SINKERS
BPA

28. POS OS
GIC
REFUNDING
TAXABLE TAIL
BOOK-ENTRY
DTC

29. UNDERWRITING HOUSING BONDS FOR LOCAL HOUSING AGENCIES
Role of Underwriter
Sells bonds
Assists with structuring transaction/“runs numbers”
Advises as to market conditions
Coordinates with rating agencies/obtains rating letter
Bids out guaranteed investment contract (“GIC”)
Obtains CUSIP numbers
Creates timetable

30. Underwriter Documents
Bond Purchase Agreement (“BPA”)
Preliminary Official Statement (“POS”)
Official Statement (“OS”)
Blue Sky Survey
Underwriter’s Counsel 10(b)5 opinion

31. Underwriting Related Documents
Continuing Disclosure Agreement
Rule 15c2-12 Certificates
DTC Letter of Representations
Sophisticated Purchaser Investment Letters (“Big Boy” letters) for unrated bond issues

32. Issuer Business Issues with Underwriter
Underwriter’s Fee (“Spread”)
Service
Indemnification
Professional Representations

33. Factors for Selection of Underwriter
Type of financing
Regional vs. national
Retail vs. institutional sales vs. private placement
Prior history/recommendations
negotiated underwriting
competitive underwriting
senior manager
co-manager
firm underwriting
best efforts underwriting
pricing the Bonds

34. Components of Pricing the Bonds
Discounts and premiums
Call protection
“underwriting risk”
“story bond”

35. Underwriting Related “Hot Topics”
Rule 15c2-12
OS “deemed final”
Continuing disclosure for secondary market
MSRB Rule-32 (delivery of OS to customers)
MSRB Rule G-37 (“political contributions” rule)
MSRB Rule G-38 (“consultant” rule)

36. Underwriting “Buzz Words”
BPA
POS OS
“story bond”
GIC
“Blue Sky”
“Big Boy” letters
DTC
“book entry”
CUSIP