Pub. 5 2014 Issue 4

www.wvbankers.org 20 West Virginia Banker Financing affordable multifamily housing has evolved of late, in ways which may be very familiar to the reader. Prior to the Great Recession, affordable multifamily housing was largely financed with the issuance of tax-exempt debt sold to investors through public offerings or private placements. T he process commences with the structuring of a project to meet the underwriting criteria of the lender and proceeds structuring the bond issue to the satisfaction of the other parties to the transaction, primarily the bond credit insurer/guarantor and the rating agency. Finally, the process concludes with the offering of the bond to public or private markets. The typical parties to these trans- actions include mortgage lenders, munici- pal bond issuers with private activity bond authority, investment bankers, trustee banks, low income housing tax credit agencies, syndicators or direct purchasers of low income housing tax credits, bond insurers or guarantors, and counsel for each of the foregoing parties. The next evolutionary step occurred through the creation of “direct purchase programs” in which large institutions, upon satisfaction of certain lending crite- ria, purchase bonds and often the atten- dant low income housing tax credits. The hallmark of the direct purchase program is to consolidate a number of the foregoing parties, eliminate the public sale aspect of the financing and offer a “one stop shopping” experience to the project owner. The financial institution often serves as the mortgage lender and the bond purchaser and typically eliminates the need for a bond insurer/guarantor, a trustee and a rating agency. These programs were very popular prior to 2007 with a number of large institutions operating on a national level. The current process follows the direct purchase model, but eschews large institutions in favor of local or regional banks or consortiums of banks. In many cases, these banks have existing relation- ships with the developers and operators of affordable housing. In effect, the bank will make a mortgage loan to the project owner utilizing its existing criteria, but will involve a municipal entity with bond issuance authority in the process, thereby converting the mortgage loan to a tax ex- empt mortgage loan. The mortgage loan may be for construction or permanent financing, although construction financing repaid with the proceeds of an FHA in- sured mortgage loan is popular in today’s economic market. The primary advantage to the bank is to capitalize on the relationship with its ex- isting client and “keep the business local.” Additional benefits include the receipt of tax-exempt interest and generation of CRA credit (note that both of the forego- ing are dependent on characteristics of the bond, the market in which the housing is located and the bank’s internal require- ments/needs). The bank may utilize its typical lending criteria or underwriting and, in many instances, the bank’s existing documents will be used to document the loan. Bond documents prepared by bond counsel will overlay the bank’s documents and provide for conversion of the loan to a tax exempt loan. The mechanics, somewhat simplistically, involve the issuance of bonds by a munic- ipal entity and the purchase of the bonds by the bank. This process is typically documented as a private placement and need not involve an offering document or prospectus. The proceeds of the bonds are then used to make a loan to the project owner. The loan payments made by the project owner and in turn used to make payments to the bank as bondholder and all security offered by the project owner is assigned to the bank. While the bond documents will describe the terms of the loan and the bonds, the loan criteria are controlled by the bank. As such, the bank may craft its own terms relating to default, repayment, inspections, draws and representations, covenants and warranties. In essence, these structures are designed to work within the operating parameters of the bank when making mortgage loans to its clients. The Evolution of Financing for Affordable Multifamily Housing By Sujyot Patel, Lewis Diaz and Dave Thomas, Dinsore & Shohl LLP