MFA Term Sheet
Tax Exempt Bond Financing for Affordable Rental Housing
General:
MFA will provide bond financing
for multifamily housing developments through the following mechanisms:
Using Private Activity Bond Volume Cap
(PABVC) multifamily project allocations from the State Board of
Finance (“SBOF”) for new tax exempt bond issues;
Refunding outstanding bond issues; or
Issuing new 501(c)(3) bonds.
MFA may issue the bonds
with or without providing the credit enhancement. As a “conduit”
issuer MFA issues the bonds that fund the developer’ loans,
but does not provide loans or take the credit risk. Consequently
the interim and permanent financing, along with the credit enhancement
for the bonds, must be provided through other sources proposed by
the developer of the project. Alternatively MFA can provide the
credit enhancement with the use of its 542(c) FHA Mortgage Insurance
Program. Processing and approvals are different in each case, with
credit enhancement requiring considerable more due diligence on
MFA’s part.
This program summary is
intended as a general guide to developers, to assist in the determination
as to whether tax exempt bond financing is an appropriate vehicle
for a proposed project. Additional issues will arise during the
course of any transaction, since all projects are different, and
changes in conditions may produce new or revised requirements from
those contained in this summary.
Application and Processing:
Following the submission of a complete Development Project Application
by the developer, MFA will begin processing the request. Requests
may be submitted at any time of year, although those which require
PABVC allocations should be submitted to MFA at least 60 days prior
to the State Board of Finance’s submission date for the meeting
in which bond volume cap allocations are to be made. (Because multifamily
bond volume cap is extremely competitive and typically awarded in
the first quarter of each calendar year, this two-month advance
deadline would require a request to MFA no later than October 15th
of the year prior to the year of the desired allocation.) Additional
time may be needed to obtain MFA approval for credit enhancement,
but this is done after the SBOF award of bond cap.
MFA will adopt an inducement
resolution, if needed, at the first or second board meeting following
the submission. If all requirements are met promptly by the developer,
the bond closing can occur within 60 to 90 days of the delivery
of firm financing and credit enhancement commitments. The second
resolution required by MFA – the bond resolution itself –
cannot be passed until all credit enhancement and financing commitments
are in place. The process would proceed as follows:
Developer Submits Application to MFA
to Issue Bonds and Complete the Consistency with the Qualified
Allocation Plan Review;
Developer and MFA Staff meet to discuss
process;
MFA Board passes Inducement Resolution;
MFA completes Determination of Consistency
with the QAP (new PABVC issues only) and Section 911/Subsidy
Layering Review (Tax Credit Projects only);
Developer and MFA Staff Prepare and
Submit Application to SBOF (new PABVC issues only);
SBOF acts on request for bond cap
and, if successful;
MFA arranges Scoping Meeting with
All Financial Interests and Counsel Represented;
Developer Obtains Financing and Credit
Enhancement Commitments;
Documents are drafted by MFA bond
counsel;
MFA publicizes and arranges TEFRA
Hearing;
MFA Board passes Bond Resolution;
and
All complete bond issue/closing.
Tax Credit Review: Virtually
all bond cap projects will use Low Income Housing Tax Credits as
an additional subsidy. This requires a market study, a determination
that the project is “consistent with the Qualified Allocation
Plan (QAP)” and in some case a “911 Subsidy Layering
Review”, both of which must be completed by MFA. Developer
requirements and fees described in the QAP, are available on MFA’s
web site.
Loan Rates and Terms: Loan
rates, credit enhancement costs, maturity dates and other loan and bond
financing terms are based on current bond market conditions and negotiated
among underwriters, lenders, credit enhancement providers, etc. Bond
Cap is limited to $8 million per project and 70% of the total financing
of the project, as stated in the QAP.
Bond Rating Requirements:
MFA’s statute requires ratings of A or better for publicly
sold bond issues. Private placements must be A-rated and credit
enhanced, or at MFA’s discretion, the following requirements
may be substituted: Ownership by a single bondholder; no bond registration
through Depository Trust Company; delivery of a “sophisticated
investor letter” by the bond purchaser and any subsequent
bond owner; and a documented prohibition against bond default.
Credit Enhancement Requirements:
Numerous alternative sources of credit enhancement are available
to the developer who chooses not to use MFA’s 542(c) program,
but the method selected must meet MFA’s approval. These include
FHA mortgage insurance, FNMA securitization, and private bank letters
of credit. Where letters of credit are the sole credit enhancement,
the provider must be specifically approved by MFA and the minimum
term would be 5 years. This requirement is to ensure that the bonds
are protected during the riskiest period of the financing –
construction, lease up and stabilization – to minimize refinancing
and bond redemption risk. Future credit enhancement substitutions
must be approved by MFA in advance of their use.
Financing Team: MFA selects
the trustee, bond counsel, and financial advisor through its own
independent procedures. An investment bank may be proposed by the
developer, but is subject to MFA approval and must meet MFA’s
disclosure and conflict of interest provisions. Additionally, one
of MFA’s banking team members must participate. The developer
may select one of MFA’s banking team members for this purpose.
Fees and other issues are worked out between the two.
Use Restrictions: All conduit
financings have federally imposed minimum tenant income restrictions.
In most cases these involve a set-aside of 20% of the units for
tenants earning no more than 50% of median income, or 40% of the
units for tenants earning no more than 60% of median income, each
adjusted for family size. Rents are not restricted under the bond
requirements per se, but Tax Credits and most other subsidies will
limit rents to 30% of the applicable income limit. For practical
purposes, however, competition for scarce resources such as bond
cap or LIHTC allocations will generate far higher set-asides than
these minimum levels, and developers should plan accordingly. MFA
may impose varying affordability requirements, based on the economics
of the individual transaction and the level of subsidy provided.
Regulatory Agreements:
The developer will enter into regulatory agreements which establish
low income set-asides, reserve requirements, monitoring and compliance
activities and fees, etc. Property transfers will be approved (without
“deemed consent”) at MFA’s discretion based on
buyer and management company experience, current fee payment status,
etc. A 60-day cure period will be provided for instances of noncompliance
with the terms of the regulatory agreement. Relocation plans are
required where displacement is likely, and tenant income surveys
may be required early on.
Fees and Expenses: The
developer will be responsible for all costs of issuance and other
direct costs of MFA. Fees will be paid as follows:
Application Fee due at submission
of application. Ten dollars per unit, and non refundable.
Commitment Fee due prior to preparation
of bond documents, in the amount of 50 basis points (0.5%) of
the bond issue amount, and non refundable.
Direct Cost Deposit due at scoping
meeting, in the amount of 50% of MFA’s Cost of Issuance.
Credited against MFA’s COI and excess, if any, returned
at closing. (Additional COI due to other third parties will
also be the obligation of the developer.)
Annual Administration Fee paid with
debt service, in the amount of 15 basis points for LIHTC projects,
or 30 basis points for non-LIHTC projects.
Transfer Fee of $2,500, plus direct
cost reimbursement, due at submission of request for transfer
of ownership or substitution of credit enhancement .
If MFA provides credit enhancement,
additional fees related to loan processing and origination will
apply.
Additional Financing and Subsidies: Additional financing
may be derived through the sale of taxable bonds along with the tax
exempt bonds. Projects which meet the criteria of other MFA multifamily
programs may be eligible for additional subsidies, including the Housing
Tax Credit, HOME Rental assistance (typically in the form of below market
rate secondary financing, and not available from MFA for projects in
Albuquerque or Las Cruces), Primero Investment Fund seed money loans
and/or BUILD interim loan guaranties. Further material on each program
is available from MFA.
