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 developers' loans, but does not provide loans or take the credit risk. Consequently, the interim and permanent financing as well as the credit enhancement for the bonds must be provided through other sources as 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 determining if tax exempt bond financing is an appropriate vehicle for a proposed project. Because all projects are unique, additional issues will arise during the course of any transaction. Such 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 (SBOF'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 (QAP) 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 parties complete bond issue/closing.
Tax Credit Review
Virtually all bond cap projects will use Low Income Housing Tax Credits (LIHTC) as an additional subsidy. This requires a market study, a determination that the project is consistent with the QAP and in some cases a 911 Subsidy Layering Review, both of which must be completed by MFA. Please refer to the applicable year QAP, underwriting guidelines and mandatory design standards for additional information and requirements. These documents are available on MFA's website here.
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 and credit enhancement providers. Bond cap must not exceed 75 percent of the project's total development cost and costs of issuance are limited 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; 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 five 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.
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.
All conduit financings have federally imposed minimum tenant income restrictions. In most cases these involve a set-aside of 20 percent of the units for tenants earning no more than 50 percent of median income, or 40 percent of the units for tenants earning no more than 60 percent 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 percent 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.
The developer will enter into regulatory agreements which establish low-income set-asides, reserve requirements, monitoring and compliance activities and fees. Property transfers will be approved (without "deemed consent") at MFA's discretion based on buyer and management company experience and current fee payment status. 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. Fee is $10 per unit, and is non-refundable.
- Commitment fee due prior to preparation of bond documents, in the amount of 50 basis points (0.5 percent) of the bond issue amount, and is non-refundable.
- Direct cost deposit due at scoping meeting in the amount of 50 percent of MFA's Cost of Issuance (COI.) Credited against MFA's COI 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.