Multifamily Finance: Case Studies in Creative Finance and

Multifamily Finance: Case Studies in Creative Finance and Deal Layering

Moderator: Tabaré Borbón

Panelists: Peter Cannava, James McIntyre, Rick Padilla, Ellen Rourke

Annual Conference April 14, 2016

THIS IS SALES AND TRADING COMMENTARY PREPARED FOR INSTITUTIONAL INVESTORS; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from others at MS (including MS Research). MS may engage in conflicting activities -- including principal trading before or after sending these views -- market making, lending, and the provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and IS NOT A PERSONAL RECOMMENDATION OR INVESTMENT ADVICE or a basis to consider MS to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and 23.605 (where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or completeness is made) and is likely to change without notice. Any price levels are indicative only and not

intended for use by third parties. Subject to additional terms at http://www.morganstanley.com/disclaimers/productspecific.html.

James McIntyre 212-761-9080

James.McIntyre@ morganstanley.com

http://www.morganstanley.com/disclaimers/productspecific.html


30 25 20 15 10

5 0

1/2/2015 2/2/2015 3/2/2015 4/2/2015 5/2/2015 6/2/2015 7/2/2015 8/2/2015 9/2/2015 10/2/2015 11/2/2015 12/2/2015 1/2/2016 2/2/2016

High Grade Municipal Credit Spreads Have Remained Consistent January 1, 2015 to Present (bps)

IG Corporate Credit Spreads Have Widened January 1, 2015 to Present (bps)

240 220 200 180 160 140 120 100

1/2/2015 2/2/2015 3/2/2015 4/2/2015 5/2/2015 6/2/2015 7/2/2015 8/2/2015 9/2/2015 10/2/2015 11/2/2015 12/2/2015 1/2/2016 2/2/2016

IG Cash

Municipal Outperformance Versus Corporate Market

-1 bp

NALHFA CONFERENCE APRIL 2016 3 Please see additional important information and qualifications at the end of this material.

Source Bloomberg

AAA MMD less AA MMD

Source Bloomberg

Synthetic Fixed Structures Have Historically Been Attractive

Estimated Synthetic Fixed (With 5-Year Cancellation) versus Fixed Rate Financing Costs April 1, 2011 – April 1, 2016 %

6

5

4

3

2

1

0

4/1/2011 9/1/2011 2/1/2012 7/1/2012 12/1/2012 6/1/2015 11/1/2015 4/1/2016 5/1/2013 10/1/2013 3/1/2014 8/1/2014 1/1/2015

Estimated Synthetic Fixed Rate Financings Costs

0.5 0.0

67% of 1 Month LIBOR Swaps Have Continued to Outperform SIFMA Swaps April 1, 2011 – April 1, 2016 % 4.0 3.5 3.0 2.5 2.0 1.5 1.0

4/1/2011 9/1/2011 2/1/2012 7/1/2012 12/1/2012 5/1/2013 10/1/2013 3/1/2014 8/1/2014 1/1/2015 6/1/2015 11/1/2015 4/1/2016

30Y SIFMA Swap


Estimated Fixed Rate Financing Costs Source Morgan Stanley Matrix

67% of 1ml LIBOR Swap

Source Morgan Stanley Matrix

Variable Rate New Issue Volume Has Declined Substantially Since 2008 and Bank Facility Market is More Concentrated

Top 10 LOC Providers 72% of Market in 2000

Bank of America 14.9%

Wells Fargo 13.7%

JPM 10.5%

US Bank 5.2%

SunTrust 4.5%

Dexia, 4.4%

CIBC 3.5%

WestLB 3.5%

Bayern- LB 3.8%

Com- merz- bank, 4.2%

Others 28.5%

Historical Variable Rate Issuance Volume Has Declined Substantially Since 2008 Last 20 Years ($BN)

$24 $25 $33 $33 $36 $51 $56

$78 $90 $98 $95 $94 $102

$123

$43 $38 $29 $30 $35 $30 $23

140 120 100

80 60 40 20

0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Variable Rate Issuance

Bank of America 12.8%

Goldman Sachs 11.7%

Wells Fargo

8.7% Ziegler 6.8%

Citi 5.3% RBC 4.3%

JPM 4.3%


Others 25.1%

Barclays 3.4%

Morgan Stanley 3.5%

UBS 4.1%

MUFG 19.2%

BNY 14.8%

Landes- bank

Hessen- Thurin-

gen 12.9%

Citi 11.0%

Bank of China 9.0%

US Bank 8.2%

RBC 2.8%

Scotia- bank 4.1%

Bank of America

4.7%

East West Bank 6.1%


Others


7.2%

Source Thompson Reuters SDC

Estimated Tax-Exempt Swap Cost

Swap Floating Rate

67% LIBOR

Swap Fixed Rate / Liquidity and Remarketing 2.00% / 0.50%

All-in Swap Cost 2.50%

All-in TIC: Fixed Rate Financing

3.31%

All-in TIC: With Swap 2.94%

Benefit 0.37%

Additional Cost: 5Y Cancelation Option 0.25%

Additional Cost: 1Y Forward 0.10%

Estimated Taxable Swap Cost

Swap Floating Rate 100% LIBOR

Swap Fixed Rate / Liquidity and Remarketing 2.80% / 0.50%

All-in Swap Cost 3.30%

All-in TIC: Fixed Rate Financing 4.17%

All-in TIC: With Swap 3.24%

Benefit 0.93%

Additional Cost: 5Y Cancelation Option 0.35%

Additional Cost: 1Y Forward

0.10%

Leveraging Swaps to Finance Long-Term Multi-Family Projects

Incorporate a Taxable Swap (And 10 Year Cancellation) $15MM Level Amortization ($MM)

1.0

0.8

0.6

0.4

0.2

0.0

2017 2020 2023 2026 2029 2032 2035 2038 2041 2044

Taxable Serial Bonds Taxable Swap

Source Morgan Stanley

Incorporate a Tax-Exempt Swap (And 10 Year Cancellation) $50MM Level Amortization ($MM)

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2017 2020 2023 2026 2029 2032 2035 2038 2041 2044

Tax-Exempt Bonds Tax-Exempt Swap



6 NALHFA CONFERENCE APRIL 2016

Bond Yield Compared to Mortgage Rate, 2008-2015 %

Earning Subsidy through Managing Variable Rate Risk Example: $100MM FRN Assumed to Pay 3mo LIBOR + 0.50%

1,500

2,000

$29 Million Cashflow Generated Since 2008 $Thousands 2,500

Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15

6.0 5.0 4.0 3.0 2.0 1.0 0.0

Dec-08 Sep-09 Jun-10 Feb-11 Nov-11 Jan-14 Oct-14 Jul-15 Apr-16

Bond Rate

Aug-12 May-13

Mortgage Rate Source Morgan Stanley Matrix

Feb-09

Source Morgan Stanley Matrix

7 NALHFA CONFERENCE APRIL 2016

Subordinate Subsidy Loan Hedge Variable Rate Debt

Achieve Higher Rating Take Equity in Projects

Leverage Excess Cash to Achieve Different Policy Goals

Cash 1% Loan

Cash Earnings

Variable Rate Debt Service

Cash Earnings

Variable Rate Debt Service

Cash

Indenture

= AAA Rating

Bonds

Cash

Debt

Equity


Please see additional important information and qualifications at the end of this material.

Disclaimer

8

APPENDIX A

(a) Morgan Stanley & Co. LLC (“Morgan Stanley”) is not recommending an action to you; (b) Morgan Stanley is not acting as an advisor to you and does not owe a fiduciary duty pursuant to Section 15B of the Exchange Act to you with respect to the information and material contained in this communication; (c) Morgan Stanley is acting for its own interests; (d) you should discuss any information and material contained in this communication with any and all internal or external advisors and experts that you deem appropriate before acting on this information or material; and (e) Morgan Stanley seeks to serve as an underwriter on a future transaction and not as a financial advisor or municipal advisor. The information provided is for discussion purposes only in anticipation of being engaged to serve as underwriter. The primary role of an underwriter is to purchase securities with a view to distribution in an arm’s-length commercial transaction with the issuer. The underwriter has financial and other interests that differ from those of the issuer and obligated persons.

Any non-historical interest rates used herein are hypothetical and take into consideration conditions in today’s market and other factual information such as the issuer’s or obligated person’s credit rating, geographic location and market sector. As such, these rates should not be viewed as rates that Morgan Stanley guarantees to achieve for the transaction should we be selected to act as underwriter. Any information about interest rates and terms for SLGs is based on current publically available information and treasury or agency rates for open-market escrows are based on current market interest rates for these types of credits and should not be seen as costs or rates that Morgan Stanley guarantees to achieve for the transaction should we be selected to act as underwriter.

NALHFA CONFERENCE APRIL 2016 9

MSRB G-23 and Municipal Advisor Disclaimer

he information in this material was prepared by sales, trading, or other non-research personnel of Morgan Stanley for institutional investors. This is not a research report, and unless otherwise indicated, the views herein (if any) are the author’s and may differ from those of our Research Department or others in the Firm. This material is not independent of the interests of our trading and other activities, which may conflict with your interests. We may deal in any of the markets, issuers, or instruments mentioned herein before or after providing this information, as principal, market maker, or liquidity provider and may also seek to advise issuers or other market participants.

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© 2016 Morgan Stanley


Disclaimer


National Association of Local Housing Finance Agencies

Dallas Conference April 14, 2016

Peter Cannava Managing Director Public Finance – Housing

Government & Institutional Banking 150 East 42nd Street, 25th Floor New York, NY 10017 T: (212) 214-6722 F: (212) 214-6669 [email protected]

Confidential – For Discussion & General Information Purposes Only

mailto:[email protected]

Disclosures

contemplated therein unless expressly agreed to in a written financial advisory or similar agreement.

This communication is for informational purposes only, is not an offer, solicitation, recommendation or commitment for any transaction or to buy or sell any security or other financial product; and is not intended as investment. The information contained herein is (i) derived from sources that Wells Fargo Securities ("WFS") in good faith considers reliable, however WFS does not guarantee the accuracy, reliability or completeness of this information and makes no warranty, express or implied, with respect thereto; and is (ii) subject to change without notice. WFS accepts no liability for its use or to update or keep it current. Products shown are subject to change and WFS and/or one or more of its affiliates may provide advice or may from time to time have proprietary positions in, or trade as principal in, securities that may be mentioned herein or other securities issued by issuers reflected herein; or in derivatives related thereto. Wells Fargo Securities is the trade name for certain securities-related capital markets and investment banking services of WFC and its subsidiaries, including Wells Fargo Securities, LLC, member NYSE, FINRA, NFA, and SIPC, and Wells Fargo Bank, N.A. (“WFBNA”), acting through its Municipal Products Group. Municipal Derivatives services are provided by WFBNA, a swap dealer registered with the CFTC and member of the NFA. This communication is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations and does not constitute advice within the meaning of Section 15B of the Securities Exchange Act of 1934. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment, and other aspects of this communication. Neither WFS nor any person providing this communication is acting as a municipal advisor or fiduciary with respect to any transaction described or

Table of Contents

1

I. Market Update

II. Case Studies: Structural Considerations & Innovations

III. GSE Financing Structures

IV. Wells Fargo‟s 2016 Housing Outlook

Market Update

Municipal Market Update

MMD vs LIBOR Swaps2 Municipal Fund Flows1

Sources: 1 Lipper, A Thompson Reuters Company chart displays funds that report weekly as of March 30, 2016, 2 Thompson Reuters,TM3 as of April 5, 2016

1 Week SIFMA vs 1 Month LIBOR2 “AAA” MMD History2

0.05

0.10

0.15

0.30

0.35

0.40

0.45

0.00 2010 2011 2012 2013 2014 2015 2016

(%)

1W SIFMA 1M LIBOR

0.0

1.0

2.0

3.0

0.25 4.0

0.20

5.0

6.0

7.0

8.0

1 5 10 30

(%)

MMD Range since 1990 Current MMD (4/5/2016) MMD 1 Year Ago

15 20 25 Term

0.5

1

2.5

3

(%)

MMD LIBOR

55 bps

(1.5)

(1.0)

0.5

2

0.0

1.5

(0.5)

1.0

1.5

$ B

illi

on

s

24.2 24.4

12.5

6.3 5.6 5.5 6.4 7.1 5.7 7.9

6.7 6.1

5.4

4.1 4.2 3.7 4.6

7.2 7.4

8.6

30.9 30.5

17.9

10.4 9.9 9.3 10.9

14.2 13.1

16.5

3.2 5

10

15

20

25

30

35

New issuance in the housing sector was $16.5 billion in 2015 (or approximately 4.2% of total municipal issuance).

o This is significantly up from the trailing 3- and 10-year average of

$12.7 billion and $16.3 billion, respectively.

$7.9 billion of single family and $8.6 billion of multi family bonds were issued in 2015.

The most housing debt was issued in New York ($3.0 billion), Minnesota ($618.6 million), Pennsylvania ($534.6 million) and Tennessee ($488.9 million).

Year to date 2016 issuance has been $3.2 billion. Multi-family issuance accounts for $1.0 billion compared to $1.2 billion issued during the same period last year.

2015 Housing Market Volume Grew to the Highest Levels since 2008

Yearly New Municipal Single and Multi-Family Housing Issuances 2006 – 2016 ($ Billions)

2015 Issuance Overview

Single Family

Multi Family

Total Issuance $7.9 bn $8.6 bn

% Change From 2014 + 37.5% + 10.2%

% Fixed Rate 89.1% 49.8%

% Variable Rate* 10.9% 50.2%

% AMT 23.3% 1.0%

% Taxable 17.4% 18.3%

% Refunding 27.9% 6.3%

In the last 10 years, total housing issuance has averaged $16.3 billion. 2015 issuance was $16.5 billion and 2016 YTD issuance is currently $3.2 billion

- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD

Multi Family Housing Single Family Housing

Source: Thomson Reuters SDC, as of April 1, 2016; includes all long-term new issuances, not including bond purchase agreements of future tranches *Includes Linked Rate Bonds

Case Studies: Structural Considerations & Innovations

In December 2015, Wells Fargo Securities served as Senior Managing Underwriter for the New York City Housing Development Housing Corporation‟s (“HDC”) 2015 Series H and I Multi-Family Housing Revenue Bonds. The Bonds were structured as 10-year Fixed Rate Mandatory Tender

Bonds with a 30-year final maturity.

The Bonds were issued out of HDC‟s Open Resolution to finance a permanent mortgage loan on the Hunter‟s Point South development, a 619-unit mixed income housing project located in Queens, New York.

100% of the units will be rented at below market rents. 60% of units above 130% of AMI; 20% at 130% of AMI; and 20% at 40%/50% of AMI.

Wells Fargo Bank, N.A also served as DUS Lender for the Fannie Mae Credit Enhancement Facility on the underlying mortgage loan.

The 2015 fixed rate bonds served as the permanent take-out of the original 2013 variable rate bonds that originally served as the construction financing, for which:

Wells Fargo Securities served as Sole Managing Underwriter and Remarketing Agent on $163,225,000 Variable Rate Demand Bonds issued in three tranches over 2013 and 2014; and

Wells Fargo Bank, N.A. served as Construction Letter of Credit provider to support the VRDBs.

Furthermore, Wells Fargo Bank, N.A. served as the LIHTC Equity Investor, providing $19,575,000 in investment proceeds.

The bond‟s marketability was bolstered by HDC‟s strength of its resolution, which paid the principal and interest on the bonds while Fannie Mae paid the put.

New York City HDC : Hybrid Bond Structure

Utilizing a strong, highly-rated HFA balance sheet, along with credit enhancement from FNMA and subsidy from the city and HFA to finance a mixed-income project in a gentrifying neighborhood.

$197,330,000 New York City

Housing Development Corporation

Multi-Family Housing Revenue Bonds Hunter‟s Point South

December 2015

Senior Manager Fannie Mae DUS Lender LIHTC Equity Investor*

* Product of Wells Fargo Bank, NA

Wells Fargo Securities served as sole managing underwriter for New Jersey Housing and Mortgage Finance Agency‟s (“NJHMFA”) issuance of $18,425,000* of tax exempt Bonds.

The bonds were publicly offered for a term of up to 24 months and sold to investors at a fixed interest rate (1.10%).

The conduit bonds financed at least 50% of the applicable costs associated with the acquisition/rehab of a 100% affordable multifamily housing project.

The Borrower sold 4% Low Income Housing Tax Credits to a syndicator/investor, creating a financing source of approximately $12,500,000.

Simultaneous with the closing of the Bonds, the Borrower closed a HUD 221(d)(4) loan, which will serve as the permanent source or debt financing for the property, which was financed by a GNMA issued by Wells Fargo Bank, N.A.

The bonds will be fully secured at all times by cash (sourced from the HUD loan and the tax credit equity) deposited in an Escrow Account held by the Trustee, resulting in a AA+ bond rating by S&P and a low interest rate.

At stabilization, or as the units are Placed-in-Service, tax exempt bonds will be redeemed with the funds deposited with the Trustee.

New Jersey Housing and Mortgage Finance Agency: Side by Side or Cash Collateralized Bonds

Utilizing very attractive long-term, FNMA MBS along with tax-exempt bonds and 4% LIHTCs to finance a 100% affordable housing project in Atlantic City

$18,425,000

New Jersey Housing and Mortgage Finance Agency

Multi-Family Conduit Revenue Bonds Series 2015CC (Carver Hall Apartment Projects)

December 2015

Sole Manager

Side-by-Side / Cash-Collateralized Bond Structure

Tax-exempt side-by-side financing combines long-term taxable loans (e.g. FHA/GNMA, Fannie Mae, Freddie Mac) with short- term, tax-exempt cash-collateralized bonds and access to 4% Low Income Housing Tax Credit Equity.

Bond Application

Bond Trustee

MBS / Loan Proceeds

Short-Term Tax-Exempt

Bond


Bond

Bond Proceeds

Bond Proceeds

Bond Proceeds

Real Estate Developer

FHA/GSE Lender

Tax-Exempt Conduit Issuer

MBS Investor

Permanent Loan (FHA, FNMA, FHLMC)

Municipal Underwriter

Loan Application

Bond Investor


Bond

Bond Proceeds

MBS / Loan Proceeds on deposit with Trustee are used to pay off Bonds at maturity

Tax-Exempt Side-by-Side Bonds offer tax-exempt funding during construction/rehabilitation, coupled with taxable permanent financing from stabilization through loan maturity

1. Short-term (2 – 3 year) tax-exempt bonds are issued in order to qualify for the 4% Low Income Housing Tax Credits

2. Tax-Exempt proceeds are deposited into trustee-held collateral account

3. Taxable permanent loan closes simultaneously with tax-exempt bonds (FHA/GNMA, Fannie Mae or Freddie Mac)

4. The Bonds are fully cash secured at all times with permanent loan proceeds being deposited with the Trustee and tax-exempt proceeds being released to fund construction/rehabilitation

5. The Trustee applies the proceeds in the collateral account to pay off the Bonds upon the project being placed in service

The short maturity coupled with the cash-collateralization results in a lower tax-exempt cost of funds and lower long-term taxable loan through maturity

Direct Purchase allows the borrower to take advantage of lower rates on the short-end of the yield curve without many of the risks associated with a short- term security.

Direct Purchases prove advantageous in the following areas:

- Eliminates bank risk / LOC trading spread volatility

- Eliminates remarketing performance risk

- Eliminates LOC and remarketing fees

- Eliminates systematic put risk

- Simpler and quicker execution than a public offering

Wells Fargo Bank, N.A has successfully implemented a draw-down construction loan note facility for MassHousing, which allows the Agency to make draws on a tax-exempt or taxable basis at a floating or fixed interest rate to fund construction loans.

To date, Wells Fargo Bank N.A has purchased 7 Blocks of floating and fixed rate drawdown Construction Loan Notes totaling over $97.8 million.

Security pledge is Mass Housing‟s General Obligation pledge.

Mass Housing : Direct Purchase Bonds to Finance Construction

Wells Fargo Bank, N.A‟s Direct Purchase rates are often more aggressive than

public market and can be structured as a draw-down facility.

- The draw-down structure saves the borrower negative arbitrage expense on

bonds used to fund draw-down construction loans.

Obligation is purchased directly by Wells Fargo Bank, N.A. as sole investor – as opposed to selling bonds in the public market to a group of investors.

The Bank holds it as an „on-balance sheet‟ loan.

$125,000,000

Massachusetts Housing Finance Agency

Direct Purchase Drawdown Construction Loan Note Facility

December 2014

Purchaser*


Utilizing Wells Fargo Bank, N.A’s Direct Purchase program to provide the borrower attractive rates on the floating rate construction loan as well as the fixed rate permanent loan to finance an integral residential component to the larger Parkside development plan.

In December 2014, Wells Fargo Bank, N.A directly purchased $21 million of tax-exempt bonds structured as a floating-to-fixed rate direct purchase transaction. This structure consists of floating rate bonds during construction period that are then converted to a predetermined fixed rate upon stabilization of the project.

30 Month floating rate Construction Financing at LIBOR + 1.65%.

The Bonds were issued as draw down bonds during construction.

17 Year Forward Starting Permanent Financing for Facility B and 9 year Forward Starting Permanent Financing for Facility C.

Proceeds

The Borrower locked in a forward starting permanent rate of 5.20% for both facility B and C at closing.

from the direct purchase were used to finance the construction of a 186-unit affordable family apartment project known as The Grove at Parkside, in Washington, D.C.

The project consists of 10 units restricted to households at 30% of

the AMI and 176 units will be restricted to households at or below 60% of the AMI.

The development is one of the largest Housing Production Trust Fund tax-exempt bond transactions in the district.

DCHFA: Direct Purchase 100% Affordable Housing Construction to Permanent Financing

$21,000,000

District of Columbia Housing Finance Agency

The Grove At Parkside

December 2014

Purchaser*


Oregon Housing and Community Services:

Oregon Housing and Community Services

Direct Purchase Tax-exempt Bond The Abigail Apartments

October 2014

Purchaser*

Utilizing Wells Fargo Bank, N.A’s balance sheet to energize the north end of Portland’s Pearl District with the addition of 155 new affordable apartments.

In October 2014, Wells Fargo Bank, N.A purchased $24.9 million of tax-exempt construction financing. 30 Month floating rate Construction Financing at 1 Month LIBOR + 1.40%.

$24,962,366 Upon stablizarion 20 years Forward Commitment Term

Permanent Financing.

The Borrower‟s two permanent loan facilities, Facility B and Facility C, were locked in a forward starting permanent rates of 5% and 6%, respectively.

The property had been awarded Oregon Affordable Housing Tax Credits (OAHTC) which effectively reduced the Facility C loan rate by 4%. The OAHTC units were assigned 63 underground parking spaces at no additional cost to the renters.

Proceeds from the direct purchase were used to finance construction of a 155-unit affordable family apartment project known as The Abigail in Portland, Oregon. 128 units were restricted to households at 50% - 60% of the AMI and 27 units were market rate. The Project also included 930 square feet of ground floor commercial space.

The transaction demonstrated a strong coordinated effort and cross-sell among a numerous groups within Wells Fargo, including Wells Fargo Multifamily Capital, Community Lending & Investment and Public Finance.


Convertible Direct Purchase

Bonds convert from taxable to tax-exempt at

future date (i.e., call date for non-advance

refundable bonds)

Forward Delivery Direct Purchase

Lock in tax-exempt rate today for future date;

generate debt service savings on otherwise

non-advance refundable bonds

Drawdown Direct

Purchase

Ability to draw from line when needed; mitigates negative arbitrage

Floating-to-Fixed Rate

Direct Purchase

Direct purchase bonds can be structured as floating rate bonds during construction period and convert to predetermined fixed rate upon stabilization

Spot Direct Purchase With Optionality

Can provide added call flexibility in the form of optional put and/or mandatory redemption

Summary of Direct Purchase Financing

Issuers can sell tax-exempt bonds to a purchaser in lieu of issuing bonds in the public market

Direct purchase can be executed on either a fixed or floating rate basis

May provide greater structural flexibility than public market transaction including call provisions, floating-to-fixed, drawdown, etc.

Rate can be highly competitive to that of a public market transaction of similar tenor

Bank Product Alternatives

As compared to public market fixed rate financing, direct purchases introduce:

Bank covenants

Variable rate risk

May introduce remarketing/renewal risk:

The Borrower is not guaranteed that the Bank will renew its lending commitment beyond the initial term.

Pricing terms and covenants are also subject to negotiation at that point as well.

Direct Purchase Fixed Rate Structure Key Considerations

Direct Purchase Overview and Considerations

Fixed or Floating Rate

Bonds

Continuing Covenants Agreement

Issuer Purchaser

1

2

3 No official statement or disclosure document is required. Typical

documentation includes a Trust Indenture and Continuing Covenants Agreement

4 Quicker speed to market given there is no public disclosure

required

10

Fixed or Floating Rate

GSE Financing Structures

Freddie Mac Tax-exempt Loan “TEL” Structure

Financing for the acquisition or refinance of stabilized affordable multifamily properties with 4% LIHTC with at least 7 years remaining in the LIHTC compliance period

FHLMC

Seller Servicer

Issuer

Borrower

FHLMC

Structure

Forward Commitment Immediate Funding

Type of Funding Immediate or forward fixed-rate financing

Immediate or forward variable-rate financing

Eligible Properties

Garden, mid-rise or high-rise multifamily properties with 4% LIHTC with 90% occupancy for 90 days

Minimum DSCR

1.15x* 1.20x with interest rate hedge

Maximum LTV 85% of adjusted value or 90% of market value

80% of adjusted value or 85% of market value

Loan Term Up to 18 years Up to 10 years

Construction Period

Up to 36 months

Maximum Amortization

Up to 35 years

Subordinate Financing

Permitted; supplemental loans are not available

Tax & Insurance Escrows

Required

Fees Application fee, commitment fee plus other fees, as

applicable

Pricing Priced at a spread to 10- year Treasuries

Priced to a spread to 1- Month LIBOR

Direct Tax-exempt Loan

“Funding Loan” “Project Loan”

Simultaneous Tax- exempt Loan

FHLMC holds Funding Loan on

balance sheet

FHLMC Purchases Funding Loan

• Structure provides a cost-effective alternative to tax-exempt bond credit enhancements with 4% LIHTC

• Streamlined process requires less documentation and fewer participants than traditional bond credit enhancement

* Adjustments may be made depending on the property, product and/or market Source: Freddie Mac

Tax-Exempt MBS-Backed Pass-Through Bonds offer the uniformity and simplicity of MBS and the benefit of tax exemption

Each Pass-Through Bond is secured by, and passes through 100% of the principal and interest payments from, one Fannie Mae MBS

Proven and in-place for single family MBS-backed securities

MBS Pass-Through allows access to investors that participate in the larger MBS marketplace.

Tax-Exempt FNMA MBS Pass-Through Bonds to Fund Affordable Multifamily Housing

Tax-exempt MBS-backed financing provides the pricing of the MBS market and access to 4% Low Income Housing Tax Credit Equity.

Real Estate Developer

DUS Lender

Tax-Exempt Issuer Trust Indenture*

Investors

FNMA MBS

FNMA MBS Payments

Municipal Underwriter

Tax-Exempt Pass-Through

Bond

Tax-Exempt Pass-Through

Bond

*The tax-exempt conduit issuer issues the tax-exempt pass-through bond (a municipal security), which is secured by trust indenture containing the Related MBS Certificate.

Loan Application

Tax-Exempt Pass-Through Bond Payments

Mortgage Loan Payments

Wells Fargo‟s 2016 Housing Outlook

Housing demand is gradually reviving as the housing market becomes unstuck. Buyers and sellers are becoming more comfortable with the state of the market.

Improved labor market conditions paired with the growing appeal for urban living will likely continue support for multifamily demand in 2016.

The decline in the homeownership rate has coincided with a dramatic increase in renter households. The number of renters will continue to increase even as the homeownership rate recovers.

The oversupply of housing has largely receded, particularly in parts of the country where population and employment are growing rapidly.

Renter Household Growth (Renter Occupied Units in millions)

Housing Starts (Millions of Units)

Housing and Real Estate Market Outlook for 2016

Vacancy Rates (Rental vs. Homeowner, Percent)

Sources: CoreLogic, U.S. Department of Commerce ,Wells Fargo Securities, LLC, as of March, 2016

13

Population Growth by Metro (Primary City vs. Suburbs) With affordability getting squeezed from tight for-sale inventories and sluggish income growth, we expect more buyers to seek out more affordable markets.

There has been a move back into the center city of many major metro areas in the South and the West. For many this marks a new development, as suburban areas have typically accounted for the bulk of population growth in recent decades. We believe this shift has staying power.

The growth in rental households has spurred a boom in the apartment market, particular in rapidly growing urban areas that are attracting scores of Millennials who prefer renting over owning.

A large proportion of new multi-family construction has been focused on higher-end apartments, which has pushed average rents up much faster than incomes in recent years.

U.S Share of Income Spent on Rent Homeownership by Age (Percent of Population)

Trends in the Housing Market

Sources: CoreLogic, U.S. Department of Commerce ,Wells Fargo Securities, LLC, as of March, 2016

14

Five Critical Key Takeaways

Gateway Markets Are Colling Off

Economic Outlook

The Housing Recovery

Apartment Construction is close to peaking

15

The Return of the Affordability Migration

The slow start to 2016 and continued global economic headwinds have caused the Federal Reserve to walk back their plans to normalize interest rates, which means mortgage rates may remain lower for even longer.

Housing demand is gradually reviving as the housing market becomes unstuck. Buyers and sellers are becoming more comfortable with the state of the market.

Apartment development is showing signs of peaking as a torrent of supply is coming to market. Rents are ebbing in even some of the highest priced areas.

With affordability getting squeezed from tight for-sale inventories and sluggish income growth, we expect more buyers to seek out more affordable markets

Slower global economic growth and declining currencies in Russia, Brazil, and China have tempered home buying in several gateway markets

Martha’s Vineyard Project Overview April 2016

Ellen Rourke 214.739.0233 www.nationalhousing.com

Martha’s Vineyard: “Before”

April 22, 2016 36

Martha’s Vineyard: “Before”

April 22, 2016 37

Martha’s Vineyard: September 2016

April 22, 2016 38

Initial Deal Structure

Unicom Crest Development, LP

GP .01%

Investor LP 99.99%

Deaf Action Center Sole Member

100%

April 22, 2016 39

Private Sector Support


GP .01%

Investor LP 99.99%


100%

Hillcrest, Hoblitzelle, Sharp, Meadows

Foundation Grants

April 22, 2016 40

Public Sector Support


GP .01%

Investor LP 99.99%


100%

Hillcrest, Hoblitzelle, Sharp, Meadows

Foundation Grants

City of Dallas Grant

April 22, 2016 41

Modified Structure / Property Tax Solution


GP .01%

Investor LP 99.98%


100%

SLP .01%

City of Dallas HFC Sole Member

100%

DAC sells land to HFC

HFC leases land to LP

April 22, 2016 42

Award and Sale of Tax Credits


GP .01%

Investor LP 99.98%


100%

SLP .01%


100%

Richman Group Class A: 99.97%

Class B: .01%

TDHCA Awards Tax Credits to LP

Sells Tax Credits

April 22, 2016 43

Provides Equity Capital

Completion of Debt Financing


GP .01%

Investor LP 99.98%


100%

SLP .01%


100%

Richman Group Class A: 99.97%

Class B: .01%

Community Bank of Texas

Senior Lender

Bond Issuer

April 22, 2016 44

Budget Summary

April 22, 2016 45

PERMANENT SOURCES PERMANENT USES

Debt Capacity $6,800,000 Hard Costs $9,390,340

Equity (from sale of Tax Credits) 4,970,787 Soft Costs 5,198,454

Public & Private Grants 3,102,625 Demoltion 462,000

Development Fee Deferral 252.382 Land 75,000

TOTAL $15,125,794 TOTAL $15,125,794

RENTAL MIX SUMMARY

Tax Credit Units (50%/60% AMI) 85

Market Rate Units 15

TOTAL 100

Closing

April 22, 2016 46

Contact Information

Ellen Rourke 214.739.0233 www.nationalhousing.com

April 22, 2016 47

NALFA Annual Conference

Rick Padilla, Director of Housing

Denver Office of Economic Development

April14, 2016

48

Affordable Housing Challenges

• Rapid population growth

• Demand outstripping housing supply

– Lack of condos

• Rapidly rising rents and home costs

• Declining federal funds

• 4,500 federally protected units to expire over

next 5 years

49

Declining Federal Funding

50

700

800

900

1000

1100

1200

1300

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

Federal Resources Average Denver Rent

CDBG*

HOME

average

Denver

rent

*Represents the City of Denver’s CDBG allocation, some of which is not available for affordable housing

investment. CDBG funds can also not be used for new construction.

Cost Burdened Households

30% AMI:

$16,800 for 1-person household


60% AMI:



80% AMI:



Gap financing for new supportive housing

Emergency Shelter Grants

Tenant-Based Rental Assistance

Gap financing for new rental

Tenant-Landlord Counseling

Rental assistance

Gap financing for new for-sale

Inclusionary Housing Ordinance

Down Payment Assistance

Housing Counseling

31 - 60% AMI 61 - 80% AMI 81 - 120% AMI < 30% AMI

75% of all

households below

30% AMI are cost

burdened

64% of all

households

between 31-60%

AMI are cost

burdened

38% of all households

between 61-80% AMI

are cost burdened

53,300 56,100

29,200

44,700

40,100

35,700

11,200 10,300

0

10,000

20,000

30,000

40,000

50,000 Total Households

Cost Burdened Households

A “Cost-Burdened” household is one

that pays more than 30% of its gross

monthly income for housing +utilities Homeless Households

2,679

51

Affordable Housing

• Of 183,300 families earning 120% or less of AMI,

97,300 are cost burdened (paying more than 30%

of monthly income on housing)

• OED and DHA are primary local agencies

responsible for developing and subsidizing

affordable housing

• Mayor’s 3x5 Challenge

– Issued in 2013

– 1,458 units created or preserved in Years 1 & 2

52

60% AMI + 80% AMI < 50% AMI

CDBG

HOPWA

HOME RAHLF

• Supportive Housing

• Critical Needs

• Rental Assistance

• Affordable Rental

Construction

• Tenant-Landlord Counseling

• Emergency Home Repair

• Affordable For-Sale Construction

• Down Payment Assistance

• Housing Counseling

Denver’s Road Home

DHA

For-Profit Developers

IHO, MMA

+ 100% AMI

Example: Colorado Coalition for

Homeless

< 30% AMI

Non-Profit Developers

FU

ND

ING

P

AR

TN

ER

S

EX

AM

PLE

S

Funding, Partners and Programs

53

54

*Including OED funding commitments made in 2015, though some may be spent down in 2016.

2011

2015

2012

2014

●

Mayor’s

Housing Task

Force

Convened

●

2013

●

Mayor

Announces

3X5 Initiative

●

Mayors

Housing

Advisory

Committee

Convened

●

Housing

Finance Task

Force

Convened

●

Task Force

Recommendations

Adopted

●

Revolving

Affordable

Housing Loan

Fund Established

●

Housing Plan

Published

●

Phase I IHO

Revisions

●

BBC Housing

Gap Analysis

NSPIII

Competitive

Grant Award

● ●

Phase II

IHO

Revisions

●

Metro Mortgage

Assistance Plan

Established

●

Housing

Plan

Outreach

●

Mile High

TOD Fund

Established

● ●

IHO Rules

& Regs.

Adopted

Dedicated

Housing

Fund

Announced

2016

●

Preservation

Ordinance

Revisions

●

Preservation

Mapping Tool

Developed

Unit Type 2011 2012 2013 2014 2015* TOTAL

Very Low Income (Below 30% AMI) 51 88 35 40 136 350

Low Income (Between 31-60% AMI) 377 415 552 405 518 2,267

Moderate Income (Between 61-80% AMI) 0 0 0 56 69 125

Market Rate/Manager 28 34 67 67 8 204

Inclusionary Housing Ordinance 24 7 0 5 22 58

TOTAL UNITS 480 544 654 573 753 3,004

Housing Timeline

3x5 Progress & Pipeline

55

In the first two years since the Mayor announced the City’s 3x5 goal – 3000 units developed or preserved in 5 years – 1,458 units were delivered, exceeding the pace for the first two years. Today, midway through Year 3, the City has made funding commitments to another 1,770 units, over one third of which are already under construction.

9% Low Income Housing Tax

Credits

In a typical affordable rental housing development, the

majority of capital comes from debt and federal Low-

Income Housing Tax Credits (LIHTC).

• Non-profit and for-profit developers can raise debt

from banks or other financial institutions

• LIHTC are allocated by CHFA for all projects in Colorado

• Tax credits can only be used for rental projects that

serve families at 60% AMI or below.

9% LIHTC provide equity for about 70% of project costs,

and are allocated once per year in a competitive process.

4% LIHTC provide equity for only about 30%-40% of

project costs, but they have a rolling application and are

non-competitive.

Affordable projects that receive either type of LIHTC still

need additional “gap financing” to have enough capital to

build affordable units.


Credits

Debt and tax credits provide most housing capital

31 - 60% AMI 61 - 80% AMI 81 - 120% AMI < 30% AMI

56

Total project cost

Private Debt


Credits

OED and its partners, including the Colorado Division of

Housing (CDOH) and CHFA, provide additional

investments to fill the financing gap.

The Denver Revolving Affordable Housing Loan Fund

includes investments from the City, CDOH, and CFHA and

provides low-interest loans to projects serving families

earning 80% AMI or less.

State Low-Income Housing Tax Credits are awarded

competitively by CHFA to projects that are also seeking

4% federal LIHTC. State LIHTC are currently set to expire

at the end of 2016 but may be extended by the State

Legislature.

OED and CDOH also invest federal, state and local funds,

including federal HOME and CDBG funds, in affordable

housing projects. (CDBG funds cannot be used for new

construction.) These funds play an important part in

making affordable housing projects happen, but are

subject to appropriations every year.


Credits

State and local funds fill a critical gap

31 - 60% AMI 61 - 80% AMI 81 - 120% AMI < 30% AMI

57

Federal, State and Local Funds

Denver Revolving Affordable

Housing Loan Fund (RAHLF)

Total project cost

Private Debt

State Low-Income Housing Tax

Credits

Federal, State and Local Funds Federal, State and Local Funds

OED typically contributes 2% - 6% of total project costs, and occasionally up to

10%, meaning that OED funds are leveraged 10x – 50x

by additional public and private investment.

2% 2% 5% 5% 4% 3% 9% 5% 4% 3% 4% 10% 3% 4% 7% 4% 5% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Private Debt & Equity Tax Credits Other Public Funds City of Denver 58

Aff. Housing Opportunities

• Created $10M Revolving Loan Fund

– GF contributions and State match

• $8M General Fund 2016

– Approximately 800 units

• $15M/Year in 2017

– 6,000 units over 10 years

• Preservation (mapping inventory, ordinance)

• Local construction defect ordinance

• Involuntary Displacement study and strategy

59

New Opportunities

• $15M /year Permanent Fund

– 6,000 units/10 years

• Denver’s Road Home “2.0”

• Examine Opportunities to Improve Structure

– Align DRH with OED/Housing, particularly as we anticipate new $15M/year for 0% to 60% AMI

• 2nd Annual Housing Summit in May

• City Council focus

• Regional focus (MDHI, MMC)

• Coordinated and rapid entry

• Stronger partnership with the State through the Governor’s Director for Homelessness Programs on housing development, Medicaid and shelter options

60

1 © 2011 Fannie Mae. Trademarks of Fannie Mae. © 2015 Fannie Mae. Trademarks of Fannie Mae.

Fannie Mae Multifamily Affordable Housing Presentation to NALHFA

April, 2016 – Creative Financing and Deal layering Panel

© 2015 Fannie Mae. Trademarks of Fannie Mae 62

Choose the Fannie Mae Tax Exempt Bond Financing Solution that Works for You!

Fannie Mae offers very competitive pricing with the most flexibility, as well as the fastest and most reliable execution.


Inaugural Fannie Mae M.TEB Structure • $21,750,000 Illinois Housing Development

Authority – Fullerton Court Apartments

• Development Type: Acq/Rehab

• Closing Date: January 26, 2015

• Bond Rating: Moody’s “Aaa”

• Term: Single 16 year Bond Maturity

• Bond Rate: 3.00%

• Bond Security: Fannie Mae MBS

• Underwriter: RBC Capital Markets

• Investors: CRA Investors, Insurance Companies and Money Managers

• Redemption: “Yield Maintenance” 1st 10 years; Par Call Thereafter

• Structure Savings:

• Estimated Savings of 25-30 BP over traditional Fannie Mae Credit Enhancement Structure

• Estimated Savings of 5 Basis Points over Taxable Conventional Fannie Mae MBS

Source: RBC Capital Markets


Flexible Application of M.TEB Structure

New Construction Reduced Occupancy

Affordable Rehabilitation

(ROAR)

M.TEB – Variable Rate

with Structured ARM

Construction loan or letter of

credit required

No Construction loan needed;

rehab costs of up to $120,000

/unit

Term of 10 years (up to 18

years); LTV of 75%

Permanent bond pricing locked

at issuance

Minimum occupancy of 50% and

minimum DSC of 1.0% (interest-

only)

Interest rate is established as

the applicable index of 1 or 3

month LIBOR plus the Margin

Monthly payment of interest

during construction phase

MBS Structure modified to

provide Fannie Mae direct credit

enhancement during rehab

period which will convert to MBS

upon completion of rehab

Interest Rate Cap Required for a

minimum of 5 years

Upon Conversion, MBS will be

delivered to the Trustee and

secure the Bonds

Increased leverage opportunities

when underwritten to as-

improved rents

Varying Prepayment Options –

One year lock-out followed by

prepayment premiums starting

at 1-4%

During the Construction phase,

Borrower will pay debt service

on the bonds and construction

loan or letter of credit

Interest rate savings similar to

full MBS Tax Exempt Pass

Through Bond execution


Index Bonds

Credit Enhancement of variable rate tax-exempt Index Bonds or Floating Rate Notes (FRNs) with

no put option, liquidity support or remarketing costs.

Key Terms and Benefits

• 10-30 year terms

• Amortization up to 35 years

• LTV up to 85%

• Minimum DSCR of 1.00x at the

Underwriting Rate

• Interest rate cap period – 5 years

• New money issues, refundings or credit

substitutions

Marshall Field Garden

Apartments

2015 Illinois Housing Development Authority

– Variable Rate Issue

$102,000,000

10 year term

SIFMA Index + 100 bps

4% LIHTC – Acquisition & Rehab


Reduced Occupancy Affordable Rehab (ROAR) Key Terms

Terms

Eligible Properties Stabilized MAH; rehab range

typically $40K-$120K/unit

Eligible Sponsors Strong sponsors with demonstrated

tenant-in-place rehab track record

LTV Up to 90% “as stabilized”

Term 5-30 years

Amortization Up to 35 years

Rehab Period 12-18 months

Minimum Loan Size $5 million

Loan Disbursement Fully funded at closing; rehab funds

escrowed by Lender


ROAR Eligible Property Types

• Section 8 HAP Contract properties utilizing newly funded

4% or 9% LIHTC

• Properties utilizing newly funded 4% or 9% LIHTC, with

rents 10-15% below market rents

• Properties utilizing newly funded 4% or 9% LIHTC with

rents close to market rents

• Transactions with significant equity (e.g. existing low

leveraged properties) where refinance proceeds will be

used to fund the rehabilitation

• Modestly underperforming properties taken over by strong

affordable operators, with a modest rehabilitation or

repositioning strategy that will improve the property

performance and may improve rent levels


Balmoral I & II First ROAR Transaction

192 unit property outside of

Boise, ID

Property struggled with low

physical occupancy, high

debt service, rent

concessions, and poor

property management

Seen as an opportunity

asset, ROAR allowed

Sponsor to borrow on the

property’s projected “as

stabilized” value/DSCR

$1.2 million of the $7.2

million loan is backed by a

letter of credit until property

stabilizes

© 2015 Fannie Mae. Trademarks of Fannie Mae.

69

Tabaré Borbón

Customer Account Manager

Multifamily Affordable Housing

[email protected]

Visit the new Multifamily website today! www.fanniemae.com/multifamily/index

mailto:[email protected]

http://www.fanniemae.com/multifamily/index

Documents

Multifamily Finance: Case Studies in Creative Finance and