Case Study

Capital Vista and Delta Towers

5 min read

Short- and long-term debt, tax credits, the whole shebang

Innovation in deals using both Low Income Housing Tax Credits and tax-exempt bonds can be seen in a pair of Washington, DC affordable housing projects that tapped the two funding sources for more than $80 million using a new master parity indenture program.

Wells Fargo worked in several capacities to help the District of Columbia Housing Finance Agency finance the two projects, Capitol Vista and Delta Towers, both in the District. Wells Fargo Securities was the senior manager for $74.4 million in tax-exempt bonds, and Wells Fargo Bank was both the construction lender and the investor in about $17 million (between the two) in four percent LIHTC equity.

Matt Engler, director at Wells Fargo Securities’ Housing Public Finance Group, says, “We helped (DCHFA) put together what was a new structure for them and a new financing approach in the market. We coordinated across the different parts of the firm as we worked with DCHFA.”

According to Engler, “Both of the loans that are being financed by the tax-exempt bonds are going to be risk share loans under the FHA Risk Share program, but they don’t start right away because this is new construction. The risk share loans don’t come in until the project has been fully constructed and leased up. Once that happens the permanent loan is coming in and will actually be taking out the construction loan from Wells Fargo in each of the two projects,” he says.

“We actually had to sell some short-term bonds to allow the project to meet the 50 percent requirement to get tax credits in the deal, and then we sold long-bid bonds to finance the permanent loans. So we locked in the funding of the permanent loans today, but the permanent loans themselves won’t come in until the project has been completed.”

Asked if this might be a market template, Engler says, “This approach could be used by DCHFA and other housing finance agencies.” He notes the fully cash collateralized nature of the bonds and a balloon loan structure as notable elements of the deal.

Todd A. Lee, executive director of the DCHFA, says the master parity indenture program allows the agency to pair two deals together for strength. Capitol Vista and Delta Towers are the second projects the agency has used the indenture program for in 2018, and the first to involve new construction.

He says $50 million of the bond proceeds are for the construction of Capitol Vista, which will have 104 units for people at or below 50 percent of area median, including 21 for people at 30 percent or below area median, while $24 million is going towards Delta Towers, which will provide 149 units of housing for very low-income seniors.

LIHTC equity is providing about $17 million between the two projects, ($14.2 million for Capitol Vista and $3 million for Delta Towers) and the balance of the project money is coming from gap financing provided by the District’s Department of Housing and Community Development. Total costs for the projects are $83 million for Capitol Vista and $96 million for Delta Towers.

Both projects will also include some retail, 3,200 square feet at Capitol Vista, which is in DC’s Mt. Vernon Triangle, and 4,300 square feet at Delta Towers, located in the 8th Street Corridor, Lee says.

The bond offerings ($34 million in short-term bonds and $40 million in long-term bonds) closed in September and construction is just starting on the buildings, the executive director says.

“Pairing the bonds and tax credits is a really efficient way to generate maximum proceeds,” Lee adds.

“The bonds are backed by HUD-insured loans and that also contributes to getting an attractive interest rate on the bonds,” he says. “Investors like to see that insurance.”

Kent Neumann, founding member at Tiber Hudson, Wells’ attorney on the deal, says his company has been seeing deals with features, like cash-backed bonds, and firms taking more than one piece of the deal this past year.

“Short-term cash backed tax-exempt bonds have worked well for four percent LIHTC deals when there are low taxable permanent loan opportunities in the market-place,” he comments. “As rates (and spreads) have increased over the past year, we have been working more with long-term tax-exempt structures from Fannie Mae, Freddie Mac, FHA Risk Share and private placement programs that have become more competitive in the marketplace.”

Neumann notes, “Despite the reduction in corporate tax rates implemented during tax reform late last year, we have also continued to see strong demand for investment opportunities from banks and other investors that benefit from serving in multiple roles on these affordable multifamily transactions. Newer financing structures we have recently been implementing have been able to accommodate this desire, while satisfying the complex tax rules that can otherwise be problematic.” Benefits of multiple roles can include increased Community Reinvestment Act credit, he says.

In general, Neumann says, a flattened yield curve has benefitted four percent LIHTC deals in the past year. “This has resulted in a major reduction (or elimination) of negative arbitrage for bond transactions that are fully funded at closing and has allowed us to implement new structuring opportunities for these deals that reduce certain costs and, in some cases, create more sources of funds.”

The short-term bonds, Series 2018 B-1, consisted of a $34 million bond with an initial mandatory tender date of March 1, 2022, Engler told a panel at the National Housing & Rehabilitation Association’s 2018 fall meeting.

Both the short-term and long-term bond series are cash-collateralized during construction by the WFBNA loan, he told the meeting.

At conversion, the short-term bonds will be paid down and the security for the long-term bonds will become two FHA Risk Share loans, each with a 17-year term and 40-year amortization, Engler says.

Story Contacts:
Matt Engler, Director
Wells Fargo Securities Housing Public Finance Group, Boston

Todd A. Lee, Executive Director
District of Columbia Housing Finance Agency

Kent Neumann, Founding Member, Tiber Hudson

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.