The four percent Low Income Housing Tax Credit goes hand-in-hand with tax-exempt bonds. To paraphrase the old song “Love and Marriage,” you really can’t have one without the other. The current interest rate environment, however, has led to some creative opportunities for pairing these nancing elements. For example, in one recent bond deal, parties utilized a “cash-backed forward structure” created by Washington, DC-based Tiber Hudson LLC to take advantage of the current inverted yield curve.
That yield curve inversion (as of this writing the two-year Treasury was trading at approximately 4.15 percent, while the Municipal Market Data was trading at approximately 2.15 percent) creates an opportunity to capture positive earnings for the deal, according to Lauren Marcus, Esq., a senior associate with Tiber Hudson, which acted as counsel to underwriter Stifel, Nicolaus & Company, Incorporated on the project.
In 2022, the DC Housing Finance Agency issued $47.49 million in bonds for the construction of Paxton Apartments in Washington, DC. The bonds were sold by the underwriter to public investors and cash-collateralized with the trustee. At closing, Freddie Mac delivered a forward commitment to lock in a permanent tax-exempt loan rate that will be effective when the project converts from its construction phase to its permanent phase. Bond proceeds and cash collateral were reinvested in short-term Treasuries to fully offset the interest owed on the bonds and take advantage of the higher yields at the short end of the yield curve, Marcus says.
