DALLAS - Following the completion of two sizable multifamily housing revenue bond issues in Texas over the past year, officials from Denver-based Newman & Associates say they believe their new GTEX structure will make such deals more successful for all of the parties involved.
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The structure combines mechanisms commonly found in commercial mortgage-backed security deals with traditional structures of tax-exempt issues. Gibson said GTEX financings are highly efficient and can make a deal with a 501(c)(3) issuer more likely to go through than without the new security.
The deals contain more tranches of debt than do traditional issues and also are usually jump-started by the seller. Most tax-exempt housing deals start with a nonprofit hoping to expand its own portfolio and so it goes looking for a seller. But in this case, the underwriter leverages its access to the commercial real estate market by finding a seller first, then identifying a nonprofit buyer.
"One of the strengths of the transaction, and keys to success, is that the financing aligns the interest of parties that may normally be on opposite sides of the table," said Tom Gibson, a managing director with Newman. "The goal of the for-profit entity is to achieve a fair market sale of the property as efficiently as possible. The goal of the nonprofit buyer is to purchase quality properties and preserve or generate affordable housing. The structure we utilize meets both sets of goals by selling a large portfolio at a market price and generating new affordable housing units."
Newman & Associates, a wholly owned subsidiary of GMAC Commercial Holding Corp. and the major servicer for Freddie Mac and Fannie Mae, has already managed two deals run through the Texas State Affordable Housing Corp., which served as a conduit issuer.
The company last fall managed its first GTEX deal, an $83 million multifamily housing revenue bond issue. Proceeds from the sale allowed two Texas nonprofits -- the National Housing Trust and the Enterprise Foundation -- to acquire seven properties from the for-profit Lincoln Properties.
The 30-year financing included five tranches of debt with ratings ranging from a triple-A series insured by MBIA Insurance Corp. to double-B uninsured. Gibson said the multilayered deal maximizes available proceeds to the original owners of the properties while creating strong debt service coverage and surplus cash flow, allowing the nonprofits acquiring the properties to reinvest surplus cash on a tax-exempt basis into the properties and other Texas affordable housing projects.
The firm in April closed its second GTEX deal, a $257 million deal almost identical to the Lincoln Properties deal. The borrowers were the American Housing Foundation, the South Texas Affordable Properties, and the American Opportunity for Housing.
The financing provided for the transfer of 24 projects in three separate cross-collateralized portfolios from a single for-profit owner, Walden Management Co., to the three nonprofit borrowers.
The average interest rates on both deals were in the 6.3% range.
"It's far more efficient to do a deal this way," said Gibson, adding that the firm did not only rely on its own site visits and research to put the deal together, but also had Standard & Poor's come in to rate the deal. "We took the information from S&P, added that to our own information, and structured the deal to maximize its effectiveness. For the bond buyer, it takes a lot of the uncertainty out of the process."
However, deals done in the future may include some changes that could make a buyer even more comfortable, according to Gibson.
"Subordinate debt is increasingly difficult to sell," he said, adding that Newman had purchased some of the double-B rated portions of the issues to make the deals "go." Gibson said that such debt is not as difficult to sell in commercial mortgage backed securities deals.
"Our company routinely sells taxable double-B bonds," he said. "We talked to the people on our CMBS side and realized that to make our structures even more marketable, we could utilize some of the tools they use."
In a taxable deal, the bond trustee generally serves as the servicer -- the party that oversees the operations of projects to ensure that debt service can be paid. However, bond trustees are not real estate experts, Gibson said.
"In a CMBS deal, the servicer is a real estate expert who may be able to pinpoint problems before they become unmanageable," he said. "Adding a servicer to the deal should bring an additional level of comfort to the bondholders. GMAC is the largest servicer in the world, and well-regarded by the ratings people -- it's really a natural fit."
