Many tax credit transactions utilize municipal bonds which can result in high fees, negative arbitrage costs and above market rates. Many borrowers would consider borrowing in the taxable markets through the sale of taxable GNMA securities. The regulatory issue is that to take advantage of 4% LIHTC credits, a project’s owner is required to finance with tax-exempt bonds, and to keep the bonds outstanding until the project’s placed-in-service date.
One solution many developers are taking advantage of is a short-term escrow which combines taxable GNMA sales with tax-exempt bonds. The escrow structure involves issuing short-term tax-exempt bonds and using the proceeds from GNMA security sales to pay off the bonds on the placed-in-service date. This short-bond structure dramatically reduces negative arbitrage and other costs and can be utilized in conjunction with FHA financing.
This structure allows for all-in long-term borrowing rates that are significantly lower than other financing options; and reduces negative arbitrage costs. Every transaction has unique fees and costs which can change the benefits of this structure, however the potential benefits of this structure allow many developers to reduce fees for qualifying transactions.