PNC Real Estate First Bank to Convert VRDB into “Index Bonds” to Preserve Low-Income Housing

PNC Real Estate executed the first conversion of Fannie Mae Credit Enhanced Variable Rate Demand Bonds (VRDB) into Fannie Mae Credit Enhanced Index Bonds in 2016 to refinance a 402-unit apartment community located in Garden Grove, California. As part of an overall $58.9 million loan to preserve 80 affordable units for very low-income tenants, PNC Real Estate executed $25.5 million in Index Bonds and a $33.4 million SARM supplemental loan.

In 2016, Fannie Mae released its Index Bond Credit Enhancement execution to finance the acquisition, new construction, refinancing or moderate to substantial rehabilitation of multifamily properties in which at least 20% of the units are set aside for low-income tenants. The effect is to help maintain the availability of low-income housing that might otherwise be converted to market rate.

How Index Bonds Preserve Low-Income Housing and Provide Borrowers with Supplemental Loan Opportunities

Fannie Mae allows refunding, conversion in lieu of refunding (amending the bond and credit enhancement documents to add the Index mode) or a new issue of bonds. Under the Index Bond structure, Fannie Mae credit enhances the variable rate tax-exempt bonds, but they do not provide liquidity support. Instead, the bond investor purchases the bonds for a period of time in exchange for a spread over the weekly SIFMA Index. At the end of the Index period, the Borrower has the flexibility to remarket the bonds, convert to fixed rate bonds or pay off the bonds.

Benefits include:

  • Bond terms up to 30 years
  • Refundings, conversions (in lieu of refundings), or new issues
  • Newly constructed or rehabilitated and stabilized 4% LIHTC with tenant-in-place rehab component
  • No put feature and therefore no liquidity fees
  • Removes Fannie Mae’s liquidity exposure on existing VRDB credit enhanced by Fannie Mae, providing borrowers with supplemental loan opportunities
  • Low borrowing cost; “AA+” rating keeps interest rates low
  • Flexible structures
  • Certainty and speed of execution

Studies of affordable housing consistently point to the increase in demand while the availability of housing stock remains flat. Index Bonds combined with PNC Real Estate’s actions to retain affordable housing are designed to improve the balance.

For more information about how to make Index Bonds part of your multifamily financing strategy, please contact Sarah Garland at sarah.garland@pnc.com.