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Private Placement Transactions
TWO TYPES OF PRIVATE PLACEMENT TRANSACTIONS
- A financial institution, an institutional investor, or a sophisticated investor will purchase bonds for their investment portfolio through a negotiated sale.
- Streamlined Tax-Exempt Placement (STEP) Program - Only financial institutions can purchase the bonds.
WHAT IS STEP?
STEP uses standardized documents that reduce the time and cost of issuing tax-exempt bonds, making this type of financing feasible to a wider range of borrowers and projects. STEP works best for nonprofit projects with borrowing needs of less than $5 million. Information on larger bond issues »
STEP BONDS WORK LIKE REGULAR LOANS
The STEP program converts what would normally be a taxable loan into a tax-exempt bond. Because interest payments become tax-exempt income to the bank, the lender passes on their tax savings to the borrower in the form of a lower interest rate. Lower interest rates mean a lower debt service or a larger loan for the borrower. Lenders use the same underwriting criteria and determine the interest rate as they would for any typical commercial loan.
THE STEP PARTICIPANTS
One way that the STEP program is made more affordable for nonprofit borrowers is by the reduction in the number of involved parties. STEP bonds involve only the borrower, the Commission, the lender, the fiscal agent, and each party’s attorney. There are no underwriters or rating agencies involved in the process.
Commission and Bond Counsel
Each project is assigned to a Finance Associate in the
Multifamily Housing & Community Facilities Division of the Commission. The Finance Associate helps
the borrower through the bond process by reviewing the application,
arranging for meetings and conference calls, and by being the connector
between the various parties involved in the transaction. Bond
Counsel ensures that the bonds will be tax-exempt by overseeing the bond
development process, reviewing the 501(c)(3) status of the borrower, and
developing the bond documents.
Borrower and their Attorney
The borrower needs the
representation of an attorney who will sign an Opinion of Borrower’s
Counsel. The opinion states that the nonprofit is in good standing under the
laws governing its creation and existence and is duly authorized and
qualified under the laws of Washington State. The borrower may want their
attorney to review the bank’s loan documents. It is not necessary to have an
attorney skilled in tax-exempt bonds.
Lender and their Attorney
STEP lending partners can be
commercial banks, thrifts, and credit unions. Lenders use the same
underwriting criteria and determine the interest rate as they would for any
typical commercial loan. The lender’s attorney drafts the loan documents.
THE STEP PROCESS
The STEP process takes approximately two to four months to complete. The following are included in a STEP transaction:
Scoping Meeting
The first meeting that the Commission requires
is the scoping meeting, which is when the parties, including the borrower,
the lender, Commission staff, and bond counsel, meet to describe the
transaction. The purpose of this meeting is to: Identify and address any
issues that could affect the issuance of the bonds; outline and agree on the
structure of the transaction; identify each party’s responsibilities; and
develop a timeline for closing the transaction. A scoping meeting takes
place after Commission staff have determined that the nonprofit and project
are eligible for tax-exempt financing, after the lender makes a preliminary
written commitment and has determined the proposed terms, and after an
application and supporting documentation have been submitted by the
borrower. The borrower must provide a deposit of 1% of the expected bond
amount before or at the scoping meeting.
The Public Hearing
A public hearing, required by the Federal tax
code, is held for each project prior to financing. The Commission considers
public opinion in approving projects for bond financing. (Issues unrelated
to the financing, such as the environmental impact of the project, are not
considered by the Commission. The applicable land-use jurisdiction hears
these issues.) The public hearing notice identifies a project's potential
owner, its location, the type of project proposed, the amount of requested
financing, and the population the project will serve. The public hearing
notice is published in the local paper and is also forwarded to the
executive of the local jurisdiction in which the project is located (such as
the mayor, county executive, or city manager). At the hearing, the
borrower makes a brief presentation on the project to the Commissioners and
should be prepared to answer questions. The lender may attend the public
hearing to speak in support of the project and to answer questions, but is
not required. The Commission sends a summary of the public hearing to the
Governor for review. The Governor must approve the issuance of bonds. Please
see Commission staff for further information about the hearing.
Document Preparation
After the scoping meeting, the attorneys draft
the bond and loan documents and distribute them via email to all parties.
The documents are commented upon via email and Commission staff schedule one
or two conference calls to discuss the pending issues, any major changes to
the documents, and any roadblocks to closing. Documents must be in
“substantially final form” prior to the Finance Resolution.
Finance Resolution
The Commissioners make the final approval of
the project for bond financing at one of their regularly scheduled monthly
meetings. Generally, neither the borrower nor the lender needs to be
present for this meeting. Before the Resolution can be approved, the lender
must submit a Bond Purchase Letter to the Commission. This letter outlines
the amount and terms of the bond and acts as the lender’s commitment to
purchase the bond at closing.
Pre-Closing and Closing
At pre-closing the documents are signed;
therefore, all document signers must be present. Authorization for signers
needs to be completed before closing. The closing takes place at the offices
of the Commission’s bond counsel. All fees related to the cost of issuance
not yet paid and Commission pre-paid fees are due at closing. If the bank
and the project are in the Seattle area, the pre-closing and closing may
take place the same day. If it is out of the vicinity, the closing typically
happens the following day. Funds are distributed, and documents are recorded
on the day of closing.
PROGRAM COSTS
Application Fee
The application fee ranges from $400 to $5000
depending on the amount of bond financing.
Public Hearing Notice
The public hearing must be published in a
local newspaper. The cost of publication ranges from $200 to $1500 depending
on the location of the project.
Bond Issuance Fee
The Commission’s STEP cost of issuance fee is 1%
of the bond amount. This covers the cost of bond counsel and bond issuance.
Nonprofit Due Diligence Costs
A fee of $3,000 will be charged for a
review of nonprofit organizations who have not recently been through the
tax-exempt bond financing process.
Annual Fee
A fee of 0.25% of the outstanding bond amount is paid
annually to the Commission.
GETTING STARTED
Please feel free to contact our staff. We prefer to start working with nonprofits during the preliminary capital campaign planning stage. Many decisions made early on will affect your financing flexibility. We are here to help you through the bond financing process. The process outlined above may sound difficult, but we make it easy. If you are a nonprofit who needs to borrow funds for your capital project, you deserve a lower interest rate. By helping you save money on your debt service, we enable you to put those valuable dollars toward serving the mission of your organization.
CONTACT BANKS
Ask banks about their loan criteria and terms, and secure a preliminary bank loan commitment. Please ask lenders unfamiliar with our program to call us.