  STEP FAQ
for Lenders
What is STEP?
(Streamlined tax-exempt
placement)
STEP is a financial tool Commission staff developed to
convert a taxable loan to a tax-exempt bond. It's purpose is to make
the borrowers interest payments tax-exempt income to the bank. The
interest savings are passed back to the borrower in the form of a
lower interest rate. STEP uses a standardized set of documents to save
time and reduce the cost.
What banks are eligible
for STEP?
Nearly every major bank in
Washington State has made a STEP loan, and a wide range of smaller
community banks have also participated (list of participating banks
to be added). At the Commission, our staff is experienced working
with community lenders who are unfamiliar with tax-exempt financing
and can help them get up to speed.
Who is involved with a
STEP transaction?
The borrower and their
attorney, the lender and their attorney, the Commission, and bond
counsel. Other parties may be involved with securing the loan, title
recording, construction or rehabilitation, etc. but would not be
directly involved with the STEP transaction.
What is the interest
rate on a STEP bond?
The borrower and the lender
negotiate the interest rate. The Commission does not set the interest
rate.
How much does
a STEP transaction cost?
Please contact us about fees.
What is the difference
between STEP and STEP Home?
The two financing models are
the same in concept and use similar documents. The most important
difference between the two models is that STEP Home has higher fees
because projects under the STEP Home have more complicated
transactions.
What is the typical size
of a STEP loan?
There is no required maximum
or minimum loan amount for STEP; however it is generally most
cost-effective for projects between $250,000 and $3 million. Since
funds for bonds under the STEP program come from a single source,
banks are often unwilling to participate when the loan amounts become
large. Furthermore, larger projects (i.e., over $3 million or so) are
usually able to achieve better interest rates through a more
conventional, public sale of tax-exempt bonds.
What are the interest
rates in STEP?
The participating lender sets the interest rate based on the cost of
funds for that lending institution, the yield it wants to make, and
the appetite the lender has for tax-exempt paper in its income
portfolio. Interest rates typically are one to two points below a
conventional loan. The interest rate is usually fixed sometime before
closing.
Are these bonds
“bank-eligible”?
Bonds are called
“bank-eligible” when a small issuer issues the bonds. The Commission
issues hundreds of millions of bonds statewide annually and is not a
small issuer. Therefore, its bonds are not bank-eligible. As a result,
banks may not realize the full tax-exempt benefit of bonds that the
Commission issues, and so the interest rates for the bonds are
somewhat higher than if they were bank-eligible.
Can the loan have a
variable interest rate?
Within certain parameters,
the interest rate can be reset based on a formula negotiated before
closing. If the lender is acting as the paying agent, the rate can be
reset as often as each calendar month. If the transaction takes place
with a paying agent, the rate can not be re-set more than once a year.
How are the loans
amortized?
The lender sets the term and amortization for the loan based on its
own underwriting criteria.
If the lender is the paying agent, the bank calculates the
amortization.
Are
construction loans allowed under STEP?
Yes, in one of two ways: as fully funded and disbursed at closing or
as fully funded and disbursed periodically.
Fully funded and disbursed at closing means that all bond proceeds are
used at closing, and no funds are held for a future date.
Fully
funded and disbursed periodically means that the entire bond amount is
issued at once, but part of the funds are deposited with the paying
agent in a tax-free money market fund for future use. The borrower may
use the funds over the next three years to pay for bank-authorized
draws. Since the interest earned in such an account may be less than
the interest rate paid on the loan (also called negative arbitrage),
the borrower needs to compare the option of paying off the
construction loan with the STEP bond versus disbursing the bond funds
periodically to pay construction expenses.
May we do swaps or other
derivatives?
Generally, swaps and other derivatives are not possible under STEP
unless they are outside the bond transaction. Please contact
Commission staff for further information if you are looking to use a
derivative product.
The STEP Process
The STEP process takes approximately two to four months to complete.
The following are included in a STEP transaction:
What is a 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
-
Develop a timeline for closing the
transaction
When are we ready to
have a scoping meeting?
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 1% of the expected bond amount before or at the scoping
meeting.
Does the borrower have
to have an 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.
When do we negotiate the
regulatory agreement for a housing project?
For-profit housing projects and some types of nonprofit housing
projects require a Regulatory Agreement. If you are a nonprofit
seeking financing for a residential project, please contact the
Commission staff to see if your project has regulatory requirements. A
Regulatory Agreement sets the low-income set-asides and addresses
other compliance concerns for housing. A separate meeting to negotiate
this document may be held. People who attend this meeting typically
are the compliance officer from the Compliance Division, the
borrower, the Commission’s counsel, and the borrower’s counsel.
A staff member from the Capital Projects Division may attend --
usually only if a problem is anticipated, or the transaction has some
special considerations. These meetings are typically held at
the offices of the Commission’s bond counsel. For more information
about low-income set-asides, the Regulatory Agreement, and other
compliance issues, please contact the Commission’s Compliance
Division.
What happens at 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. Housing
project developers are expected to present information about the
affirmative marketing activities planned for the project. The lender
may attend the public hearing to speak in support of the project and
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.
What happens during a
status or document review call?
Typically, after draft
documents are distributed to all parties, but before the Commission
passes a financing resolution, all parties join in a telephone call to
discuss the pending issues, the documents, and any roadblocks to
closing. Commission staff initiates this call.
What is in the bond
purchase letter?
The bond purchase letter,
which is from the lender and is addressed to the Commission, outlines
the important points of the transaction, such as:
-
Bond title
-
Bond amount
-
Anticipated closing date
-
Maturity date
-
Interest rate and how it will be set
and re-set, if applicable
-
Any other conditions the lender
requires
If the bank
needs a sample bond purchase letter, Commission staff can provide one
by mail or electronically.
When does the
lender provide the bond purchase letter?
The lender provides a final bond purchase letter before the Commission
passes its Finance Resolution authorizing the bonds to be issued.
What happens when the
Commission passes a bond Finance Resolution?
The Commissioners make the
final approval of the project for bond financing. Generally, neither
the borrower nor the lender needs to be present for this meeting.
What happens at the
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.
What’s a Closing
Memorandum?
The Closing Memorandum outlines the steps and flow of money necessary
to close the bonds. Each step in the memo includes the date the action
is to take place, a description of this action, and a breakout of the
wire instructions, if applicable. Commission staff prepares this
document.
Can I get a copy of the
finalized bond documents after we close?
Bond counsel provides a copy of all the documents in a bound transcript
(at additional expense) or CD-ROM for the borrower and the lender
after closing is completed.
How does the borrower
make payments on the STEP loan?
The paying agent
automatically withdraws payments from an account identified by the
borrower on the designated payment date. The borrower needs to
ensure that adequate funds to cover loan payments are available in the
account.
Can the borrower make
extra payments?
If the lender is the paying agent, the borrower may make extra
payments in accordance with the loan agreement. The Commission must be
notified, and the lender must run a new amortization schedule.
If a third
party paying agent is involved, borrowers may pay additional money on
the loan no more than twice a year, on January 1 and July 1, as long
as that is allowed by the lender. The borrower must contact the paying
agent and the Commission so that a new amortization schedule can be
run and the correct debit can be made from the account.
After the bonds are
issued, can we modify the transaction?
No changes to the terms of the loan can be made without first
consulting the Commission. Changing the terms and conditions may affect
the tax-exempt status of the bond.
This page was modified on 04/13/2006. |
