Tax‑exempt bond executions are reemerging as one of the most powerful tools in the affordable housing capital stack as higher interest rates magnify the value of the federal tax exemption and allow sophisticated sponsors to materially cut borrowing costs and stretch proceeds, according to NewPoint Real Estate Capital. When taxable rates rise, investors place a premium on tax‑exempt income, keeping tax‑exempt bond yields meaningfully below comparable taxable borrowing rates and creating a wider, more actionable spread for borrowers.
Rob Wrzosek, president of Affordable Strategies at NewPoint Real Estate Capital, told GlobeSt.com that this spread is translating directly into lower debt service costs, higher mortgage proceeds and reduced subsidy needs for affordable housing deals.
"In today's environment, the economic advantage of tax‑exempt financing is materially stronger than it was during the low‑rate period prior to 2022," Wrzosek said. "Put simply: long‑term tax‑exempt rates are typically 20% to 30% lower than taxable rates, and as overall rates rise, the value of that discount becomes even more impactful."
Wrzosek said sponsors are stacking tax‑exempt bonds with Fannie Mae, Freddie Mac and FHA tools to get deals done in the current rate environment. He noted that borrowers are increasingly returning to structures that were more common before the Global Financial Crisis, pairing tax‑exempt bond executions with long‑term financing programs from the agencies or FHA.
In these structures, the underlying mortgage is ultimately securitized into a government‑sponsored enterprise or Ginnie Mae mortgage‑backed security and used to secure a stand‑alone municipal bond issuance.
By combining tax‑exempt bonds with agency or FHA credit enhancement and securitization platforms, sponsors can lower all‑in borrowing costs, increase loan proceeds, reduce debt service and improve overall project feasibility compared with traditional taxable structures, according to Wrzosek. "This structure is gaining renewed traction because it better aligns with investor demand," he said.
Before the recent run‑up in rates, GNMA executions were typically sold into the taxable market, leaving the value of the tax exemption untapped. At the same time, Wrzosek said GSE executions were often structured as "tax‑exempt loans," which did not price as efficiently as the roughly $4 trillion municipal bond market, which prefers debt structured as bonds.
Today, sponsors are reintroducing true bond structures that fully capture the tax‑exempt benefit and price more efficiently with municipal investors, he said.
NewPoint has positioned itself to capitalize on this shift by taking what Wrzosek describes as an entrepreneurial approach to bond credit enhancement and deal structuring. "Unlike many market participants who operate in a single role within the capital stack, NewPoint has the ability to purchase tax‑exempt senior bonds, invest in tax‑exempt subordinate bonds and serve as the Fannie Mae, Freddie Mac or FHA lender for the underlying mortgage financing," he said.
That flexibility allows NewPoint to structure transactions holistically and respond quickly as market conditions change, he said. For example, NewPoint can acquire unrated tax‑exempt bonds based on its own underwriting, often within 30 to 60 days, and structure those bonds so that the interest rate steps down once a GSE or GNMA mortgage‑backed security is issued.
"This approach enables borrowers to secure financing and move developments forward quickly while ultimately capturing the lower long‑term cost of agency or FHA financing," Wrzosek said.
Because NewPoint participates across multiple levels of the capital stack, it can also tailor subordinate debt to meet Fannie Mae, Freddie Mac and FHA requirements while helping borrowers maximize proceeds and preserve eligibility for those executions, according to Wrzosek. The result, he said, is greater execution certainty, faster decision‑making and more efficient financing structures that better match each project's specific capital needs.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.