Tax-exempt bond financing, used primarily to support the common good in areas like healthcare, affordable housing, education and many nonprofit organizations, allows eligible borrowers to raise funds for capital expenses. At a time when affordable housing is a major focus in the Puget Sound, tax-exempt bond financing can help the community thrive.
Typically, state and other government entities will issue tax-exempt bonds, which lowers the effective interest rates banks can offer to the recipients in order to finance capital needs. Without tax-exempt bond financing, it would be too expensive for many borrowers to go through normal bank financing procedures.
Before privately-held tax-exempt bond financing, banks would predominantly issue a standby letter of credit to support private activity bonds and sell them on the bond market to private or public investors. This model hurt the industry as a whole during the recession. As the market recovered, changes were made to make it easier for banks to purchase government-issued bonds. They assume the loan and offer below-market financing, and projects are realized.
For example, affordable housing typically does not have a strong revenue base, as it rents to lower-income households. It needs a lower debt-to-income ratio, making the tax-exempt bond financing model ideal. The borrower pays interest that’s below market rates; the bank invests in the bonds and is able to write off the interest income.
Most regional and national banks offer tax-exempt bond financing, but you don’t generally see this expertise in smaller community banks. Relationships with the Washington State Housing and Finance Commission and the Washington State Healthcare Facilities Authority are key, as they provide the bond financing structure. We have this expertise at Heritage Bank.
Our experts have realized a number of tax-exempt bond financing projects in the community. The Foss Home Village in North Seattle and the Vancouver Family Housing in Vancouver, Washington are two examples of how this financing has supported affordable housing and assisted living projects in our communities.
It’s these types of projects in the community that make it attractive to work with a community bank—relationship, service and accessibility; it’s a competitive advantage.
About the Author
Carlos Guangorena is the senior vice president, regional commercial banking manager at Heritage Bank. He has been with Heritage since 2012 but has been in the banking industry since 1980. Carlos is responsible for all of the commercial lending, structure and pricing in the Seattle and Everett regions, including commercial real estate term loans, construction loans, lines of credit, tax-exempt financing and commercial real estate for affordable housing development and preservation and nonprofit community facilities.