Vice President and CFO Maria Green explains CIL's 100% Financing Model.

CIL was able to close on our first bank direct purchase bond in 2017.  It’s easy to get lost in the arcane language of the financial sector with terms like variable rate demand bond, letter of credit enhancement, general obligation, cross-collateralization versus cross-default, tax-exempt conduit issuers, trustees…and the list goes on.

All of these technical terms can hide the importance of bonds and what they allow us to do for our partner agencies.  Let’s pull the curtain back and see how this method can benefit our clients, the states, and the individuals who live in the homes we develop.

The simplest way to think of a bond, is like a mortgage on your house.  So, here’s an overview of how the system often works for our partner agencies.

A service provider agency might get a request from the State to find and operate a home for four individuals in a particular town, or area.  The agency comes to us and tells us what they need.  Our developers find an appropriate building, or lot upon which to build, and establish a budget for the cost of providing the home.  Once approved, we take care of the design, permitting, and construction of the new home.  Once it’s ready, the agency goes through the licensing procedure and the individuals move into their new home.

The cost of the home and interest to service the loan is converted into a fixed monthly lease cost for the agency.  It’s like a 30-year mortgage on your house.  You borrow the money to purchase your home and you agree to pay a monthly mortgage.  The nuance here is just that CIL borrows the money and the agency pays a monthly lease to CIL, as the owner of the property.  In reality, it’s even more like the mortgage analogy, because once we’ve paid off the money we borrowed, we donate the home to the agency and then they own it – just like paying off your mortgage.

That’s pretty straightforward, but behind that simple process, there are many hidden benefits.  First of all, there was no mention of a “down payment” because there is no need for one.  Typically, an agency working on their own might have to put down 20 to 30% of the cost before borrowing the money for a home, but through the bond process, CIL is able to provide 100% financing of the costs.

Another great advantage is that the provider agency doesn’t have to worry about construction financing on new homes.  If you were planning to get a mortgage for a new house you want to build, you would find out that the mortgage is the “permanent” financing for after it’s completed and can be used as collateral.  However, while it’s being built you would need a construction loan (sometimes called a bridge loan).  CIL takes care of this by having access to a $55 million construction line of credit, so again, no issue for the agency.

It just keeps getting better, though, because CIL and the agency sign a lease with fixed payments for the duration of the lease term, based on an assumed interest rate.  If the rates that CIL gets in the bond market are lower than that assumed rate, then the bond is paid off early.  Either way, when the bond is paid off, CIL donates the home to the agency.  The State can benefit, too, because if we pay off (retire) the bond early, the State doesn’t have to continue reimbursing the payments.

The reason we’re able to do all of this is because CIL is working for multiple agencies and we can combine projects and costs to package them for financing through the bond market.  The cost of issuing a bond can be very high – several hundred thousand dollars.  By combining many properties into a single bond, CIL can spread those costs out and include them in the fixed lease payments.

Currently, CIL has bonds supporting hundreds of projects, totaling more than $135 million.  Our first two bonds to be retired were paid off several years early, resulting in savings of more than $40 million for the State of Connecticut.   The properties were donated, by CIL, to the provider agencies who leased them.

This type of 100% financing model, using the tax-exempt bond market, isn’t always the best solution for our partner not-for-profit agencies, but when it is, it can truly benefit everyone involved.   We’re proud to be able to offer this type of solution.