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Fair Value of Financial Instruments
 9 Months Ended
Sep. 30, 2024
Fair Value Measurements [Abstract]  
Fair Value of Financial Instruments

20. Fair Value of Financial Instruments

Current accounting guidance on fair value measurements establishes a framework for measuring fair value and provides for expanded disclosures about fair value measurements. The guidance:

•
Defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date; and
•
Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are defined as follows:

•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 inputs are unobservable inputs for assets or liabilities.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodologies used for the assets and liabilities measured at fair value on a recurring basis.

Investments in MRBs, Taxable MRBs and Bond Purchase Commitments

The fair value of the Partnership’s investments in MRBs, taxable MRBs and bond purchase commitments as of September 30, 2024 and December 31, 2023, is based upon prices obtained from third-party pricing services, which are estimates of market prices. There is no active trading market for these securities, and price quotes for the securities are not available. The valuation methodology of the Partnership’s third-party pricing services incorporates commonly used market pricing methods. The valuation methodology considers the underlying characteristics of each security as well as other quantitative and qualitative characteristics including, but not limited to, market interest rates, illiquidity, legal structure of the borrower, collateral, seniority to other obligations, operating results of

the underlying property, geographic location, and property quality. These characteristics are used to estimate an effective yield for each security. The security fair value is estimated using a discounted cash flow and yield to maturity or call analysis by applying the effective yield to contractual cash flows. Significant increases (decreases) in the effective yield would have resulted in a significantly lower (higher) fair value estimate. Changes in fair value due to an increase or decrease in the effective yield do not impact the Partnership’s cash flows.

The Partnership evaluates pricing data received from the third-party pricing services by evaluating consistency with information from either the third-party pricing services or public sources. The fair value estimates of the MRBs, taxable MRBs and bond purchase commitments are based largely on unobservable inputs believed to be used by market participants and requires the use of judgment on the part of the third-party pricing services and the Partnership. Due to the judgments involved, the fair value measurements of the Partnership’s investments in MRBs, taxable MRBs and bond purchase commitments are categorized as Level 3 assets.

The range of effective yields and weighted average effective yields of the Partnership’s investments in MRBs, taxable MRBs and bond purchase commitments as of September 30, 2024 and December 31, 2023 are as follows:

 

 

 

Range of Effective Yields

 

Weighted Average Effective Yields (1)

 

Security Type

 

September 30, 2024

 

December 31, 2023

 

September 30, 2024

 

 

December 31, 2023

 

Mortgage revenue bonds

 

2.3% - 7.8%

 

2.3% - 7.7% (2)

 

 

5.0

%

 

4.8% (2)

 

Taxable mortgage revenue bonds

 

6.3% - 11.1%

 

6.5% - 11.9%

 

 

8.1

%

 

 

8.8

%

Bond purchase commitments

 

n/a

 

4.1%

 

n/a

 

 

 

4.1

%
(1)
Weighted by the total principal outstanding of all the respective securities as of the reporting date.
(2)
Mortgage revenue bonds excludes the Provision Center 2014-1 MRB as the bankruptcy process was nearly complete.

Derivative Instruments

The effect of the Partnership’s interest rate swap agreements is to change a variable rate debt obligation to a fixed rate for that portion of the debt equal to the notional amount of the derivative agreement. The Partnership uses a third-party pricing service that incorporates commonly used market pricing methods to value the interest rate swaps. The fair value is based on a model that considers observable indices and observable market trades for similar arrangements and therefore the interest rate swaps are categorized as Level 2 assets or liabilities.

The effect of the Partnership’s interest rate cap is to set a cap, or upper limit, subject to performance of the counterparty, on the base rate of interest paid on the Partnership’s variable rate debt financings equal to the notional amount of the derivative agreement. The Partnership uses a third-party pricing service to value the interest rate cap. The inputs into the interest rate cap agreements valuation model include SOFR rates, unobservable adjustments to account for the SIFMA index, as well as any recent interest rate cap trades with similar terms. The fair value is based on a model with inputs that are not observable and therefore the interest rate cap is categorized as a Level 3 asset.

The effect of the Partnership’s total return swap was to lower the net interest rate related to the Partnership’s Secured Notes equal to the notional amount of the derivative agreement. The Partnership used a third-party pricing service to value the total return swap position and the inputs in the total return swap valuation model include changes in the value of the Secured Notes and the associated changes in value of the underlying assets securing the Secured Notes, accrued and unpaid interest, and any potential gain share amounts. The fair value was based on a model with inputs that are not observable and therefore the total return swaps were categorized as Level 3 assets or liabilities.

Assets measured at fair value on a recurring basis as of September 30, 2024 are summarized as follows:

 

 

Fair Value Measurements as of September 30, 2024

 

Description

 

Assets and Liabilities
at Fair Value

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

 

Significant Other
Observable Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets and Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bonds, held in trust

 

$

1,026,363,997

 

 

$

-

 

 

$

-

 

 

$

1,026,363,997

 

Mortgage revenue bonds

 

 

6,527,143

 

 

 

-

 

 

 

-

 

 

 

6,527,143

 

Taxable mortgage revenue bonds (reported within other assets)

 

 

19,858,516

 

 

 

-

 

 

 

-

 

 

 

19,858,516

 

Derivative instruments (reported within other assets)

 

 

2,704,180

 

 

 

-

 

 

 

2,704,180

 

 

 

-

 

Derivative swap liability (reported within other liabilities)

 

 

(3,166,639

)

 

 

-

 

 

 

(3,166,639

)

 

 

-

 

Total Assets and Liabilities at Fair Value, net

 

$

1,052,287,197

 

 

$

-

 

 

$

(462,459

)

 

$

1,052,749,656

 

The following table summarizes the activity related to Level 3 assets for the three and nine months ended September 30, 2024:

 

 

For the Three Months Ended September 30, 2024

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

Mortgage
Revenue Bonds (1)

 

 

Bond Purchase
Commitments

 

 

Taxable Mortgage
Revenue Bonds

 

 

Derivative
Instruments

 

 

Total

 

Beginning Balance July 1, 2024

 

$

1,002,052,025

 

 

$

46,238

 

 

$

15,926,321

 

 

$

-

 

 

$

1,018,024,584

 

Total gains (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (interest income and
   interest expense)

 

 

1,161,061

 

 

 

-

 

 

 

(3,073

)

 

 

-

 

 

 

1,157,988

 

Included in other comprehensive income

 

 

16,685,728

 

 

 

(46,238

)

 

 

938,468

 

 

 

-

 

 

 

17,577,958

 

Purchases and advances

 

 

36,512,542

 

 

 

-

 

 

 

4,000,000

 

 

 

-

 

 

 

40,512,542

 

Settlements and redemptions

 

 

(23,520,216

)

 

 

-

 

 

 

(1,003,200

)

 

 

-

 

 

 

(24,523,416

)

Ending Balance September 30, 2024

 

$

1,032,891,140

 

 

$

-

 

 

$

19,858,516

 

 

$

-

 

 

$

1,052,749,656

 

Total amount of gains for the
   period included in earnings attributable
   to the change in unrealized losses relating to assets or
   liabilities held on September 30, 2024

 

$

17,344

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

17,344

 
(1)
Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.

 

 

 

For the Nine Months ended September 30, 2024

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

Mortgage
Revenue Bonds (1)

 

 

Bond Purchase
Commitments

 

 

Taxable Mortgage
Revenue Bonds

 

 

Derivative
Instruments

 

 

Total

 

Beginning Balance January 1, 2024

 

$

930,675,295

 

 

$

197,788

 

 

$

21,460,288

 

 

$

265

 

 

$

952,333,636

 

Total gains (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (interest income and
   interest expense)

 

 

1,288,901

 

 

 

-

 

 

 

(12,017

)

 

 

(265

)

 

 

1,276,619

 

Included in earnings (provision for credit loss)

 

 

169,308

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

169,308

 

Included in earnings (gain on sale of
   mortgage revenue bond)

 

 

1,012,581

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,012,581

 

Included in other comprehensive income

 

 

(5,835,153

)

 

 

(197,788

)

 

 

842,634

 

 

 

-

 

 

 

(5,190,307

)

Purchases and advances

 

 

141,185,402

 

 

 

-

 

 

 

10,077,000

 

 

 

-

 

 

 

151,262,402

 

Sales

 

 

(8,221,234

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,221,234

)

Settlements and redemptions

 

 

(27,383,960

)

 

 

-

 

 

 

(12,509,389

)

 

 

-

 

 

 

(39,893,349

)

Ending Balance September 30, 2024

 

$

1,032,891,140

 

 

$

-

 

 

$

19,858,516

 

 

$

-

 

 

$

1,052,749,656

 

Total amount of gains (losses) for the
   period included in earnings attributable
   to the change in unrealized losses relating to assets or
   liabilities held on September 30, 2024

 

$

221,152

 

 

$

-

 

 

$

-

 

 

$

(265

)

 

$

220,887

 
(1)
Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.

Assets measured at fair value on a recurring basis as of December 31, 2023 are summarized as follows:

 

 

Fair Value Measurements as of December 31, 2023

 

Description

 

Assets and Liabilities
at Fair Value

 

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

 

Significant Other
Observable Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets and Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage revenue bonds, held in trust

 

$

883,030,786

 

 

$

-

 

 

$

-

 

 

$

883,030,786

 

Mortgage revenue bonds

 

 

47,644,509

 

 

 

-

 

 

 

-

 

 

 

47,644,509

 

Bond purchase commitments (reported within other assets)

 

 

197,788

 

 

 

-

 

 

 

-

 

 

 

197,788

 

Taxable mortgage revenue bonds (reported within other assets)

 

 

21,460,288

 

 

 

-

 

 

 

-

 

 

 

21,460,288

 

Derivative instruments (reported within other assets)

 

 

5,254,663

 

 

 

-

 

 

 

5,254,398

 

 

 

265

 

Derivative swap liability (reported within other liabilities)

 

 

(705,694

)

 

 

-

 

 

 

(705,694

)

 

 

-

 

Total Assets and Liabilities at Fair Value, net

 

$

956,882,340

 

 

$

-

 

 

$

4,548,704

 

 

$

952,333,636

 

 

The following tables summarize the activity related to Level 3 assets and liabilities for the three and nine months ended September 30, 2023:

 

 

For the Three Months ended September 30, 2023

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

Mortgage
Revenue Bonds (1)

 

 

Bond Purchase Commitments

 

 

Taxable Mortgage
Revenue Bonds

 

 

Derivative
Instruments

 

 

Total

 

Beginning Balance July 1, 2023

 

$

905,963,979

 

 

$

138,100

 

 

$

22,297,418

 

 

$

301,624

 

 

$

928,701,121

 

Total gains (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (interest income and
   interest expense)

 

 

76,047

 

 

 

-

 

 

 

(6,050

)

 

 

1,215,389

 

 

 

1,285,386

 

Included in other comprehensive income

 

 

(46,097,421

)

 

 

(250,548

)

 

 

(1,676,780

)

 

 

-

 

 

 

(48,024,749

)

Purchases and advances

 

 

7,665,000

 

 

 

-

 

 

 

4,000,000

 

 

 

-

 

 

 

11,665,000

 

Settlements and redemptions

 

 

(8,561,655

)

 

 

-

 

 

 

(7,002,925

)

 

 

(1,292,000

)

 

 

(16,856,580

)

Ending Balance September 30, 2023

 

$

859,045,950

 

 

$

(112,448

)

$

17,611,663

 

 

$

225,013

 

 

$

876,770,178

 

Total amount of gains (losses) for the
   period included in earnings attributable
   to the change in unrealized losses relating to assets
   or liabilities held on September 30, 2023

 

$

17,344

 

 

$

-

 

 

$

-

 

 

$

(74,463

)

 

$

(57,119

)
(1)
Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.

 

 

 

For the Nine Months Ended September 30, 2023

 

 

 

Fair Value Measurements Using Significant

 

 

 

Unobservable Inputs (Level 3)

 

 

 

Mortgage
Revenue Bonds (1)

 

 

Bond Purchase Commitments

 

 

Taxable Mortgage
Revenue Bonds

 

 

Derivative
Instruments

 

 

Total

 

Beginning Balance January 1, 2023

 

$

799,408,004

 

 

$

98,929

 

 

$

16,531,896

 

 

$

331,240

 

 

$

816,370,069

 

Total gains (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings (interest income and
   interest expense)

 

 

231,376

 

 

 

-

 

 

 

(18,149

)

 

 

3,844,528

 

 

 

4,057,755

 

Included in other comprehensive income

 

 

(36,662,853

)

 

 

(211,377

)

 

 

(2,213,376

)

 

 

-

 

 

 

(39,087,606

)

Purchases and advances

 

 

119,452,688

 

 

 

-

 

 

 

10,319,875

 

 

 

-

 

 

 

129,772,563

 

Settlements and redemptions

 

 

(23,383,265

)

 

 

-

 

 

 

(7,008,583

)

 

 

(3,950,755

)

 

 

(34,342,603

)

Ending Balance September 30, 2023

 

$

859,045,950

 

 

$

(112,448

)

 

$

17,611,663

 

 

$

225,013

 

 

$

876,770,178

 

Total amount of gains for the
   period included in earnings attributable
   to the change in unrealized gains (losses) relating to assets or
   liabilities held on September 30, 2023

 

$

51,656

 

 

$

-

 

 

$

-

 

 

$

(88,722

)

 

$

(37,066

)
(1)
Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.

Total gains and losses included in earnings for the derivative instruments are reported within “Net result from derivative transactions” in the Partnership's condensed consolidated statements of operations.

As of September 30, 2024 and December 31, 2023, the Partnership utilized a third-party pricing service to determine the fair value of the Partnership’s GILs, taxable GILs, and construction financing property loans that share a first mortgage lien with the GILs, which is an estimate of their market price. The valuation methodology of the Partnership’s third-party pricing service incorporates commonly used market pricing methods. The valuation methodology considers the underlying characteristics of the GILs and property loans as well as other quantitative and qualitative characteristics including, but not limited to, the progress of construction and operations of the underlying properties, and the financial capacity of guarantors. The valuation methodology also considers the probability that conditions for the execution of forward commitments to purchase the GILs will be met. Due to the judgments involved, the fair value measurements of the Partnership’s GILs, taxable GIL, and construction financing property loans are categorized as Level 3 assets. The estimated fair value of the GILs and taxable GILs was $207.9 million and $2.8 million as of September 30, 2024, respectively. The estimated fair value of the GILs and taxable GILs was $225.7 million and $12.1 million as of December 31, 2023, respectively. The fair value of the construction financing property loans approximated amortized cost as of September 30, 2024 and December 31, 2023.

As of September 30, 2024 and December 31, 2023, the Partnership utilized a third-party pricing service to determine the fair value of the Partnership’s financial liabilities, which are estimates of market prices. The valuation methodology of the Partnership’s

third-party pricing service incorporates commonly used market pricing methods. The valuation methodology considers the underlying characteristics of each financial liability as well as other quantitative and qualitative characteristics including, but not limited to, market interest rates, legal structure, seniority to other obligations, operating results of the underlying assets, and asset quality. The financial liability values are then estimated using a discounted cash flow and yield to maturity or call analysis.

The Partnership evaluates pricing data received from the third-party pricing service, including consideration of current market interest rates, quantitative and qualitative characteristics of the underlying collateral, and other information from either the third-party pricing service or public sources. The fair value estimates of these financial liabilities are based largely on unobservable inputs believed to be used by market participants and require the use of judgment on the part of the third-party pricing service and the Partnership. Due to the judgments involved, the fair value measurements of the Partnership’s financial liabilities are categorized as Level 3 liabilities. The TEBS financings are credit enhanced by Freddie Mac. The TOB trust financings are credit enhanced by either Mizuho or Barclays. The table below summarizes the fair value of the Partnership’s financial liabilities as of September 30, 2024 and December 31, 2023:

 

 

 

September 30, 2024

 

 

December 31, 2023

 

 

 

Carrying Amount

 

 

Fair Value

 

 

Carrying Amount

 

 

Fair Value

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt financing

 

$

1,062,407,615

 

 

$

1,065,585,120

 

 

$

1,015,030,066

 

 

$

1,019,218,351

 

Secured lines of credit

 

 

44,400,000

 

 

 

44,400,000

 

 

 

33,400,000

 

 

 

33,400,000

 

Mortgages payable

 

 

1,690,000

 

 

 

1,690,000

 

 

 

1,690,000

 

 

 

1,690,000