Developers may reduce the interest rate by paying the cost of issuance out-of pocket, by approximately 15 basis points. The actual discount in the rate will be provided prior to bond issuance. The election to pay for the cost of issuance out of pocket must be made two weeks prior to the date of bond pricing. The payment of same must be made one week prior to bond pricing. If the interest rate on the investments is greater than the bond yield, positive arbitrage will result, and conversely, if the investment rate is lower than the bond yield, negative arbitrage is created.
Arbitrage is market driven.
The actual amount of arbitrage is not known until a construction draw schedule is provided, the bonds are priced and the investment contract is awarded. The developer is quoted a best guess prior to pricing. Approximately two weeks prior to pricing bonds, the Chief Financial Officer will prepare a detailed document which explains the costs of issuance and negative arbitrage calculations pursuant to the deal. Developers using permanent financing only will be required to pay for negative arbitrage two weeks prior to the issuance of bonds. This expense may be reimbursed at the time that the loan is made, provided there is sufficient funding in the capital budget.