Title 9 Part 1643

Accounting entries and procedures pertaining to the financing of State-aided low rent public housing projects are described in this Part. Information with respect to making out the requisition papers—the housing loan voucher and the certificate of purposes—which are a part of every financing transaction will be found in Part 1646, Development Period Accounting. State-aided projects are developed under the terms of a loan contract wherein the State agrees to lend, and the local agency agrees to borrow, the project development cost. The State raises the funds it has agreed to lend to the local agency by issuing State housing bonds. The bond issue is termed permanent financing. However, prior to issuing bonds, the State may raise the funds it has agreed to lend to the local agency by issuing short-term notes or, in lieu thereof, it may authorize the local agency to issue its own short-term notes. In the latter case, the local agency borrows directly from private investors in anticipation of the loan to be made by the State. The issue of short term notes, whether by the State or by the local agency, prior to the issue of bonds, is termed temporary financing.

The permanent financing of State-aided projects is achieved through the issue, by the State, of its housing bonds. These bonds represent direct and general obligations of the State of New York, rather than those of the local agency. The local agency is, however, bound by the loan contract not only to repay the sums it has borrowed from the State, with interest, but also to make the payments of principal and interest at such times and in such amounts as will enable the State to meet the charges for interest and amortization on the bond issue. (See Part 1644, Debt Service.) As evidence of its indebtedness for advances made by the State out of the proceeds of a bond issue, the local agency issues its certificate of indebtedness. The timing of the issue of bonds by the State is entirely within the discretion of the State Comptroller, subject to the limitations, described hereafter, of the State Finance Law with respect to the refunding of short-term notes issued by the State, and of Public Housing Law with respect to the refunding of short-term notes issued by the local agency.

The method of temporary financing which will be employed in connection with the development of a given project is, again, entirely within the discretion of the State Comptroller. Short term notes issued by the State in connection with temporary financing may have a maturity not in excess of one year from the date of issue and may be refunded, upon maturity, through the sale of similar short-term notes. The State Finance Law, however, places a limitation of two years, from the respective dates of original issue, on the period during which such refunding operations may be conducted. Eventually, short-term notes issued by the State to raise funds to be advanced to local agencies for project development are refunded out of the proceeds of a housing bond issue by the State, but they may also be refunded, prior to the issue of bonds, out of the proceeds of an issue of short-term notes by the local agency direct to private investors. No refunding or short-term notes may occur after bonds have been issued for same. The evidence of the local agency's indebtedness to the State, when the advances by the State represent the proceeds of an issue of short-term notes by the State, is a certificate of indebtedness, identical in form with the certificate of indebtedness issued for the proceeds of a bond issue.

Local agencies may be authorized or directed by the division to issue their own short term notes directly to private investors, such as banks, to finance the cost of project development, prior to the issue of housing bonds by the State. These notes are termed temporary loan notes and are issued in anticipation of the loan to be made by the State. Temporary loan notes may have a maturity not in excess of one year from the date of issue, but subject to prepayment in advance of maturity, and may be refunded, upon maturity, through the sale of a similar issue of short-term notes by the local agency, subject to the limitations of the Public Housing Law. Where a project has been declared substantially completed, the local agency may only issue temporary loan notes that mature within a period not to exceed one year beyond the date of maturity of notes outstanding on the date of substantial completion. Temporary loan notes may also be refunded out of advances made by the State representing either the proceeds of a bond issue or an issue of short-term notes by the State. No refunding of temporary loan notes, may, however, take place after the bonds have been issued for same. The Public Housing Law further provides that the proceeds of an issue of short-term notes by the local agency in anticipation of a loan from the State shall be used only for the purposes for which the proceeds of the loan itself may be used.

Where the temporary financing of project cost is by borrowing from private investors, such as banks, the security for the temporary loan notes issued is a requisition agreement between the State and the local agency and an advance loan note, executed simultaneously with the temporary loan notes and deposited in escrow. The advance loan note is made payable by the local agency to the State of New York, is dated as of the date of maturity of the temporary loan notes for which the advance loan note is the security, matures one year from such date and is made out in a principal amount, rounded off to the nearest $1,000, sufficient to pay the principal of and the interest on the temporary loan notes. The requisition agreement, in turn, specifies that the State will purchase the local agency's advance loan note on the date of maturity of the temporary loan notes and that the proceeds of such purchase will be applied to the payment of the principal of and the interest on the temporary loan notes, the balance, if any, being paid to the local agency for deposit in the project's development fund. In the event that the temporary loan notes are refunded, upon maturity, by a similar issue of temporary loan notes, the old requisition agreement and advance loan note are cancelled and replaced by a new requisition agreement and advance loan note securing the new issue of temporary loan notes. In the event the State purchases the advance loan note, upon maturity of the temporary loan notes, out of the proceeds of a bond issue or an issue of short-term notes, the division will hold the advance loan note against the receipt of the local agency's certificate of indebtedness. The advance loan note will thereupon be cancelled and returned to the local agency.

Entry (2):

Debit: Account 1111, Development Fund $XXX

Credit: Account 2312, Certificates of Indebtedness Unissued $XXX

Note:

The certificates of indebtedness issued and outstanding will appear on financial statements as the difference between the credit balance of account 2311, Certificates of Indebtedness Authorized, and the debit balance of account 2312, Certificates of Indebtedness Unissued.

This resolution is passed, prior to the initial financing, at the same time as the resolution authorizing the contracting of indebtedness and the issuance of certificates of indebtedness. Passage of this resolution indicates that the local agency anticipates borrowing funds required for the temporary financing of project cost from private investors, rather than from the State. The resolution gives the form of the requisition agreements and advance loan notes but, unlike the resolution authorizing the contracting of indebtedness, does not authorize the officers of the local agency to execute requisition agreements and issue advance loan notes, as required. Each requisition agreement and each issue of advance loan notes must be authorized by separate resolutions of the local agency.

Accounting entry: No accounting entry is made to reflect passage of this resolution.

The passage of this resolution represents the second step in the initial financing, where funds are to be borrowed from private investors. As previously noted, the advance loan note should be authorized in an amount sufficient to pay the principal of and interest on the temporary loan notes for which it is the security. Inasmuch as the advance loan note is executed in advance of the issuance of the temporary loan notes, at which time the actual rate of interest may not yet have been fixed, an estimated rate will be used for the purposes of computing the interest to be included in the principal amount of the advance loan note. For example, assume an advance loan note is being prepared in connection with an issue of $500,000 principal amount of temporary loan notes, which will have a maturity of six months from date of issue. The interest rate on the latter has not yet been fixed by negotiation with the private investors or through competitive bidding. Assume that reference to the financial columns of the newspapers or inquiry addressed to the division establishes the fact that recent issues of short term paper by local agencies have carried interest rates of one per cent per annum. Application of this rate to the temporary loan notes to be issued would give an estimated interest cost of $2,500 which is rounded off to the next higher $1,000 and added to the principal amount of the temporary loan notes to give an advance loan note in the amount of $503,000.

Accounting entry: No accounting entry is made to reflect passage of the resolution authorizing the execution of the requisition agreement and the execution and deposit, in escrow, of the advance loan note. The execution and deposit, in escrow, of the advance loan note should be the subject of a balance sheet footnote to the effect that temporary loan notes outstanding in the amount of $______ are secured by a requisition agreement and an advance loan note in the amount $_____, held in escrow by the ________ bank.

Accounting entry: No accounting entry is made to reflect the passage of this resolution.

Assuming that the local agency is to borrow $500,000, the accounting entry for the receipt of the proceeds of the initial issue of temporary loan notes is made through the cash receipts register, as follows:

Entry (3):

Debit: Account 1111, Development Fund $500,000

Credit: Account 2120, Temporary Loan Notes Payable $500,000

Note:

Premiums, if any, received on the sale of the notes will be simultaneously credited through the cash receipts register or general journal, as described in section 1644-2.5.

Amendments which do not affect the aggregate maximum principal amount of the loan contract are not reflected in the books of account. Where the effect of the amendment is to change the amount of the loan, appropriate resolutions amending the resolution authorizing the contracting of indebtedness (see § 1643-2.2[b]) and the resolution authorizing the execution of requisition agreements and the issuance of advance loan notes in the aggregate maximum principal amount of the loan contract (see § 1643-2.4[a]) are required. A journal entry adjusting account 2311, Certificates of Indebtedness Authorized, and account 2312, Certificates of Indebtedness Unissued, for the difference in the amount of the loan contract, as amended, is then made. No entry should be made until the amended contract has been approved by the division and executed.