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Copyright © 2012 Novogradac & Company LLP 1 Building an Affordable New York Thursday, May 12, 2011 13 th Annual Conference Wednesday, May 16, 2012 Building an Affordable New York Thursday, May 12, 2011 13 th Annual Conference Wednesday, May 16, 2012 Panelists: John Kelley, Esq. Holland & Knight, LLP Benathan Upshaw CB Emmanuel Learn the Basics: Tax Exempt Bonds Moderator/Presenter: Charles A. Rhuda, III Novogradac & Company LLP

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Copyright © 2012 Novogradac & Company LLP1

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Panelists:

John Kelley, Esq.Holland & Knight, LLP

Benathan UpshawCB Emmanuel

Learn the Basics:Tax Exempt Bonds

Moderator/Presenter:

Charles A. Rhuda, IIINovogradac & Company LLP

Copyright © 2012 Novogradac & Company LLP2

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements

Copyright © 2012 Novogradac & Company LLP3

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements

Copyright © 2012 Novogradac & Company LLP4

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Can you lower your rent to $400/month?

Developer/Owner

Sorry.

“Affordable Housing”

DEBT

Total Project Costs

Copyright © 2012 Novogradac & Company LLP5

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

InvestorTax Liability

Section 42

“Low Income Housing Tax Credit”

Developer/Owner

x 10 years

• Income limits• Rent limits

• Partnership• LLC• S-Corp

Tax LiabilityEquity

Total Project Costs

DEBT

Copyright © 2012 Novogradac & Company LLP6

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

InvestorTax Liability

Section 42

“Low Income Housing Tax Credit”

Developer/Owner

x 10 years

• Income limits• Rent limits

• Partnership• LLC• S-Corp

Tax LiabilityEquity

Bonds

Total Project Costs

Bonds

Low-Interest Debt

DEBT

Copyright © 2012 Novogradac & Company LLP7

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

NY population: 2012ApproxxApprox

19.47 mil$95

$1.85 bil

NY population: 2012ApproxxApprox

Private ActivityTax-Exempt Bonds

19.47 mil$2.20

$42.8 mil

Section 42

State Allocating Agency

LIHTCs

LIHTCs

Greater of $95 per capita OR $284,560,000$1.85B

Copyright © 2012 Novogradac & Company LLP8

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

4% credits

*x 10 =$108 Mil*

mathematical potential if nearly all bonds were issued for affordable housing;actual credits utilized will be far less than $108 million

Private ActivityTax-Exempt Bonds

Section 42

State Allocating Agency

LIHTCs

LIHTCs

9%, per capita, “competitive” credits

$1.85BLIHTCs

Developer/Owner

Copyright © 2012 Novogradac & Company LLP9

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

x

x

x

x

x

x 10$1.44 Mil

$5.86 Mil75%

$4.40 Mil3.28%$144k

10$1.54 Mil

$4.81 Mil100%

$4.81 Mil3.20%$154k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

B

= $10.67 Mil

$2.98 Mil

A

Total project costs = $11.2 Mil

Developer/Owner

Copyright © 2012 Novogradac & Company LLP10

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

9%$433k

9%$396k

$3.96 Mil $4.33 Mil

x

x

x

x

x

x 10

$5.86 Mil75%

$4.40 Mil

10

$4.81 Mil100%

$4.81 Mil

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

B

= $10.67 Mil

A

Total project costs = $11.2 Mil

Developer/Owner

$8.29 Mil

Copyright © 2012 Novogradac & Company LLP11

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Developer/Owner

Copyright © 2012 Novogradac & Company LLP12

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Developer/Owner

InvestorTax Liability

Fund “Upper Tier”

“Lower Tier”

LP

Copyright © 2012 Novogradac & Company LLP13

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Developer/Owner

InvestorTax Liability

Fund

Syndicator

LP

GP

GP LP

Copyright © 2012 Novogradac & Company LLP14

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

$3.96 Mil $4.33 Mil

x

x

x

x

x

x 10

$5.86 Mil75%

$4.40 Mil

10

$4.81 Mil100%

$4.81 Mil

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

B

= $10.67 Mil

A

Total project costs = $11.2 Mil

9%$396k

9%$433k

$8.29 Mil

$7.0M

$11.2 Mil

Equity 63%

x

Copyright © 2012 Novogradac & Company LLP15

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

BA

Total project costs = $11.2 Mil

$2.5M

$11.2 Mil

Equity 22%

x

x

x

x

x

x

x 10$1.44 Mil

$5.86 Mil75%

$4.40 Mil3.28%$144k

10$1.54 Mil

$4.81 Mil100%

$4.81 Mil3.20%$154k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

= $10.67 Mil

$2.98 Mil

Why go the bond route?

Copyright © 2012 Novogradac & Company LLP16

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

BA

Total project costs = $11.2 Mil

$2.5M

$11.2 Mil

Equity 22%

x

x

x

x

x

x

x 10$1.44 Mil

$5.86 Mil75%

$4.40 Mil3.28%$144k

10$1.54 Mil

$4.81 Mil100%

$4.81 Mil3.20%$154k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

= $10.67 Mil

$2.98 Mil

Why go the bond route?

Bonds >50%

Copyright © 2012 Novogradac & Company LLP17

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

BA

Total project costs = $11.2 Mil

$11.2 Mil

$3.3M Equity 29%

x

x

x

x

x

x

x 10$1.87 Mil

$7.62 Mil75%

$5.71 Mil3.28%$187k

10$2 Mil

$6.25 Mil100%

$6.25 Mil3.20%$200k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

= $13.87 Mil

$3.87 Mil

Bonds >50%

“QCT” =

Copyright © 2012 Novogradac & Company LLP18

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements

Copyright © 2012 Novogradac & Company LLP19

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Public BondsBondholders

State Allocating Agency

Copyright © 2012 Novogradac & Company LLP20

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Public Bonds

Interest Payments

BondholdersPrivate Bonds

Interest Payments

Private Sector

Copyright © 2012 Novogradac & Company LLP21

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Airports

StudentLoans

Single‐FamilyHousing

Industrial Development

Bondholders

Interest Payments

State Allocating Agency

Multi‐FamilyRental Housing

Private ActivityTax-Exempt Bonds

$1.85B

Copyright © 2012 Novogradac & Company LLP22

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements

Copyright © 2012 Novogradac & Company LLP23

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

State Allocating Agency

Developer/Owner

BondApplication

Private ActivityTax-Exempt Bonds

Section 42

$1.85B

Copyright © 2012 Novogradac & Company LLP24

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Bond Issuer

(City/County)

Borrower

InducementResolutionInducementResolution

Public hearing or “TEFRA” requirement

P’ship

Copyright © 2012 Novogradac & Company LLP25

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Credit Enhancer

Purchasers

Trustee

Bond Proceeds

Bond Proceeds

Project

Trust IndentureTrust 

Indenture

Interest Payments

MortgageNote

MortgageNote

BondsBonds

DRAW ReqDRAW Req

“AAA”“Aaa”

InvoicesInvoices

Interest Payments

Bond Purchase Agreement

Bond Purchase Agreement

Underwriter

Loan Agreement

Loan Agreement

RegulatoryAgreement

RegulatoryAgreement

Lender

Bond Issuer

(City/County)

Copyright © 2012 Novogradac & Company LLP26

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements

Copyright © 2012 Novogradac & Company LLP27

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Types of Bond Issues1. “Essential Function” or “Governmental Purpose” Bonds issued

under Section 103 -- project to be owned by a public body– Good news: Much less restrictive rules than either

of 2 other categories

– Bad news: Not eligible for 4% LIHTC

2. “501(c)(3)” Bonds issued under Section 145

– For charitable organization having a designation under IRC Section 501(c)(3) in order to:

• Provide affordable housing for persons of lower income, or

• Provide appropriate housing for the elderly or handicapped

– Good news: Don’t need private activity bond volume allocation

– Bad news: Not eligible for 4% LIHTC

Copyright © 2012 Novogradac & Company LLP28

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Types of Bond Issues3. Private Activity Bonds issued under IRC Section 142(d) -- for profit-

motivated owner

– Usually combined with 4% LIHTC

– This is the most common “new money” category – generally represents 85-90% of “new money” deals

– Main requirements include:• Lower income targeting – 20% at 50% AMI or 40% at 60% AMI• Private activity bond volume allocation (“volume cap”)

“Refunding” Bonds– Proceeds used to pay off bonds previously issued to finance a

multifamily rental housing project– Used to reduce interest rates or change credit enhancement

BondApplication

Private ActivityTax-Exempt Bonds

Copyright © 2012 Novogradac & Company LLP29

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Financing Alternatives

DSC LTV Amort. C/E Fees Timeframe Variable?

Credit Enhancement Alternatives• FHA / GNMA 1.11 90%+ 35-40 Low 90-150 No

• Fannie Mae and Freddie Mac 1.15-1.20 80% 30-35 Mid 60-90 Yes

• Bank Letters of Credit 1.15-1.25 75-85% 25-30 High 60-90 Yes

Non-Credit Enhanced Executions• Stand-Alone Bond Rating 1.45 n/a 30 Mid-to-High 60-90 No

• Conduit Bond Lender 1.15-1.20 80-85% 30-35 n/a 60 Maybe

Copyright © 2012 Novogradac & Company LLP30

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements

Copyright © 2012 Novogradac & Company LLP31

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

$2.5M

BA

Total project costs = $11.2 Mil

$11.2 Mil

Equity 22%

x

x

x

x

x

x

x 10$1.44 Mil

$5.86 Mil75%

$4.40 Mil3.28%$144k

10$1.54 Mil

$4.81 Mil100%

$4.81 Mil3.20%$154k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

= $10.67 Mil

$2.98 Mil

“Aggregate Basis”Fixed Assets

50%

Equity

Copyright © 2012 Novogradac & Company LLP32

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

$5.45 Mil

$1.9M

BA

Total project costs = $11.2 Mil

$11.2 Mil

x

x

x

x

x

x

x 10$1.44 Mil

$5.86 Mil75%

$4.40 Mil3.28%$144k

10$1.54 Mil

$4.81 Mil100%

$4.81 Mil3.20%$154k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

= $10.67 Mil

$2.98 Mil

“Aggregate Basis”Fixed Assets

$10.9 Mil

11%Equity49.9999%

49.9999%

Bonds

Copyright © 2012 Novogradac & Company LLP33

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

BA

Total project costs = $11.2 Mil

$2.5M

$11.2 Mil

Equity 22%

x

x

x

x

x

x

x 10$1.44 Mil

$5.86 Mil75%

$4.40 Mil3.28%$144k

10$1.54 Mil

$4.81 Mil100%

$4.81 Mil3.20%$154k

Ten yearsTotal tax credits

Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits

= $10.67 Mil

$2.98 Mil

Bonds 54%

“Aggregate Basis”

$6M

Fixed Assets

$10.9 Mil

$6M$5.45 Mil

100%

Copyright © 2012 Novogradac & Company LLP34

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

“Aggregate Basis”Fixed Assets

Bond issuance costs (BIC) paid from bond proceeds ≤ $120k

2% “Cost of Issuance Limitation”

$6M($6 mil x 2%)

Copyright © 2012 Novogradac & Company LLP35

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

“Aggregate Basis”Fixed Assets

$6M

“Good Costs/Bad Costs”95% of proceeds must be used for “good costs”

$5.7 mil

Good CostsLand and depreciable costs for income tax purposes

…paid or incurred after the date of the Inducement Resolution

Copyright © 2012 Novogradac & Company LLP36

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

“Aggregate Basis”Fixed Assets

$6M

“Good Costs/Bad Costs”95% of proceeds must be used for “good costs”

≤ $300kBad Costs

Costs incurred prior to Inducement Resolution

Intangible assets

Bond issuance costs and underwriting

Loan origination fees amortized over the perm loan period

Assumed debt

Copyright © 2012 Novogradac & Company LLP37

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

95% of proceeds must be used for “good costs”

60 days

“Good Costs”“Bad Costs”

“Good Costs/Bad Costs”

Copyright © 2012 Novogradac & Company LLP38

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Copyright © 2012 Novogradac & Company LLP39

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Copyright © 2012 Novogradac & Company LLP40

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Copyright © 2012 Novogradac & Company LLP41

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Copyright © 2012 Novogradac & Company LLP42

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Questions?

John Kelley, Esq.Holland & Knight, LLP

[email protected].(617) 305-2042

Benathan UpshawCB Emmanuel

[email protected](716) 310-9136

Charles A. Rhuda, IIINovogradac & Company [email protected]

(617) 330-1920

Copyright © 2012 Novogradac & Company LLP43

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Free Tax Credit Resources:www.taxcredithousing.com

Copyright © 2012 Novogradac & Company LLP44

Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012

Outline

How Tax Credit Financing Works

Tax-Exempt Bond Overview

Players in a Bond Transaction

Types of Bond Issues

50% Test and Other Bond Requirements