Tax Exempt BondsTax Exempt Bonds 11

Bonding 101 – Tax-Exempt Bonds as a Bonding 101 – Tax-Exempt Bonds as a Way to Finance Your ProjectsWay to Finance Your Projects

Vince O’Donnell, Vice President of Vince O’Donnell, Vice President of Affordable Housing PreservationAffordable Housing Preservation

Local Initiatives Support CorporationLocal Initiatives Support Corporationvodonnell@lisc.orgvodonnell@lisc.org

617-338-5170617-338-5170

Tax Exempt BondsTax Exempt Bonds 22

TAX EXEMPT BONDSTAX EXEMPT BONDS

Three kinds of tax-exempt bonds are issued Three kinds of tax-exempt bonds are issued by public housing finance entitiesby public housing finance entities Private Activity Bonds for for-profit entitiesPrivate Activity Bonds for for-profit entities Private Activity Bonds for 501(c)(3) Private Activity Bonds for 501(c)(3)

organizationsorganizations Essential Purpose Bonds issued for various Essential Purpose Bonds issued for various

activities that may include housingactivities that may include housing

Tax Exempt BondsTax Exempt Bonds 33

TAX EXEMPT BONDSTAX EXEMPT BONDS

Combining tax credits and tax-exempt Combining tax credits and tax-exempt bondsbonds

What additional parties are involved?What additional parties are involved?

What are the additional documents What are the additional documents needed?needed?

Tax Exempt BondsTax Exempt Bonds 44

Qualified PABs with Tax CreditsQualified PABs with Tax Credits

Use Limited Partnership or LLC structure Use Limited Partnership or LLC structure

Available to both for-profit and nonprofit Available to both for-profit and nonprofit developersdevelopers

Interest on these bonds is tax exempt if:Interest on these bonds is tax exempt if: Bond amount is within State’s bond volume capBond amount is within State’s bond volume cap TEFRA (Tax Equity and Fiscal Responsibility Act of TEFRA (Tax Equity and Fiscal Responsibility Act of

1982) public hearing held before bonds issued1982) public hearing held before bonds issued

Tax Exempt BondsTax Exempt Bonds 55

Qualified PABs with Tax CreditsQualified PABs with Tax Credits

Tax credits are allocated to the LP “as-of-Tax credits are allocated to the LP “as-of-right”right”

““50% Test” – bonds must fund 50% of 50% Test” – bonds must fund 50% of project’s depreciable basis to receive all tax project’s depreciable basis to receive all tax credits; otherwise LIHTC are pro-rated per credits; otherwise LIHTC are pro-rated per fraction of total development cost supported.fraction of total development cost supported.

Tax Exempt BondsTax Exempt Bonds 66

Combining Tax Credits and BondsCombining Tax Credits and Bonds

4% (30% present vale) tax credit rate – 4% (30% present vale) tax credit rate – federally subsidized financingfederally subsidized financing

Project must be consistent with State’s QAPProject must be consistent with State’s QAP

Minimum LIHTCs required for financial Minimum LIHTCs required for financial feasibilityfeasibility

Use of bond proceeds must stay within use Use of bond proceeds must stay within use limitations (“Good Costs”)limitations (“Good Costs”)

Tax Exempt BondsTax Exempt Bonds 77

Combining Tax Credits and BondsCombining Tax Credits and Bonds

Meeting the “50% test” is criticalMeeting the “50% test” is critical

Tax credit tenant income rules apply. Tax credit tenant income rules apply. Needed for Needed for Exemption of interest from Federal income Exemption of interest from Federal income

taxestaxes Compliance with LIHTC requirementsCompliance with LIHTC requirements

Can transfer ownership to tenants at year 16Can transfer ownership to tenants at year 16

Tax Exempt BondsTax Exempt Bonds 88

Additional Parties in a T.E. Bond IssueAdditional Parties in a T.E. Bond Issue

Bond Issuer – government Bond Issuer – government agency/entity/PHAagency/entity/PHA

Bond Counsel – determines compliance Bond Counsel – determines compliance with lawswith laws

Bond Trustee – protects interests of Bond Trustee – protects interests of bondholdersbondholders

Underwriter – structures bonds for marketUnderwriter – structures bonds for market

Tax Exempt BondsTax Exempt Bonds 99

Additional Parties in a T.E. Bond IssueAdditional Parties in a T.E. Bond Issue

Financial Advisor – does feasibility analysisFinancial Advisor – does feasibility analysis

Credit enhancement provider – increases Credit enhancement provider – increases marketability of the bondsmarketability of the bonds

Bond Rating Agency – rating influences the Bond Rating Agency – rating influences the issue’s price and marketabilityissue’s price and marketability

Tax Exempt BondsTax Exempt Bonds 1010

Bond Financing InstrumentsBond Financing Instruments

Mortgage – documents the property Mortgage – documents the property lienlien

Loan Agreement – repayment and Loan Agreement – repayment and securitysecurity

Official Statement – key business Official Statement – key business aspectsaspects

Tax Exempt BondsTax Exempt Bonds 1111

Bond Financing InstrumentsBond Financing Instruments

Trust Indenture – establishes bond Trust Indenture – establishes bond trustee’s responsibilities and rightstrustee’s responsibilities and rights

Bond Purchase Agreement – basis for Bond Purchase Agreement – basis for Underwriter purchasing bonds from Underwriter purchasing bonds from IssuerIssuer

Credit Enhancement Documents – Credit Enhancement Documents – improves credit rating, reduces cost of improves credit rating, reduces cost of borrowingborrowing

Tax Exempt BondsTax Exempt Bonds 1212

Other Housing Tax Exempt Bonds -Other Housing Tax Exempt Bonds -Without Tax Exempt BondsWithout Tax Exempt Bonds

501(c)(3) Qualified PABs501(c)(3) Qualified PABs Not eligible for LIHTCs – nonprofit ownerNot eligible for LIHTCs – nonprofit owner Less restrictive income, use restrictionsLess restrictive income, use restrictions

Essential Function Bonds (issued by gov’t Essential Function Bonds (issued by gov’t entities)entities) Not eligible for LIHTCs – government ownerNot eligible for LIHTCs – government owner Least restrictive requirementsLeast restrictive requirements

Tax Exempt BondsTax Exempt Bonds 1313

Response to Current Market ConditionsResponse to Current Market Conditions

Issues:Issues:Flight of capital to U.S. Treasuries and other Flight of capital to U.S. Treasuries and other “safe” instruments.“safe” instruments.High rates of tax-exempt municipal bonds.High rates of tax-exempt municipal bonds.Low rates on taxable bonds using FHA and Low rates on taxable bonds using FHA and GNMAGNMAInfeasible to meet 50% test for 4% LIHTCs Infeasible to meet 50% test for 4% LIHTCs using traditional permanent debt structure.using traditional permanent debt structure.

Tax Exempt BondsTax Exempt Bonds 1414

Response to Current Market ConditionsResponse to Current Market Conditions(continued)(continued)

Solution:Solution:

Short-term cash-collateralized tax-exempt Short-term cash-collateralized tax-exempt bonds for 50% of TDC.bonds for 50% of TDC.

Replace drawdowns of tax-exempt bond Replace drawdowns of tax-exempt bond proceeds with FHA-GNMA-insured loan proceeds with FHA-GNMA-insured loan proceeds.proceeds.

Repay tax-exempt bonds after placed-in-Repay tax-exempt bonds after placed-in-service debt.service debt.

Tax Exempt BondsTax Exempt Bonds 1515

Response to Current Market ConditionsResponse to Current Market Conditions(continued(continued

Solution (continued):Solution (continued):Credit Enhancement:Credit Enhancement:– FHA §223(f) – including LIHTC Affordable FHA §223(f) – including LIHTC Affordable

Pilot ProgramPilot Program– FHA §221(d)(4) New Construction – FHA §221(d)(4) New Construction –

Substantial Rehab.Substantial Rehab.– USDA §538 USDA §538

Savings: 100-150 basis pointsSavings: 100-150 basis pointsReduced claim on bond capReduced claim on bond cap

Tax Exempt BondsTax Exempt Bonds 1616

Additional ResourcesAdditional Resources

Multifamily Rental Housing: Financing With Multifamily Rental Housing: Financing With Tax-Exempt BondsTax-Exempt Bonds

Jason Cooper, Jason Cooper, Orrick, Herrington & Sutcliffe LLPOrrick, Herrington & Sutcliffe LLP

http://www.orrick.com/Events-and-Publications/Documents/http://www.orrick.com/Events-and-Publications/Documents/2709.pdf2709.pdf

Tax Exempt BondsTax Exempt Bonds 1717

Additional ResourcesAdditional Resources

Combining Short-term Cash Backed Tax-Combining Short-term Cash Backed Tax-exempt Bonds With Taxable GNMA Sales exempt Bonds With Taxable GNMA Sales For Affordable Housing Projects Using For Affordable Housing Projects Using FHA InsuranceFHA Insurance

R. Wade Norris, Esq., Eichner Norris &Neumann PLLCR. Wade Norris, Esq., Eichner Norris &Neumann PLLCMarch 15, 2013March 15, 2013

http://www.citibank.com/icg/sa/citicommunitycapital/docs/http://www.citibank.com/icg/sa/citicommunitycapital/docs/031513_combining.pdf031513_combining.pdf