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

1. Bonding 101 – Tax-Exempt Bonds as a Way to Finance Your Projects Vince O’Donnell, Vice President of Affordable Housing Preservation Local Initiatives Support Corporation vodonnell@lisc.org 617-338-5170 Tax Exempt Bonds

2. TAX EXEMPT BONDS • Three kinds of tax-exempt bonds are issued by public housing finance entities • Private Activity Bonds for for-profit entities • Private Activity Bonds for 501(c)(3) organizations • Essential Purpose Bonds issued for various activities that may include housing Tax Exempt Bonds

3. TAX EXEMPT BONDS • Combining tax credits and tax-exempt bonds • What additional parties are involved? • What are the additional documents needed? Tax Exempt Bonds

4. Qualified PABs with Tax Credits • Use Limited Partnership or LLC structure • Available to both for-profit and nonprofit developers • Interest on these bonds is tax exempt if: • Bond amount is within State’s bond volume cap • TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) public hearing held before bonds issued Tax Exempt Bonds

5. Qualified PABs with Tax Credits • Tax credits are allocated to the LP “as-of-right” • “50% Test” – bonds must fund 50% of project’s depreciable basis to receive all tax credits; otherwise LIHTC are pro-rated per fraction of total development cost supported. Tax Exempt Bonds

6. Combining Tax Credits and Bonds • 4% (30% present vale) tax credit rate – federally subsidized financing • Project must be consistent with State’s QAP • Minimum LIHTCs required for financial feasibility • Use of bond proceeds must stay within use limitations (“Good Costs”) Tax Exempt Bonds

7. Combining Tax Credits and Bonds • Meeting the “50% test” is critical • Tax credit tenant income rules apply. Needed for • Exemption of interest from Federal income taxes • Compliance with LIHTC requirements • Can transfer ownership to tenants at year 16 Tax Exempt Bonds

8. Additional Parties in a T.E. Bond Issue • Bond Issuer – government agency/entity/PHA • Bond Counsel – determines compliance with laws • Bond Trustee – protects interests of bondholders • Underwriter – structures bonds for market Tax Exempt Bonds

9. Additional Parties in a T.E. Bond Issue • Financial Advisor – does feasibility analysis • Credit enhancement provider – increases marketability of the bonds • Bond Rating Agency – rating influences the issue’s price and marketability Tax Exempt Bonds

10. Bond Financing Instruments • Mortgage – documents the property lien • Loan Agreement – repayment and security • Official Statement – key business aspects Tax Exempt Bonds

11. Bond Financing Instruments • Trust Indenture – establishes bond trustee’s responsibilities and rights • Bond Purchase Agreement – basis for Underwriter purchasing bonds from Issuer • Credit Enhancement Documents – improves credit rating, reduces cost of borrowing Tax Exempt Bonds

12. Other Housing Tax Exempt Bonds -Without Tax Exempt Bonds • 501(c)(3) Qualified PABs • Not eligible for LIHTCs – nonprofit owner • Less restrictive income, use restrictions • Essential Function Bonds (issued by gov’t entities) • Not eligible for LIHTCs – government owner • Least restrictive requirements Tax Exempt Bonds

13. Response to Current Market Conditions Issues: • Flight of capital to U.S. Treasuries and other “safe” instruments. • High rates of tax-exempt municipal bonds. • Low rates on taxable bonds using FHA and GNMA • Infeasible to meet 50% test for 4% LIHTCs using traditional permanent debt structure. Tax Exempt Bonds

14. Response to Current Market Conditions(continued) Solution: • Short-term cash-collateralized tax-exempt bonds for 50% of TDC. • Replace drawdowns of tax-exempt bond proceeds with FHA-GNMA-insured loan proceeds. • Repay tax-exempt bonds after placed-in-service debt. Tax Exempt Bonds

15. Response to Current Market Conditions(continued Solution (continued): • Credit Enhancement: • FHA §223(f) – including LIHTC Affordable Pilot Program • FHA §221(d)(4) New Construction – Substantial Rehab. • USDA §538 • Savings: 100-150 basis points • Reduced claim on bond cap Tax Exempt Bonds

16. Additional Resources Multifamily Rental Housing: Financing With Tax-Exempt Bonds Jason Cooper, Orrick, Herrington & Sutcliffe LLP http://www.orrick.com/Events-and-Publications/Documents/2709.pdf Tax Exempt Bonds

17. Additional Resources Combining Short-term Cash Backed Tax-exempt Bonds With Taxable GNMA Sales For Affordable Housing Projects Using FHA Insurance R. Wade Norris, Esq., Eichner Norris &Neumann PLLC March 15, 2013 http://www.citibank.com/icg/sa/citicommunitycapital/docs/031513_combining.pdf Tax Exempt Bonds