IPED HOUSING TAX CREDITS “101”

1. IPED HOUSING TAX CREDITS “101” Tax Exempt Bonds and Housing Tax Credits presented by: James Duffy – Nixon Peabody LLP Dan Smith – Novogradac & Company LLP Travis Gibbs – Nixon Peabody LLP Faith Bruins – Nixon Peabody LLP

2. Presuming I leave here today and want to develop a successful tax-exempt bond project, what’s my first step? Assemble your team early Accountant Developer’s Bond Counsel Equity Partner Underwriter Local Consultant / Political Liaison What key piece of advice should I take away from this panel?

3. 1986 IRC §103(a) Interest Income Federal Exemption State Income Exemption (Generally) Bonds Eligible For Exemption Private Activity Bonds Governmental Bonds §501(c)(3) Tax-Exempt Bonds What are Tax-Exempt Bonds?

4. Economic Benefit To Buyers Economic Benefit To Issuers Interest Rate Determination Bond Rating Credit Enhancement What do Tax-Exempt Bonds Offer?

5. Demand for Tax Credit Allocations (9% LIHC Deals) Uses conventional financing Only $1.85 Per Capita available - $ 2,125,000 Limited “pool” of tax credits Developers Apply To State Allocating Agencies States Oversubscribed: 4-6 To 1 Why are Developers doingTax-Exempt Bond Deals?

6. Compete For Bonds To Avoid Competition for 9% Tax Credits (Beauty Contest) Bonds Structure Now Feasible Credit Enhancements Available Higher Credit Prices Low interest rates Excess Demand For Bonds ($80.00 Per Capita) $ 239,180,000 Housing Competes With Other Uses More Mixed Income Developments So Are Bonds a Better Way to Go?

7. Interest Rate Benefit Bond Rating Credit Enhancement Reduced Interest Rate (More Debt!) Possible To Reduce Debt Coverage Ratios “Automatic” 4% Tax Credit Allocation Less Operational Regulations Than LIHC Larger Developments In Better Markets What are the Benefits of Bonds?

8. Bond Issuing States Local Government Entities (Cities, Townships,Counties, HFCs) Qualified IRC §501(c)(3) Organizations AndGovernmental Units (Tax-Exempt Corporations) Bond Issuance vs. Bond Allocation How do I get these Bonds andWho gives them to me?

9. Multi-Year Construction/Permanent Nominal Permanent Lender Multi-Series What Types of Financing are Available?

10. 9% LIHC Credits Using Conventional Debt 4% Project Using Tax-Exempt Bond Debt Equity Equity Debt Debt How are Tax-Exempt Bond Deals Different than Conventional Tax Credit Deals?

11. Reduced Credit Percentage (4% Vs 9%) Tax Losses Are Spread Across A SmallerAmount Of Tax Credit Dollars Result May Be An Increased Credit Price Why is there so much less Equity in a Bond Deal?

12. EB x LIOP x CP x 10 = Credits The Credit Percentage is the Tax Credit Percentage Rate published monthly in our LIHC Monthly Report and on our website! October 2004 = 7.98% & 3.42% November 2004 = 7.96% & 3.41% What’s the Difference Between 9% and 4% Credits?

13. Income Restrictions: 20% at 50% AMGI 40% at 60% AMGI Sounds pretty good!! What are the rules and restrictions I have to follow?

14. At Least 95% Must Be Used To Pay OrReimburse “Good Costs” “Good Costs” Include: Land & Depreciable Costs For Income Tax Purposes Paid Or Incurred After The Date Of Inducement Resolution Special Rules:Good Costs vs. Bad Costs

15. “Bad Costs” Include: Costs incurred prior to Inducement Resolution Intangible Assets Bonds Issuance Costs and Underwriting Loan Origination Fees Amortized over thePermanent Loan Period Special Rules:Good Costs vs. Bad Costs

16. No More Than 2% Of Proceeds Can BeUsed For Bond Issuance Costs Taxable Tails / Owner Equity Special Rules:Good Costs vs. Bad Costs

17. If 50% of the Aggregate Basis is Financed by Bond Proceeds, Entire Basis Exempted From LIHC Volume Limitation Aggregate Basis includes: Land And Building Excludes Permanent Loan Fees and Interest,Intangible Assets, Cash Reserves andLease-Up Costs 50% Financing Requirement

18. If 50% of the Aggregate Basis is Financed by Bond Proceeds, Entire Basis Exempted From LIHC Volume Limitation What does “Financed by” mean?? 50% Financing Requirement

19. CAUTION!! States are asking developers to find other sources of financing in order to stretch bond cap Construction overruns and/or delays will adversely affect the 50% calculation 50% Financing Requirement

20. Difficult To Develop or Qualified Census Tract “Bonus” – Available For Rehabilitation Or New Construction Costs DDA / QCT 130% applied to Eligible Basis Increase in Annual Tax Credit All Bond Issuance Costs ExcludedFrom Eligible Basis Other Effects: Eligible Basis

21. Compared to a 9% / Conventional Debt Deal: Not Subject to Carryover Allocation Rules (10% Test) Placed In Service Within Two Years Bonds Generally Allow Larger Development Generally Less Competition For Bond Allocation Bond Transactions Have Less Social Engineering Is there anything easier in aTax-Exempt Bond Deal?

22. Put the Team Together: Accountant Equity Partner Underwriter Local Developer’s Bond Counsel Credit Enhancer Sounds Good!!! How do I get started?

23. Find a potential property and run initial numbers for feasibility of the project Put the team together: Accountant Equity Partner Underwriter Local Developer’s Bond Counsel Credit Enhancer How do I put my Deal Together?

24. Issuer passes inducement resolution Credit enhancement commitment Private activity bond application submitted to Issuing Authority How do I put my Deal Together?

25. Public notice of the project (2 weeks) TEFRA hearing held The Tax Equity and Fiscal Responsibility Act How do I put my Deal Together?

26. Private activity bond application approved Bond allocation awarded Tax credit application submitted How do I put my Deal Together?

27. Bond counsel drafts documents required for closing Bond Indenture Loan agreement Regulatory agreement Underwriter-due diligence POS preliminary official statement Credit enhancer documents Tax credit investor documents Partnership agreement How do I put my Deal Together?

28. Issuer passes bond resolutionincluding the following: Issuer’s approval of TEFRA hearing Private activity bond allocation Credit enhancement commitment Bond rating from agency Preliminary official statement How do I put my Deal Together?

29. Underwriter prices and contracts for selling the bonds Bond purchase agreement Bond Closing Final Official Statement How do I put my Deal Together?

30. Bond Purchase Contract Official Statement Bond Underwriter Bond Issuer Bonds Indenture LIHC Partnership “Borrower” Bond Proceeds Bond Holder Trustee Loan Agreement Deed of Trust Payments of Principal & Interest Reimbursement Agreement Deed of Trust Credit Enhancement Credit Enhancer What does a typical Tax-Exempt Bond Structure Look Like?

31. Bond Counsel: Attorney representing the bond issuer and bondholders. The attorney provides an opinion that the interest on the bonds is exempt from federal taxation. Responsible for the bond inducement resolution, bonds, the bond indenture, the financing agreement, the regulatory agreement and the tax opinion. Glossary

32. Inducement Resolution: A resolution passed by the bond issuer communicating the intent to issue bonds for a specific activity. Official Statement: The marketing prospectus used by underwriters to sell the bonds. The official statement summarizes the terms of the bonds and other information relevant to the investment decision. Glossary

33. Arbitrage Yield Restriction: Arbitrage occurs when tax-exempt bond proceeds are invested in securities that yield a greater return than the interest charged on the bonds. Restrictions exist on the amount of arbitrage bonds can earn without putting the tax-exempt status of the bonds in peril. In instances where the restriction is violated, exceptions exist that allow for the tax-exempt status of the bonds to remain intact. Glossary

34. Bond Issuer: Governmental or Non-Profit entity responsible for issuing the bonds. Credit Enhancer: For fee, guarantees that the bondholders will receive scheduled bond payments. Indenture: An agreement between the bond issuer and the trustee containing the terms and procedures for payment of the bonds. Glossary

35. Rating Agency: Agencies that determine or “rate” the investment risk of the bonds. Examples include Standard & Poor’s and Moody’s Investor Services. Regulatory Agreement: An agreement entered into between the borrower, the bond issuer and the trustee specifying the income rent and income restrictions a project owner must comply with for the bonds to retain their tax exempt status. Glossary

36. TEFRA Hearing: The bond issuer’s public notice, public hearing and approval by elected officials of a bond issuance. Underwriter: An investment bank that underwrites and markets the bonds to investors. Glossary

37. Dan Smith Novogradac & Company LLP 303 W. Third Street Dover, OH 44622 Phone: (330) 602-4600 Fax: (330) 602-4601 Contact Information:

38. QUESTIONS ??? For free tax credit resources:Go to www.taxcredithousing.com Or email us at: dan.smith@novoco.com