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Tax Exempt Bonds with 4% Low-Income Housing Tax Credits September 3, 2014

Tax Exempt Bonds with 4% Low-Income Housing Tax Credits September 3, 2014. The Low Income Housing Tax Credit Program. A housing subsidy program for rental housing created in 1986 under Section 42 of the Internal Revenue Code

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Tax Exempt Bonds with 4% Low-Income Housing Tax Credits September 3, 2014

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  1. Tax Exempt Bonds with 4% Low-Income Housing Tax CreditsSeptember 3, 2014

  2. The Low Income Housing Tax Credit Program • A housing subsidy program for rental housing created in 1986 under Section 42 of the Internal Revenue Code • Accounts for approximately 90% of all affordable rental housing in the United States • Each state receives an amount of tax credits annually to allocate to affordable housing projects • Generally administered by each state’s housing finance agency (VHDA in VA) Eichner Norris & Neumann PLLC 202-973-0107

  3. How Do Housing Tax Credits Work? • Applicable for rental units with tenants earning no more than 60% of area median income • Investors earn dollar-for-dollar credits against their federal tax liability and also get tax benefits from losses • Generally, tax credits are received over the first 10 years of operation • Some tax credits are recaptured by the IRS if the project does not comply for 15 years after placed in service Eichner Norris & Neumann PLLC 202-973-0107

  4. Unit Restrictions • Occupancy Restricted - Who can live there? • At least 40% of the units must be set aside for families earning below 60% of Area Median Income (AMI) based published HUD data (adjusted for family size). 20/50 election also available. • Rent Restricted – How much can tenants pay? • Rents and utilities – limited to 30% of threshold income • Allowable rent based on size of unit Eichner Norris & Neumann PLLC 202-973-0107

  5. Tax Credits vs. Tax Deductions Eichner Norris & Neumann PLLC 202-973-0107

  6. Types of Low Income Housing Tax Credits: • 9% New Construction/ Rehab Credit - Provides ~70% of financing subsidy for a Project. • Very competitive (extremely limited annual supply) – scored based on states qualified allocation plan (QAP) • Can’t use tax-exempt bonds • 4% New Construction/ Rehab Credit - Provides ~30% of financing subsidy for a Project. • Allocated on a non-competitive basis (not limited) • Must be used with tax-exempt bonds Eichner Norris & Neumann PLLC 202-973-0107

  7. Tax Exempt Bonds with 4% LIHTCs • In Virginia, Tax Exempt Bonds can be issued through: • the State (Virginia Housing Development Authority) or • a local Redevelopment Housing Authority • Eligible for 4% credits • No separate allocation of 4% credits needed. In VA, VHDA is the allocation administrator of the credits. • Tax Exempt Bond amount must exceed 50% of aggregate basis (50% test) • Bonds must remain outstanding at least until the Project is placed in service (i.e. construction completion) Eichner Norris & Neumann PLLC 202-973-0107

  8. CURRENT MARKET FACTORS DRIVING 4% BOND STRUCTURES • Community Reinvestment Act (“CRA”) and the Recapitalization of Large Commercial Banks has resulted in the rise of private placement bond executions. • Relatively High 4% LIHTC Pricing: $0.90 – $1.10 per dollar of tax credit • Historically low long-term taxable rates combined with innovative bond structures: provideall in borrowing costs of 4.00% – 5.25%. • Relatively Steep Yield Curve pushing structures that help minimize construction period negative arbitrage (see next page). • “Preservation” of first-generation LIHTC deals which are now exiting their 15-year compliance period is providing more transactions into the market. Eichner Norris & Neumann PLLC 202-973-0107

  9. Constant Maturity Treasury Yield Curve Eichner Norris & Neumann PLLC 202-973-0107

  10. Negative Arbitrage Savings Example Assumed: $10,000,000 Bond Deal with 2-Year Construction Period and 24 level draws. Eichner Norris & Neumann PLLC 202-973-0107

  11. CURRENT TAX EXEMPT MULTIFAMILY HOUSING BONDS STRUCTURES • Bank Private Placements • Short-Term Fixed Rate Bonds with Taxable Credit Enhanced Loans (FHA/GSE/Rural Development) • VHDA Long-Term Fixed Rate Bond Transactions Eichner Norris & Neumann PLLC 202-973-0107

  12. Private Placement Bond Structure • Bonds are generally issued locally through an RHA • Variable rate drawdown structure during construction period eliminates construction period negative arbitrage and lowers capitalized interest requirements • Lower Costs of Issuance: No credit enhancement, rating or remarketing costs • Faster Execution Time: 90-150 days • Underwriting: 80% LtV; 1.15-1.20 DSCR; 30-35 year amortization w/ 18 year term • Recourse guarantees typically required during construction and lease up • Mostly available in CRA markets • Potential tax implications if bond purchase is related to 4% tax credit investor (see §1.148 program investment regulations) Eichner Norris & Neumann PLLC 202-973-0107

  13. LONG TERM TAXABLE LOANS WITH SHORT-TERM TAX-EXEMPT BONDS AND 4% LIHTC • Taxable MBS Markets continues to deliver historically low pricing: • FHA/GNMA: 223(f)/221(d) GNMA sales currently provide 3.5% - 4.0% all-in borrowing rate with no negative arbitrage and 35-40 year amortization • RD 538/GNMA loans provide similar pricing to corresponding FHA/GNMA loans • Fannie/Freddie loans with no construction period (i.e. immediately funded transactions w/ mod-light rehab) currently provide 4.0% - 4.5% all in borrowing rate with 30-35 year amortizations. • Short Term Bonds are issued locally through an RHA to meet the 50% test and significantly reduce construction period negative arbitrage • Execution Time: 90-150 days for GSE; 180-270 days for FHA • Underwriting: 80% LtV; 1.15-1.20 DSCR; 30-35 year amortization w/ 18 year term for GSE; 85% LtV; 1.15 DSCR; 35-40 year amortization and term for FHA/RD • Recourse guarantees typically required during construction and lease up Eichner Norris & Neumann PLLC 202-973-0107

  14. COMBINED TAXABLE LOAN WITH TAX EXEMPT BONDS Bond Payoff (after Project is placed in service) Trustee ~2-Yr Bonds 8 2 1 6 5 7 4 3 Escrow Account Bond Proceeds Account MBS Proceeds Bond Purchaser MBS Purchaser Bond Proceeds Bond Proceeds Sale of Taxable MBS Borrower Draw Request FHA/GSE/RD Lender Loan Funding Eichner Norris & Neumann PLLC 202-973-0107

  15. RELATED QUESTIONS • Bond Amount > Taxable Loan Amount: • Other sources of funds (i.e. Equity, Subordinate loan, etc.) needed to cover the differential. Timing of funding is crucial • Additional Rating Agency requirements on publically offered transactions • Bridging Equity: • Limited collateral available for bridge financing • Seller Note can occationallybe used to help with timing of funds • Publically Offered vs. Privately Placed: • Timing; Cost; Issuer requirements • Potential tax implications if Bond Purchaser is “related” to the Borrower (see §1.148 program investment regulations) • Bond Interest &Third Party (Bond Related) Fees • Typically escrowed at closing with Trustee for full term of Bonds • Possible limitation on Issuer Fees due to short maturity and Loan Yield limitations Eichner Norris & Neumann PLLC 202-973-0107

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