1. Tax Exempt Bonds 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

2. Tax Exempt Bonds 2 TAX EXEMPT BONDS Three kinds of tax-exempt bonds are issued by public housing finance entities 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

3. 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?

4. 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

5. 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.

6. 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”)

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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.

14. 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.

15. 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

16. 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

17. 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_c ombining.pdf