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

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

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: 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 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, ombining.pdf