1. Midwest Lenders Conference Chicago, IL
Tax Exempt Bonds 101
Midwest Lenders Conference
Chicago, IL
September 2018
Tracy Peters
Kent Neumann
Terry Wellman
Tracy Peters
Direct: (614)
Kent Neumann, Esq.
Direct: (202)
Cell: (703)
Terry Wellman
Direct: (949)

3. What Are Tax Exempt Bonds?
Tax Exempt Municipal Bonds:
Debt obligations issued by state and local governments (not federal bonds) to fund certain public projects.
Projects can include: construction and repair of roads, schools, hospitals, water and sewer systems, public works, student housing, single family housing and multifamily housing.
Unlike stocks (where the stock owner has an ownership stake in the company) bonds are loans to the state or local government entity that issued the bond – the issuer of the bonds promises to pay a specified amount of interest and principal over the term of the bond.

4. What Are Tax Exempt Bonds (con’t)?
The interest earned on these bonds is generally tax-free to the bondholder – they do not have to pay federal income tax on the interest received.
The vast majority of the bonds issued for affordable multifamily housing transactions around the country are part of the private activity bond volume that each state obtains annually.
In 2016, over $14 billion of private activity multifamily housing bonds were issued.

5. Why invest in municipal bonds?
1. Attractive current income, free from federal and, in some cases, state and local taxes;
2. Credit quality (AAA or AA+) with regard to payment of interest and repayment of principal;
3. Predictable stream of income;
4. Wide range of choices to meet investment objectives regarding investment quality, maturity, choice of issuer, type of bond and geographical location; and
5. Marketability in the event an investor decides to sell before maturity.

6. Why Do Developers Want TE Bonds?
“Sounds complicated.”
“It is.”
“So, why bother with bonds?”

7. Why Do Developers Want TE Bonds?
4% Low Income Tax Credits*
Using Tax Exempt Bonds to qualify for 4% Tax Credits results in 30% or more additional equity source in the transaction!
Over $3 million generated for a $10 million development.
* Prior to Great Recession a lower interest rate than conventional financing was also a reason to use TE bonds.

8. Current Financial Landscape
Despite recent rise in interest rates, taxable FHA mortgage loan rates are still very competitive for financing affordable housing projects.
To access powerful 4% tax credit equity, tax exempt bonds are needed to be used for part of the financing.
Interest rates for short term debt and long term debt are historically close to each other (know as a “flat yield curve”). Difference between 2 year treasury and 30 year treasury is only 0.40%.
Current tax exempt bond structure used for affordable housing projects specifically with 4% tax credits and FHA financing was developed almost a decade ago…..

9. FHA Loan > 50% Bonds Short-Term Bond Structure Borrower LP Investor
Bond proceeds
LP Investor
Debt service
payments
Trustee
FHA Loan > 50% Bonds
Bond
proceeds
Cash
collateral
Lender
funds
Bond Holders
FHA Lender

10. Documents required by HUD for TE Bond Deals
Lender Certification for Tax Exempt Bond Transactions
FHA Lender certifies that lender’s funds sent to Trustee are NOT FHA insured funds pursuant to chapter
See FHA Lender Funds reference on prior slide.
Funds are FHA insured only when they are disbursed to the owner/project at the direction of the FHA Lender.
Funding and/or Loan Disbursement Agreement
Memorializes funding sources and order during construction.
Creates legal between FHA Lender and Bond Trustee.
HUD Override Language in Key Bond Documents

11. Today’s Benefits of Short Term Bond Structure
Qualify for 4% tax credits (due to the use of tax exempt bonds) which results in equity source of over 30% of development costs.
Lower FHA Mortgage Rate
Minimal to NO Negative Arbitrage. Saves hundreds of thousands of dollars in transaction costs.

12. Collateral for Short-Term Bond Structure
Trustee always has 100% cash collateral
Cash collateral can be invested while held with the Trustee
Trustee
Bondholders are receiving (tax exempt) interest while outstanding
Bond
proceeds
Cash
collateral
Lender
funds
Bond Holders
FHA Lender

13. What is Negative (or Positive) Arbitrage?
Trustee
Treasury Investment
Bond Holders
2.60%
2.00%
Cash collateral can be invested in treasury while held with the Trustee
Bondholders are receiving (tax exempt) interest while bonds are outstanding
60 BPS Positive Arbitrage
(Needs to go back to IRS)
Avg Investment Yield
Bond Rate

14. Major Parties in TE Bond Transaction
The Issuer – state or local gov’t agency issuing tax exempt bonds
Bond Counsel – provides tax opinion and prepares the main bond documents (i.e. Indenture, Loan Agreement and Regulatory Agreement)
Issuer Counsel/Consultant – if applicable, advises issuer on various matters relating to the financing
Bond Underwriter – sells tax exempt bonds to holders; coordinates various aspects of all the different participants
Underwriter's Counsel – prepares underwriter documents (i.e. Official Statement, Bond Purchase Agreement, etc.)

15. Major Parties in TE Bond Transaction
Rating Agency – provides rating for the Bonds
Trustee and Trustee’s Counsel – administers trust indenture; makes payments to Bondholders; manages investments of funds
Owner & Owner Counsel – developer of the affordable housing project; reviews all documents and provides information to all parties
FHA Lender & Lender Counsel – drafts fha mortgage loan documents and manages the fha/GNMA part of the transaction
Tax Credit Investor & Investor Counsel – drafts partnership agreement and manages the tax credit part of the transaction
 Typical “all hands” bond calls can have in excess of 20 participants!

16. Major Tax Exempt Bond Documents
Category
Documents
Bond Documents
(typically prepared by Bond Counsel)
Trust Indenture
Loan or Financing Agreement
Tax Regulatory Agreement
Land Use Restriction Agreement
Underwriter Documents
(typically prepared by Underwriter’s Counsel)
Official Statement
Bond Purchase Agreement
Continuing Disclosure Agreement
Remarketing Agreement
Tax Credit Documents
(typically prepared by Tax Credit Counsel)
Partnership Agreement
Extended Use Agreement
FHA Documents
(typically prepared by FHA Lender’s Counsel)
FHA Loan Documents
Disbursement and/or Funding Agreement
Lender Certification

17. The Many Paths to Closing

18. More Info re Bond Related Timing
Bond application submitted either separately or combined with tax credit application – process varies by state.
Issuer meetings for certain approvals (TEFRA, Resolutions, Document approval) are all crucial for closing and vary by state.
Some states may have more than one potential issuer of the Bonds – e.g., CA, TX. Some states have just one – e.g., DC.
Issuer costs and bond counsel options can vary depending on state. Important for developer to know their options.
Coordination with HUD closing schedule is crucial; typically coordinated by bond underwriter.
Need firm closing date from HUD in order to price (market and sell) the bonds.

19. Importance of Setting Closing Date
Bond transactions often have hard closing deadlines that could be set by:
Bond volume cap award expiration date;
Purchase and sale expiration date;
Construction contract expiration date;
Placed-in-service deadlines.
Missing these dates could result in:
Loss of Bond allocation from the state;
Renegotiation of purchase price or loss of property;
Increase construction cost;
Downward adjustments in the final amount of tax credit equity.
The Bond Underwriter needs a firm closing date from HUD at least 2 weeks prior to when the closing is to occur……

20. Ideal Closing Timing Sequence
Often best to work backwards from Closing Deadline:
Bond Closing Deadline:
Friday, October 26
Target Closing/Funding Date1:
Thursday, October 25
HUD "Passing of Papers“2:
Wednesday, October 24
Recording3:
Tuesday, October 23
Bond Preclosing/Document Signing4:
Monday, October 22
Bonds Priced:
Friday, October 19
Print Preliminary Official Statement / Market Bonds:
Monday, October 12
HUD Closing Date Confirmed:
Friday, October 11
Notes:
1: Most Bond deals have a 1pm et closing deadline so funding date should always be day after HUD “preclosing”.
2: Often confused with funding date. Important to clarify funding is following day.
3: Varies by jurisdiction – can take 2+ days in some locations.
4: Often accomplished by “mail” with no in person meeting required.