1. IPED HOUSING TAX CREDITS 101 Tax Exempt Bonds and Housing Tax Credits presented by: Dan Smith – Novogradac & Company LLP

2. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" What key piece of advice should I take away from this panel? Presuming I leave here today and want to develop a successful tax-exempt bond project, whats my first step? Assemble your team early –Accountant –Developers Bond Counsel –Equity Partner –Underwriter –Local Consultant / Political Liaison

3. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" What are Tax-Exempt Bonds? 1986 IRC §103(a) –Interest Income Federal Exemption –State Income Exemption (Generally) Tax-Exempt Housing Bond interest not subject to AMT Effective: Bonds issued after July 30, 2008 Bonds Eligible For Income Exemption –Private Activity Bonds (IRC §146) –Governmental Bonds –§501(c)(3) Tax-Exempt Bonds

4. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" What do Tax-Exempt Bonds Offer? Economic Benefit To Buyers Economic Benefit To Issuers Interest Rate Determination –Bond Rating –Credit Enhancement

5. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Why are Developers doing Tax-Exempt Bond Deals? Demand for Tax Credit Allocations (9% LIHC Deals) Uses conventional financing Only $2.20 Per Capita available - $ 2,560,000 –Limited pool of tax credits Developers Apply To State Allocating Agencies States Oversubscribed: 4-6 To 1

6. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" So Are Bonds a Better Way to Go? 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 More Mixed Income Developments

7. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" So Are Bonds a Better Way to Go? Excess Demand For Bonds ($85.00 Per Capita) –$ 262,095,000 –Housing Competes With Other Uses Can be reissued to another project without counting against the bond volume cap Addition of $11 billion annually of tax exempt bonds available for housing for 2008- 2010

8. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" What are the Benefits of Bonds? Interest Rate Benefit –Bond Rating –Credit Enhancement Reduced Interest Rate (More Debt!) Possible To Reduce Debt Coverage Ratios Automatic 4% Tax Credit Allocation Basically the Same Operational Regulations as LIHC Larger Developments In Better Markets

9. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I get these Bonds and Who gives them to me? Bond Issuing –States –Local Government Entities (Cities, Townships, Counties, HFCs) –Qualified IRC §501(c)(3) Organizations And Governmental Units (Tax-Exempt Corporations) Bond Inducement vs. Issuance vs. Allocation

10. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" What Types of Financing are Available? Multi-Year Construction/Permanent Multi-Series

11. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How are Tax-Exempt Bond Deals Different than Conventional Tax Credit Deals? Equity Debt 9% LIHC Credits Using Conventional Debt 4% Project Using Tax-Exempt Bond Debt Equity Debt

12. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Why is there so much less Equity in a Bond Deal? Reduced Credit Percentage (4%(actually less) Vs 9%) Tax Losses Are Spread Across A Smaller Amount Of Tax Credit Dollars Result May Be An Increased Credit Price

13. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Whats the Difference Between 9% and 4% Credits? EB x LIOP x CP x 10 = Credits The Credit Percentage is the Tax Credit Percentage Rate published monthly in our Journal Of Tax Credit Housing and on our website! October 2008 = (9% vs. 3.37%)

14. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Sounds pretty good!! What are the rules and restrictions I have to follow? Income Restrictions: –20% at 50% AMGI 40% at 60% AMGI

15. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Special Rules: Good Costs vs. Bad Costs At Least 95% Must Be Used To Pay Or Reimburse Good Costs Good Costs Include: –Land & Depreciable Costs For Income Tax Purposes –Paid Or Incurred After The Date Of Inducement Resolution

16. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Special Rules: Good Costs vs. Bad Costs Bad Costs Include: –Costs incurred prior to Inducement Resolution –Intangible Assets –Bonds Issuance Costs and Underwriting –Loan Origination Fees Amortized over the Permanent Loan Period

17. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Special Rules: Good Costs vs. Bad Costs No More Than 2% Of Proceeds Can Be Used For Bond Issuance Costs –Taxable Tails / Owner Equity

18. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" 50% Financing Requirement 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 and Lease-Up Costs

19. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" 50% Financing Requirement If 50% of the Aggregate Basis is Financed by Bond Proceeds, Entire Basis Exempted From LIHC Volume Limitation What does Financed by mean??

20. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" 50% Financing Requirement 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

21. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Other Effects: Eligible Basis 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 Excluded From Eligible Basis

22. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Is there anything easier in a Tax-Exempt Bond Deal? 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

23. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Sounds Good!!! How do I get started? Put the Team Together: –Accountant –Equity Partner –Underwriter –Local Developers Bond Counsel –Credit Enhancer

24. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" What does a typical Tax-Exempt Bond Structure Look Like? Bond Holder Bond Issuer LIHC Partnership Borrower Credit Enhancer Trustee BondUnderwriter Bond Purchase Contract Official Statement Bonds Bond Proceeds Indenture Payments of Principal & Interest Loan Agreement Deed of Trust Credit Enhancement Reimbursement Agreement Deed of Trust

25. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 1.Find a potential property and run initial numbers for feasibility of the project 2.Put the team together: –Accountant –Equity Partner –Underwriter –Local Developers Bond Counsel –Credit Enhancer

26. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 3.Issuer passes inducement resolution 4.Credit enhancement commitment 5.Private activity bond application submitted to Issuing Authority

27. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 6.Tax credit application submitted 7.Public notice of the project (2 weeks) 8.TEFRA hearing held –The Tax Equity and Fiscal Responsibility Act

28. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 8.Private activity bond application approved –Bond allocation awarded

29. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 9. 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

30. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 10.Issuer passes bond resolution including the following: Issuers approval of TEFRA hearing Private activity bond allocation Credit enhancement commitment Bond rating from agency Preliminary official statement

31. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" How do I put my Deal Together? 11.Underwriter prices and contracts for selling the bonds 12.Bond purchase agreement 13.Bond Closing 14.Final Official Statement

32. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Glossary 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.

33. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Glossary 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.

34. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Glossary 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.

35. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Glossary 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.

36. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Glossary Rating Agency: Agencies that determine or rate the investment risk of the bonds. Examples include Standard & Poors and Moodys 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.

37. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Glossary TEFRA Hearing: The bond issuers 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.

38. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" Contact Information: Dan Smith Novogradac & Company LLP 303 W. Third Street Dover, OH 44622 Phone: (330) 602-4600 Fax: (330) 602-4601 dan.smith@novoco.com

39. Tax Exempt Bonds and Housing Tax Credits IPED: Housing Tax Credits "101" QUESTIONS ??? For free tax credit resources: Go to www.taxcredithousing.com Or email us at: dan.smith@novoco.com