1. Tax Exempt Bonds with 4% Low- Income Housing Tax Credits September 3, 2014 Presented by: KENT S. NEUMANN, ESQ. kneumann@ennbonds.com (202) 973-0107 EICHNER NORRIS & NEUMANN PLLC 1225 19 th Street, N.W., 7 th Floor Washington, D.C. 20036 website: www.ennbonds.com

2.  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) 2 Eichner Norris & Neumann PLLC 202-973-0107

3.  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 3 Eichner Norris & Neumann PLLC 202-973-0107

4.  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 4 Eichner Norris & Neumann PLLC 202-973-0107

5. 5 No Tax Credit/ No Deduction DeductionTax Credit Net Income from Operations 1,000,000 Taxable Deductionsnone(300,000)none Taxable Income1,000,000700,0001,000,000 Tax Liability: Tax at 40% tax rate $400,000280,000400,000 Low-Income Housing Tax Creditsnone (300,000) Net Tax Liability$400,000$280,000$100,000 Eichner Norris & Neumann PLLC 202-973-0107

6.  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 6 Eichner Norris & Neumann PLLC 202-973-0107

7.  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) 7 Eichner Norris & Neumann PLLC 202-973-0107

8.  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: provide all 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. 8 Eichner Norris & Neumann PLLC 202-973-0107

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10. Assumed: $10,000,000 Bond Deal with 2-Year Construction Period and 24 level draws. 10 Eichner Norris & Neumann PLLC 202-973-0107 Short Term Fixed Rate Fully Funded Variable Rate Draw Down Long Term Fixed Rate Fully Funded Annual Bond Rate: 0.50%2.75%5.50% Interest Due on Bonds (24 months): $100,000$275,000$1,100,000 Mortgage Rate: 4.00% Additional Interest: $400,000 Total Interest: $500,000$275,000$1,100,000

11.  Bank Private Placements  Short-Term Fixed Rate Bonds with Taxable Credit Enhanced Loans (FHA/GSE/Rural Development)  VHDA Long-Term Fixed Rate Bond Transactions 11 Eichner Norris & Neumann PLLC 202-973-0107

12.  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) 12 Eichner Norris & Neumann PLLC 202-973-0107 Estimated Construction/Perm Interest Rate Stack Bond Rate – Construction (VR): LIBOR + ~2.50 (draw-down)2.70% Bond Rate – Permanent (FR): 10-year LIBOR Swap Rate + ~2.005.25%

13.  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 13 Eichner Norris & Neumann PLLC 202-973-0107

14. 14 Eichner Norris & Neumann PLLC 202-973-0107 Borrower MBS Purchaser Draw Request Loan Funding Trustee Bond Purchaser Bond Purchaser Bond Proceeds Account ~2-Yr Bonds Bond Proceeds Bond Payoff (after Project is placed in service) MBS Proceeds 34 Sale of Taxable MBS 756 812 Bond Proceeds Escrow Account FHA/GSE/RD Lender

15.  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 occationally be 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 15 Eichner Norris & Neumann PLLC 202-973-0107