1. Tax-Exempt Bonds and 4% Tax Credits Mary Nash K. Rusher Hunton & Williams LLP (919) 899-3066 mnrusher@hunton.com Mark Shelburne Novogradac & Company LLP (919) 889-2596 mark.shelburne@novoco.com 2015 North Carolina Affordable Housing Conference October 29, 2015

2. 2 What are multifamily housing revenue bonds? Bond (debt) issued by a governmental entity (state, regional or local housing authority, county or city - the “Issuer”) Proceeds are loaned to private entity (typically a partnership or LLC - the “Borrower”) Borrower uses those dollars to acquire, construct and/or rehab and equip “multifamily residential rental housing” Bonds are “private activity bonds” or “exempt facility bonds” under Section 142 of the Code

3. Tax-exempt bonds issued under IRC Section 142 combined with the 4% tax credits under Section 42 are an alternative to traditional 9% tax credits Section 42 provides an “automatic” 4% tax credit 50% or more of the project’s eligible costs must be financed with tax-exempt private activity bonds Developer must submit an application to NCHFA for allocation of “volume cap” (i.e. permission to issue) If NCHFA approves, the project sponsor/developer is not required to compete separately for tax credits 3

4. 4 Each state is permitted to issue a limited amount of private activity bonds in each year (“volume cap”) Volume cap is divided among industrial development, student loan, single family, waste disposal and multifamily housing Currently far more supply than demand In NC, 2015 volume cap is more than $944 million Volume cap for housing allocated by the NC Federal Tax Reform Allocation Committee (“TRAC”) Use for multifamily housing is based on NCHFA recommendation

5. Benefits of tax-exempt bonds & 4% LIHTCs No competition; resource goes largely unused Tremendous need across the state NC has extensive developer capacity – more than 60 groups involved in the 9% process annually Difficult but certainly not impossible to make the numbers work Developers all understand LIHTCs, which is the most difficult part 5

6. Bond/4% Affordability Requirements Bonds and tax credit rules require that at least 40% of the units be rented to households at <60% of AMI As a practical matte most are 100% restricted Tax rules permit as few as 20% to be leased to HHs at <50% AMI, with the remaining at 80% at market Only one such project in N.C. (Charlotte) An 80/20 project could be an option anywhere a market rate complex works 6

7. Portfolio Transactions Portfolio transactions are a very specialized activity Involve combining several properties in different locations under one owner Challenging, lots of moving parts Very efficient outcome as compared to submitting many 9% applications NCHFA rather than a local authority is the issuer since it has statewide jurisdiction 7

8. Expected Bond Calendar for 2016, First Round (Draft QAP, same as 9%) 8 January 22Deadline for submission of preliminary applications (noon) March 24Notification of final site scores and initial evaluation of rehab projects May 13Deadline for full application (12:00 noon) August, 2016 Notification of tax credit awards December 31, 2016Deadline for closing transaction

9. NCHFA Review Criteria for Bond/4% Deals Requirements essentially the same as the 9% pre-app –site score, although no competition –site thresholds still apply –market study is the same –need an option or contract on the real property Other than the last item, a fairly small investment 9

10. NCHFA Requirements Meet all QAP standards unless indicated otherwise Inducement resolution with the full application All projects will carry out DHHS targeting Rehabilitation applications must: –Be placed in service date or before December 31, 1999 –Require at least $10,000 per unit of rehabilitation –Not have an acquisition cost >60% of the total cost Qualify for experience with an out-of-state bond deal Operating reserve must be the greater of $1,500/unit or four months’ debt and operating Developer fee same as for 9% other than max of $1,900,000 10

11. Summary of initial steps for approval Apply to NCHFA for approval of volume cap Identify an issuer – local housing authority (best choice), regional housing authority, city or county Issuer adopts preliminary (also called “inducement” or “reimbursement”) resolution Issuer agrees that it will issue bonds if all approvals are obtained Receive approval from NCHFA and allocation of volume cap 11

12. Summary of remaining steps Public hearing (“TEFRA” hearing) after 14 days’ published notice before Issuer or city/county Followed by approval resolution from city/county in which project is located If debt outstanding >5 years, Issuer adopts findings resolution to satisfy Local Government Commission (Treasurer); meets once a month Approval by town/city if a county or regional housing authority exercising jurisdiction there Final approval by Issuer 12

13. Why does someone want to buy these bonds? 13 Interest received is exempt from income tax In NC, the LGC requires bonds must have credit enhancement, be sold to a financial institution, or have an investment grade rating HUD insured mortgage with Ginnie Mae Certificates Can be privately placed May be purchased by a single institutional investor, which may also be the tax credit investor Banks get Community Reinvestment Act credit

14. Two Primary Structures: Long-Term Bonds Remain in place at least for the full tax credit period Rents must cover the debt service Often require some sort of credit enhancement (i.e. Fannie Mae, HUD guaranty) or A number of banks now will do privately placed long term debt (SunTrust, Bank of America, CitiBank) or Freddie Mac also has a long term product 14

15. STRUCTURE – LONG-TERM TAX-EXEMPT MULTIFAMILY HOUSING BONDS 15 B OND H OLDERS O R P URCHASER T AX C REDIT I NVESTOR [I NDENTURE T RUSTEE ] A UTHORITY D EVELOPER /B ORROWER P ROJECT C ONSTRUCTION F UND R ESTRICTIVE C OVENANTS F ILED AT C LOSING Purchase Price ($$) Note Assigned Loan Agreement & Note Upfront Issuance Fee Limited Partnership Interest Sells Bonds $$ U NDERWRITER ($$) Tax Credits Revenues $$ Bonds

16. Bonds are outstanding only during construction Bonds and HUD 221(d)(4)/223(f)/Fannie Mae loan are outstanding simultaneously Construction draws on HUD or Fannie Mae loan deposited to a cash collateral account; corresponding amount of bonds used to pay actual costs Result is >50% of basis is constructed with bond proceeds Bondholders have no interest in the Project but are 100% cash secured; result is lower rate for short-term debt Bondholders have cash collateral; almost no risk 16 Two Primary Structures: Short Bonds

17. STRUCTURE – SHORT-TERM TAX-EXEMPT MULTIFAMILY HOUSING BONDS 17 U NDERWRITER Release corresponding amount of bond proceeds B OND H OLDERS O R P URCHASER T AX C REDIT I NVESTOR I NDENTURE T RUSTEE OR E SCROW A GENT A UTHORITY D EVELOPER /B ORROWER P ROJECT C ONSTRUCTION F UND R ESTRICTIVE C OVENANTS F ILED AT C LOSING B OND P ROCEEDS Note Assigned Sells Bonds $$ Purchase Price ($$) M ORTGAGE S ERVICER FOR HUD/F ANNIE M AE C ASH C OLLATERAL F UND Disbursement Request Advance Funds At end of construction, cash pays off bonds Tax Credits Upfront Issuance Fee Loan Agreement & Note Limited Partnership Interest Revenues $$ Bonds

18. Who are the players in a bond deal? Issuer – governmental unit that issues bonds Very important to identify issuer early in the process In NC the local housing authority is the first choice; cities and counties can also act as housing authorities Purchaser – institution that purchases bonds Underwriter – for publicly offered bonds, the investment banking firm that structures the deal and finds buyers Trustee – bonds are issued under a trust indenture; the trustee holds proceeds pending disbursement for construction and collects payments for bondholders Credit Enhancer – provides financial guarantee for bonds/project; makes bonds ratable/marketable 18

19. Who are the players in a bond deal? (cont’d) Bond Counsel – oversees entire process and issues opinion that bonds are tax-exempt Underwriter’s Counsel – prepares disclosure document to sell bonds to the market place – “Official Statement” Borrower’s Counsel – looks out for Borrower’s interest; generally does real estate, tax credits, and opinion (sometimes roles split between >1 firm) Issuer’s Counsel – represents the bond issuer Rating Agency – will issue ratings for the bonds based on credit enhancement; makes bonds more marketable 19

20. QUESTIONS? 20 Mary Nash K. Rusher Hunton & Williams LLP (919) 899-3066 mnrusher@hunton.com Mark Shelburne Novogradac & Company LLP (919) 889-2596 mark.shelburne@novoco.com