tax exempt bonds 1 bonding 101 – tax-exempt bonds as a way to finance your projects vince...
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Tax Exempt BondsTax Exempt Bonds 11
Bonding 101 – Tax-Exempt Bonds as a Bonding 101 – Tax-Exempt Bonds as a Way to Finance Your ProjectsWay to Finance Your Projects
Vince O’Donnell, Vice President of Vince O’Donnell, Vice President of Affordable Housing PreservationAffordable Housing Preservation
Local Initiatives Support CorporationLocal Initiatives Support [email protected]@lisc.org
617-338-5170617-338-5170
Tax Exempt BondsTax Exempt Bonds 22
TAX EXEMPT BONDSTAX EXEMPT BONDS
Three kinds of tax-exempt bonds are issued Three kinds of tax-exempt bonds are issued by public housing finance entitiesby public housing finance entities Private Activity Bonds for for-profit entitiesPrivate Activity Bonds for for-profit entities Private Activity Bonds for 501(c)(3) Private Activity Bonds for 501(c)(3)
organizationsorganizations Essential Purpose Bonds issued for various Essential Purpose Bonds issued for various
activities that may include housingactivities that may include housing
Tax Exempt BondsTax Exempt Bonds 33
TAX EXEMPT BONDSTAX EXEMPT BONDS
Combining tax credits and tax-exempt Combining tax credits and tax-exempt bondsbonds
What additional parties are involved?What additional parties are involved?
What are the additional documents What are the additional documents needed?needed?
Tax Exempt BondsTax Exempt Bonds 44
Qualified PABs with Tax CreditsQualified PABs with Tax Credits
Use Limited Partnership or LLC structure Use Limited Partnership or LLC structure
Available to both for-profit and nonprofit Available to both for-profit and nonprofit developersdevelopers
Interest on these bonds is tax exempt if:Interest on these bonds is tax exempt if: Bond amount is within State’s bond volume capBond amount is within State’s bond volume cap TEFRA (Tax Equity and Fiscal Responsibility Act of TEFRA (Tax Equity and Fiscal Responsibility Act of
1982) public hearing held before bonds issued1982) public hearing held before bonds issued
Tax Exempt BondsTax Exempt Bonds 55
Qualified PABs with Tax CreditsQualified PABs with Tax Credits
Tax credits are allocated to the LP “as-of-Tax credits are allocated to the LP “as-of-right”right”
““50% Test” – bonds must fund 50% of 50% Test” – bonds must fund 50% of project’s depreciable basis to receive all tax project’s depreciable basis to receive all tax credits; otherwise LIHTC are pro-rated per credits; otherwise LIHTC are pro-rated per fraction of total development cost supported.fraction of total development cost supported.
Tax Exempt BondsTax Exempt Bonds 66
Combining Tax Credits and BondsCombining Tax Credits and Bonds
4% (30% present vale) tax credit rate – 4% (30% present vale) tax credit rate – federally subsidized financingfederally subsidized financing
Project must be consistent with State’s QAPProject must be consistent with State’s QAP
Minimum LIHTCs required for financial Minimum LIHTCs required for financial feasibilityfeasibility
Use of bond proceeds must stay within use Use of bond proceeds must stay within use limitations (“Good Costs”)limitations (“Good Costs”)
Tax Exempt BondsTax Exempt Bonds 77
Combining Tax Credits and BondsCombining Tax Credits and Bonds
Meeting the “50% test” is criticalMeeting the “50% test” is critical
Tax credit tenant income rules apply. Tax credit tenant income rules apply. Needed for Needed for Exemption of interest from Federal income Exemption of interest from Federal income
taxestaxes Compliance with LIHTC requirementsCompliance with LIHTC requirements
Can transfer ownership to tenants at year 16Can transfer ownership to tenants at year 16
Tax Exempt BondsTax Exempt Bonds 88
Additional Parties in a T.E. Bond IssueAdditional Parties in a T.E. Bond Issue
Bond Issuer – government Bond Issuer – government agency/entity/PHAagency/entity/PHA
Bond Counsel – determines compliance Bond Counsel – determines compliance with lawswith laws
Bond Trustee – protects interests of Bond Trustee – protects interests of bondholdersbondholders
Underwriter – structures bonds for marketUnderwriter – structures bonds for market
Tax Exempt BondsTax Exempt Bonds 99
Additional Parties in a T.E. Bond IssueAdditional Parties in a T.E. Bond Issue
Financial Advisor – does feasibility analysisFinancial Advisor – does feasibility analysis
Credit enhancement provider – increases Credit enhancement provider – increases marketability of the bondsmarketability of the bonds
Bond Rating Agency – rating influences the Bond Rating Agency – rating influences the issue’s price and marketabilityissue’s price and marketability
Tax Exempt BondsTax Exempt Bonds 1010
Bond Financing InstrumentsBond Financing Instruments
Mortgage – documents the property Mortgage – documents the property lienlien
Loan Agreement – repayment and Loan Agreement – repayment and securitysecurity
Official Statement – key business Official Statement – key business aspectsaspects
Tax Exempt BondsTax Exempt Bonds 1111
Bond Financing InstrumentsBond Financing Instruments
Trust Indenture – establishes bond Trust Indenture – establishes bond trustee’s responsibilities and rightstrustee’s responsibilities and rights
Bond Purchase Agreement – basis for Bond Purchase Agreement – basis for Underwriter purchasing bonds from Underwriter purchasing bonds from IssuerIssuer
Credit Enhancement Documents – Credit Enhancement Documents – improves credit rating, reduces cost of improves credit rating, reduces cost of borrowingborrowing
Tax Exempt BondsTax Exempt Bonds 1212
Other Housing Tax Exempt Bonds -Other Housing Tax Exempt Bonds -Without Tax Exempt BondsWithout Tax Exempt Bonds
501(c)(3) Qualified PABs501(c)(3) Qualified PABs Not eligible for LIHTCs – nonprofit ownerNot eligible for LIHTCs – nonprofit owner Less restrictive income, use restrictionsLess restrictive income, use restrictions
Essential Function Bonds (issued by gov’t Essential Function Bonds (issued by gov’t entities)entities) Not eligible for LIHTCs – government ownerNot eligible for LIHTCs – government owner Least restrictive requirementsLeast restrictive requirements
Tax Exempt BondsTax Exempt Bonds 1313
Response to Current Market ConditionsResponse to Current Market Conditions
Issues:Issues:Flight of capital to U.S. Treasuries and other Flight of capital to U.S. Treasuries and other “safe” instruments.“safe” instruments.High rates of tax-exempt municipal bonds.High rates of tax-exempt municipal bonds.Low rates on taxable bonds using FHA and Low rates on taxable bonds using FHA and GNMAGNMAInfeasible to meet 50% test for 4% LIHTCs Infeasible to meet 50% test for 4% LIHTCs using traditional permanent debt structure.using traditional permanent debt structure.
Tax Exempt BondsTax Exempt Bonds 1414
Response to Current Market ConditionsResponse to Current Market Conditions(continued)(continued)
Solution:Solution:
Short-term cash-collateralized tax-exempt Short-term cash-collateralized tax-exempt bonds for 50% of TDC.bonds for 50% of TDC.
Replace drawdowns of tax-exempt bond Replace drawdowns of tax-exempt bond proceeds with FHA-GNMA-insured loan proceeds with FHA-GNMA-insured loan proceeds.proceeds.
Repay tax-exempt bonds after placed-in-Repay tax-exempt bonds after placed-in-service debt.service debt.
Tax Exempt BondsTax Exempt Bonds 1515
Response to Current Market ConditionsResponse to Current Market Conditions(continued(continued
Solution (continued):Solution (continued):Credit Enhancement:Credit Enhancement:– FHA §223(f) – including LIHTC Affordable FHA §223(f) – including LIHTC Affordable
Pilot ProgramPilot Program– FHA §221(d)(4) New Construction – FHA §221(d)(4) New Construction –
Substantial Rehab.Substantial Rehab.– USDA §538 USDA §538
Savings: 100-150 basis pointsSavings: 100-150 basis pointsReduced claim on bond capReduced claim on bond cap
Tax Exempt BondsTax Exempt Bonds 1616
Additional ResourcesAdditional Resources
Multifamily Rental Housing: Financing With Multifamily Rental Housing: Financing With Tax-Exempt BondsTax-Exempt Bonds
Jason Cooper, Jason Cooper, Orrick, Herrington & Sutcliffe LLPOrrick, Herrington & Sutcliffe LLP
http://www.orrick.com/Events-and-Publications/Documents/http://www.orrick.com/Events-and-Publications/Documents/2709.pdf2709.pdf
Tax Exempt BondsTax Exempt Bonds 1717
Additional ResourcesAdditional Resources
Combining Short-term Cash Backed Tax-Combining Short-term Cash Backed Tax-exempt Bonds With Taxable GNMA Sales exempt Bonds With Taxable GNMA Sales For Affordable Housing Projects Using For Affordable Housing Projects Using FHA InsuranceFHA Insurance
R. Wade Norris, Esq., Eichner Norris &Neumann PLLCR. Wade Norris, Esq., Eichner Norris &Neumann PLLCMarch 15, 2013March 15, 2013
http://www.citibank.com/icg/sa/citicommunitycapital/docs/http://www.citibank.com/icg/sa/citicommunitycapital/docs/031513_combining.pdf031513_combining.pdf