IPED HOUSING TAX CREDITS 101 Tax Exempt Bonds

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

Tax Exempt Bonds and Housing Tax Credits 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, what’s my first step? Assemble your team early – – – Accountant Developer’s Bond Counsel Equity Partner Underwriter Local Consultant / Political Liaison IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

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

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits What’s 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%) IPED: Housing Tax Credits "101"

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

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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? ? IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

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

Tax Exempt Bonds and Housing Tax Credits 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 Developer’s Bond Counsel Credit Enhancer IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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

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

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

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

Tax Exempt Bonds and Housing Tax Credits Glossary • Rating Agency: Agencies that determine or “rate” the investment risk of the bonds. Examples include Standard & Poor’s and Moody’s 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. IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits Glossary • TEFRA Hearing: The bond issuer’s 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. IPED: Housing Tax Credits "101"

Tax Exempt Bonds and Housing Tax Credits 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 IPED: Housing Tax Credits "101"

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