IPED HOUSING TAX CREDITS “101”. Tax Exempt Bonds and Housing Tax Credits presented by: Dan Smith – Novogradac & Company LLP. 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
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Tax Exempt Bonds and Housing Tax Credits
Dan Smith – Novogradac & Company LLP
Assemble your team early
Developer’s Bond Counsel
Local Consultant / Political LiaisonWhat key piece of advice should I take away from this panel?
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)
§501(c)(3) Tax-Exempt BondsWhat are Tax-Exempt Bonds?
Bonds Structure Now Feasible
Credit Enhancements Available
Higher Credit Prices
Low interest rates
More Mixed Income DevelopmentsSo Are Bonds a Better Way to Go?
9% LIHC Credits
Using Conventional Debt
Using Tax-Exempt Bond Debt
Tax Losses Are Spread Across A SmallerAmount Of Tax Credit Dollars
Result May Be An Increased Credit PriceWhy is there so much less Equity in a Bond Deal?
20% at 50% AMGI
40% at 60% AMGISounds pretty good!! What are the rules and restrictions I have to follow?
“Good Costs” Include:
Land & Depreciable Costs For Income Tax Purposes
Paid Or Incurred After The Date Of Inducement ResolutionSpecial Rules:Good Costs vs. Bad Costs
Taxable Tails / Owner EquitySpecial Rules:Good Costs vs. Bad Costs
Aggregate Basis includes:
Land And Building
Excludes Permanent Loan Fees and Interest,Intangible Assets, Cash Reserves andLease-Up Costs50% Financing Requirement
What does “Financed by” mean??50% Financing Requirement
DDA / QCT
130% applied to Eligible Basis
Increase in Annual Tax Credit
All Bond Issuance Costs ExcludedFrom Eligible BasisOther Effects: Eligible Basis
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 EngineeringIs there anything easier in aTax-Exempt Bond Deal?
Deed of Trust
Principal & Interest
Deed of Trust
EnhancerWhat does a typical Tax-Exempt Bond Structure Look Like?
Put the team together:
Local Developer’s Bond Counsel
Credit EnhancerHow do I put my Deal Together?
POS preliminary official statement
Credit enhancer documents
Tax credit investor documents
Partnership agreementHow do I put my Deal Together?
Issuer’s approval of TEFRA hearing
Private activity bond allocation
Credit enhancement commitment
Bond rating from agency
Preliminary official statementHow do I put my Deal Together?
Bond purchase agreement
Final Official StatementHow do I put my Deal Together?
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.Glossary
A resolution passed by the bond issuer communicating the intent to issue bonds for a specific activity.
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.Glossary
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.Glossary
Governmental or Non-Profit entity responsible for issuing the bonds.
For fee, guarantees that the bondholders will receive scheduled bond payments.
An agreement between the bond issuer and the trustee containing the terms and procedures for payment of the bonds.Glossary
Agencies that determine or “rate” the investment risk of the bonds. Examples include Standard & Poor’s and Moody’s Investor Services.
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.Glossary