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IPED HOUSING TAX CREDITS “101” PowerPoint PPT Presentation


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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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IPED HOUSING TAX CREDITS “101”

Tax Exempt Bonds and Housing Tax Credits

presented by:

Dan Smith – Novogradac & Company LLP


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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

What key piece of advice should I take away from this panel?


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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

What are Tax-Exempt Bonds?


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Economic Benefit To Buyers

Economic Benefit To Issuers

Interest Rate Determination

Bond Rating

Credit Enhancement

What do Tax-Exempt Bonds Offer?


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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

Why are Developers doingTax-Exempt Bond Deals?


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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

So Are Bonds a Better Way to Go?


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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

So Are Bonds a Better Way to Go?


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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

What are the Benefits of Bonds?


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Bond Issuing

States

Local Government Entities (Cities, Townships,Counties, HFCs)

Qualified IRC §501(c)(3) Organizations AndGovernmental Units (Tax-Exempt Corporations)

Bond Inducement vs. Issuance vs. Allocation

How do I get these Bonds andWho gives them to me?


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Multi-Year

Construction/Permanent

Multi-Series

What Types of Financing are Available?


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How are Tax-Exempt Bond Deals Different than Conventional Tax Credit Deals?

9% LIHC Credits

Using Conventional Debt

4% Project

Using Tax-Exempt Bond Debt

Equity

Equity

Debt

Debt


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Reduced Credit Percentage (4%(actually less) Vs 9%)

Tax Losses Are Spread Across A SmallerAmount Of Tax Credit Dollars

Result May Be An Increased Credit Price

Why is there so much less Equity in a Bond Deal?


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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%)

What’s the Difference Between 9% and 4% Credits?


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Income Restrictions:

20% at 50% AMGI

40% at 60% AMGI

Sounds pretty good!! What are the rules and restrictions I have to follow?


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At Least 95% Must Be Used To Pay OrReimburse “Good Costs”

“Good Costs” Include:

Land & Depreciable Costs For Income Tax Purposes

Paid Or Incurred After The Date Of Inducement Resolution

Special Rules:Good Costs vs. Bad Costs


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“Bad Costs” Include:

Costs incurred prior to Inducement Resolution

Intangible Assets

Bonds Issuance Costs and Underwriting

Loan Origination Fees Amortized over thePermanent Loan Period

Special Rules:Good Costs vs. Bad Costs


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No More Than 2% Of Proceeds Can BeUsed For Bond Issuance Costs

Taxable Tails / Owner Equity

Special Rules:Good Costs vs. Bad Costs


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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 andLease-Up Costs

50% Financing Requirement


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If 50% of the Aggregate Basis is Financed by Bond Proceeds, Entire Basis Exempted From LIHC Volume Limitation

What does “Financed by” mean??

50% Financing Requirement


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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

50% Financing Requirement


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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 ExcludedFrom Eligible Basis

Other Effects: Eligible Basis


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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

Is there anything easier in aTax-Exempt Bond Deal?


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Put the Team Together:

Accountant

Equity Partner

Underwriter

Local Developer’s Bond Counsel

Credit Enhancer

Sounds Good!!! How do I get started?


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Bond Purchase Contract

Official Statement

Bond

Underwriter

Bond Issuer

Bonds

Indenture

LIHC

Partnership

“Borrower”

Bond Proceeds

Bond Holder

Trustee

Loan Agreement

Deed of Trust

Payments of

Principal & Interest

Reimbursement

Agreement

Deed of Trust

Credit

Enhancement

Credit

Enhancer

What does a typical Tax-Exempt Bond Structure Look Like?


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Find a potential property and run initial numbers for feasibility of the project

Put the team together:

Accountant

Equity Partner

Underwriter

Local Developer’s Bond Counsel

Credit Enhancer

How do I put my Deal Together?


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Issuer passes inducement resolution

Credit enhancement commitment

Private activity bond application submitted to Issuing Authority

How do I put my Deal Together?


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Tax credit application submitted

Public notice of the project (2 weeks)

TEFRA hearing held

The Tax Equity and Fiscal Responsibility Act

How do I put my Deal Together?


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Private activity bond application approved

Bond allocation awarded

How do I put my Deal Together?


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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

How do I put my Deal Together?


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Issuer passes bond resolutionincluding the following:

Issuer’s approval of TEFRA hearing

Private activity bond allocation

Credit enhancement commitment

Bond rating from agency

Preliminary official statement

How do I put my Deal Together?


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Underwriter prices and contracts for selling the bonds

Bond purchase agreement

Bond Closing

Final Official Statement

How do I put my Deal Together?


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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.

Glossary


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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.

Glossary


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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.

Glossary


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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.

Glossary


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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.

Glossary


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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.

Glossary


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Dan Smith

Novogradac & Company LLP

303 W. Third Street

Dover, OH 44622

Phone: (330) 602-4600

Fax: (330) 602-4601

[email protected]

Contact Information:


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QUESTIONS ???

For free tax credit resources:Go to

www.taxcredithousing.com

Or email us at:

[email protected]


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