RURAL DEVELOPMENT NORTHEAST REGIONAL BUYERS AND SELLERS CONFERENCE JUNE 30-JULY 1, 2010 ALBANY, NY

1. RURAL DEVELOPMENT NORTHEAST REGIONALBUYERS AND SELLERS CONFERENCEJUNE 30-JULY 1, 2010ALBANY, NY Richard Michael Price, Esq./Deborah VanAmerongen Nixon Peabody LLP/Strategic Policy Advisor 401 9th Street, NW, Suite 900/437 Madison Avenue Washington, DC 20004/New York, NY 10022 (202) 585-8000/(212) 940-3054

2. MULTI-FAMILY HOUSING BONDS: • Private Activity Bonds or Section 142(d) Bonds. • Two Essential Characteristics: Structured to comply with the private activity rules of the Internal Revenue Code (IRC or Code) They finance projects owned and operated by private parties (through single purpose legal entities known as limited partnerships or limited liability companies).

3. A finance structure in which a governmental entity issues bonds for a non-governmental, privately-owned project • All tax-exempt bonds must be issued by a governmental entity even though the proceeds of the bonds are used entirely by a private party. • The private owner utilizes the mechanism of a governmental bond issue to obtain the lower cost of capital resulting from the sale of tax-exempt bonds. • To achieve this benefit the bonds must comply with the provisions of the IRC.

4. Multi-family housing, together with industrial development, solid waste disposal, airports, water and sewage facilities, and single family housing are examples of qualifying uses for private activity bonds under the Code. Each state has a maximum limit on the amount of private activity bonds that can be issued in a year – this is called the volume cap. The Code provisions applicable to multi-family housing are found at section 142(d); hence, the reference to them as 142(d) bonds.

5. Alternative to Private Activity Bonds • 501(c)(3) • Section 501(c)(3) is a specific section of the Code that confers tax-exempt status on not-for-profit corporations and other legal entities that are organized and operated exclusively for, among others, religious, charitable, scientific, public safety testing, literary or educational purposes. • The provision of multi-family residential housing is treated as FURTHERING A CHARITABLE PURPOSE when the housing meets certain conditions, including satisfying the special needs of the elderly and assistance to the distressed and poor.

6. ADVANTAGES include: no volume cap requirement, no limitation on acquiring or constructing property (e.g., financing of working capital is a permissible purpose for a qualified 501(c)(3) bond issue) and the interest is not a preference item subject to AMT. Qualified 501(c)(3) bonds, however, remain subject to the TEFRA public approval rules and 2% costs of issuance limitation. • The Low Income Housing Tax Credit is not used under this structure because the 501(c)(3) organizations which own such multifamily housing projects are exempt from federal income tax.

7. Types of Issuers- • Multi-family housing bonds are typically issued by two types of governmental units: • (i) State or local public authorities or agencies - act as instrumentalities of, and under the authority of, a state or local government. These issuers include housing finance authorities, or • (ii) IDAs and redevelopment authorities; Municipal corporations (i.e., cities, towns and counties) - created by state charter to exercise local powers delegated by the state.

8. Major Tax Restrictions • Must be a Residential Rental Project. • At least 95% of the proceeds of the bonds must be used to finance a residential rental project. • No incomplete kitchens or bathrooms, hotels, motels, dormitories, fraternity and sorority houses, rooming houses, hospitals, sanitariums, rest homes, and trailer parks and rooms for use on a transient basis.

9. Functionally Related and Subordinate Property. • “Functionally related and subordinate” property - finance health clubs, swimming pools, parking, etc. • They must be reasonably required for the project - of a character and size commensurate with the character and size of the project.

10. Low Income Set-Aside: 20% or 50% or40% at 60% • Required Compliance During Qualified Project Period. • The Code defines the qualified project period as beginning on the date when at least 10% of the units in the project are occupied and ends on the later of: • (i) the date that is 15 years after the date on which 50% of the units are occupied; • (ii) the first day on which no tax-exempt private activity bonds are outstanding for the project; or • (iii) the date on which any Section 8 assistance terminates. • Noncompliance with these rules during the qualified project period results in the loss of tax-exempt status unless the noncompliance is cured within a reasonable period of time. An involuntary loss of the project (e.g., through fire) terminates the application of the rule if the bonds are retired or the project is reconstructed.

11. 95% Qualified Cost Requirement/Good Money & Bad Money. • At least 95% of the NET PROCEEDS of the bonds must be used for qualifying costs, “good costs.” “Net proceeds” includes investment earnings on bond proceeds but EXCLUDES monies in a reasonably required reserve fund. • Qualifying costs include only those costs incurred after the date that is 60 days prior to the date on which the issuer of the bonds declared its official intent to issue the bonds. Costs incurred prior to this date are not “good” costs and are NOT eligible to be paid with bond proceeds.

12. This does not necessarily mean that these costs cannot be financed with bond proceeds. They could be financed out of the 5% bad money portion of the bond issue or from other sources, such as equity. • No more than 5% of other expenses or “Bad Costs” can be financed with the tax-exempt Bonds. In addition, the Code limits to 2% of the bond proceeds the amount that can be used for the expenses incurred for the costs of issuance of the bonds (including underwriting discounts, rating agency charges, attorney fees, etc.). • Since the “Bad Costs” typically > 3% and COI, typically > 2% TAXABLE BONDS may be issued to finance these costs. These taxable bonds are often referred to as taxable tails.

13. Under the 50% test applicable to 4% deals, more than 50% of the eligible basis must be financed with tax-exempt bond proceeds for the owner to qualify for 100% tax credits. • The 50% test is not a reasonable expectations test at bond closing; it is an actual use, after the fact test.

14. Existing Property - 15% Rehab Requirement on Acquisition Financing • equal at least 15% of the depreciable cost of acquiring the building and fixtures [excluding land] financed with net proceeds, and • must be spent for rehabilitation within two years of the later of issuing the bonds or acquisition of the building. • Rehabilitation expenditures include air conditioning, new electrical wiring, insulation and new windows.

15. Construction/permanent financing • Conventional Construction Financing • Various long-term credit enhancers typically do not take construction risk and only provide permanent financing once the project has reached “stabilization” (e.g., break-even, length of operation, minimum debt service coverage or some other agreed upon measure).

16. Credit Substitution • The most common method of obtaining both construction and permanent financing in one bond issue is credit substitution. Under this scenario, long-term bonds are issued, often in a variable rate mode. Liquidity and credit enhancement for the bonds are provided by a financial institution that takes construction risk. A typical form of credit enhancement is letter of credit backed bonds. • Under the structure, the original bond documents must include all the terms of the credit substitution. The credit substitution is generally triggered by a notice from the owner certifying that the prerequisite conditions to conversion have been satisfied. The conversion from one credit to another will be accompanied by a mandatory tender of the outstanding bonds. Once the substitution is completed, the construction lender drops out and the permanent lender is in place. • The advantage of providing for the credit substitution in the original bond documents is the avoidance of reissuance. Under Federal tax law, a reissuance of the original bonds can occur if the terms of the bonds are changed significantly from the original terms.

17. TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) • In order to permit citizens living in areas where projects financed by tax-exempt bonds are situated to have a voice, the Code requires public hearings, upon reasonable notice to the community, for all “new money” private activity bonds. In addition the process generally requires the approval of local elected officials. Must have public hearing and approval.

18. Approvals • Official Action Resolution • Before the expenditure is made (or within 60 days thereafter), the issuer of the bonds MUST DECLARE ITS OFFICIAL intent to reimburse itself with bond proceeds. The issuer ordinarily declares its intent by having the governing body or board of the issuer pass or adopt a resolution or similar document. • These documents are known as inducement resolutions (old nomenclature) or declarations of official intent (DOI) or official action resolutions or reimbursement resolutions.

19. Official Statements • Do many of you keep a diary? The O/S is the story of the life of the bond; everything important about the bonds in it. • The Official Statement is the most important disclosure document in the transaction. The offering or sale of municipal bonds is made through the use of an official statement, private placement memorandum or other document which is prepared by the issueror the underwriter and signed by the issuer of the municipal bonds. Often, an underwriter will typically first prepare a preliminary official statement, which is a document that provides information to potential investors and underwriters and assists in the offering and sale of the securities.

20. The “mailing” refers to the printing and mailing of a preliminary official statement to potential purchasers of the bonds by the underwriters. It contains information concerning the proposed issue as of the date of release of the document, which is prior to the date of sale of the bonds. • A preliminary official statement should be complete and accurate as of its date, but specifically may omit certain offering information and certain information in it may be changed prior to the delivery of the final official statement if intervening events occur, additional information is requested by the underwriters or new information becomes available. • The preliminary official statement and the official statement are the same document in existence at different times of the deal. The official statement is the preliminary official statement in its completed form, dated the sale date, and is the offering document, similar in function to the prospectus in a registered securities public offering.