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Bonding 101 – Tax-Exempt Bonds as a Way to Finance Your Projects. Vince O’Donnell, Vice President of Affordable Housing Preservation Local Initiatives Support Corporation vodonnell@lisc.org 617-338-5170. TAX EXEMPT BONDS.

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bonding 101 tax exempt bonds as a way to finance your projects
Bonding 101 – Tax-Exempt Bonds as a Way to Finance Your Projects

Vince O’Donnell, Vice President of Affordable Housing Preservation

Local Initiatives Support Corporation

vodonnell@lisc.org

617-338-5170

Tax Exempt Bonds

tax exempt bonds
TAX EXEMPT BONDS
  • Three kinds of tax-exempt bonds are issued by public housing finance entities
    • Private Activity Bonds for for-profit entities
    • Private Activity Bonds for 501(c)(3) organizations
    • Essential Purpose Bonds issued for various activities that may include housing

Tax Exempt Bonds

tax exempt bonds1
TAX EXEMPT BONDS
  • Combining tax credits and tax-exempt bonds
  • What additional parties are involved?
  • What are the additional documents needed?

Tax Exempt Bonds

qualified pabs with tax credits
Qualified PABs with Tax Credits
  • Use Limited Partnership or LLC structure
  • Available to both for-profit and nonprofit developers
  • Interest on these bonds is tax exempt if:
    • Bond amount is within State’s bond volume cap
    • TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) public hearing held before bonds issued

Tax Exempt Bonds

qualified pabs with tax credits1
Qualified PABs with Tax Credits
  • Tax credits are allocated to the LP “as-of-right”
  • “50% Test” – bonds must fund 50% of project’s depreciable basis to receive all tax credits; otherwise LIHTC are pro-rated per fraction of total development cost supported.

Tax Exempt Bonds

combining tax credits and bonds
Combining Tax Credits and Bonds
  • 4% (30% present vale) tax credit rate – federally subsidized financing
  • Project must be consistent with State’s QAP
  • Minimum LIHTCs required for financial feasibility
  • Use of bond proceeds must stay within use limitations (“Good Costs”)

Tax Exempt Bonds

combining tax credits and bonds1
Combining Tax Credits and Bonds
  • Meeting the “50% test” is critical
  • Tax credit tenant income rules apply. Needed for
    • Exemption of interest from Federal income taxes
    • Compliance with LIHTC requirements
  • Can transfer ownership to tenants at year 16

Tax Exempt Bonds

additional parties in a t e bond issue
Additional Parties in a T.E. Bond Issue
  • Bond Issuer – government agency/entity/PHA
  • Bond Counsel – determines compliance with laws
  • Bond Trustee – protects interests of bondholders
  • Underwriter – structures bonds for market

Tax Exempt Bonds

additional parties in a t e bond issue1
Additional Parties in a T.E. Bond Issue
  • Financial Advisor – does feasibility analysis
  • Credit enhancement provider – increases marketability of the bonds
  • Bond Rating Agency – rating influences the issue’s price and marketability

Tax Exempt Bonds

bond financing instruments
Bond Financing Instruments
  • Mortgage – documents the property lien
  • Loan Agreement – repayment and security
  • Official Statement – key business aspects

Tax Exempt Bonds

bond financing instruments1
Bond Financing Instruments
  • Trust Indenture – establishes bond trustee’s responsibilities and rights
  • Bond Purchase Agreement – basis for Underwriter purchasing bonds from Issuer
  • Credit Enhancement Documents – improves credit rating, reduces cost of borrowing

Tax Exempt Bonds

other housing tax exempt bonds without tax exempt bonds
Other Housing Tax Exempt Bonds -Without Tax Exempt Bonds
  • 501(c)(3) Qualified PABs
    • Not eligible for LIHTCs – nonprofit owner
    • Less restrictive income, use restrictions
  • Essential Function Bonds (issued by gov’t entities)
    • Not eligible for LIHTCs – government owner
    • Least restrictive requirements

Tax Exempt Bonds

response to current market conditions
Response to Current Market Conditions

Issues:

  • Flight of capital to U.S. Treasuries and other “safe” instruments.
  • High rates of tax-exempt municipal bonds.
  • Low rates on taxable bonds using FHA and GNMA
  • Infeasible to meet 50% test for 4% LIHTCs using traditional permanent debt structure.

Tax Exempt Bonds

response to current market conditions continued
Response to Current Market Conditions(continued)

Solution:

  • Short-term cash-collateralized tax-exempt bonds for 50% of TDC.
  • Replace drawdowns of tax-exempt bond proceeds with FHA-GNMA-insured loan proceeds.
  • Repay tax-exempt bonds after placed-in-service debt.

Tax Exempt Bonds

response to current market conditions continued1
Response to Current Market Conditions(continued

Solution (continued):

  • Credit Enhancement:
    • FHA §223(f) – including LIHTC Affordable Pilot Program
    • FHA §221(d)(4) New Construction – Substantial Rehab.
    • USDA §538
  • Savings: 100-150 basis points
  • Reduced claim on bond cap

Tax Exempt Bonds

additional resources
Additional Resources

Multifamily Rental Housing: Financing With Tax-Exempt Bonds

Jason Cooper, Orrick, Herrington & Sutcliffe LLP

http://www.orrick.com/Events-and-Publications/Documents/2709.pdf

Tax Exempt Bonds

additional resources1
Additional Resources

Combining Short-term Cash Backed Tax-exempt Bonds With Taxable GNMA Sales For Affordable Housing Projects Using FHA Insurance

R. Wade Norris, Esq., Eichner Norris &Neumann PLLC

March 15, 2013

http://www.citibank.com/icg/sa/citicommunitycapital/docs/031513_combining.pdf

Tax Exempt Bonds