IPED HOUSING TAX CREDITS “101”

IPED HOUSING TAX CREDITS “101”

Tax Exempt Bonds and Housing Tax Exempt Bonds and Housing Tax CreditsTax Credits

presented by:presented by:

Dan Smith – Novogradac & Company LLPDan Smith – Novogradac & Company LLP

Tax Exempt Bonds and Housing Tax CreditsTax Exempt Bonds and Housing Tax Credits

IPED: Housing Tax Credits "101"

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



What are Tax-Exempt Bonds?

• 1986 IRC §103(a) – Interest Income Federal Exemption– State Income Exemption (Generally)

• Bonds Eligible For Exemption– Private Activity Bonds– Governmental Bonds– §501(c)(3) Tax-Exempt Bonds



What do Tax-Exempt Bonds Offer?

• Economic Benefit To Buyers

• Economic Benefit To Issuers

• Interest Rate Determination– Bond Rating– Credit Enhancement



Why are Developers doingTax-Exempt Bond Deals?

Demand for Tax Credit Allocations (9% LIHC Deals)

• Uses conventional financing• Only $1.95 Per Capita available - $ 2,275,000

– Limited “pool” of tax credits

• Developers Apply To State Allocating Agencies• States Oversubscribed: 4-6 To 1



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

• Excess Demand For Bonds ($85.00 Per Capita)– $ 256,235,000

• Housing Competes With Other Uses• More Mixed Income Developments



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• Less Operational Regulations Than LIHC• Larger Developments In Better Markets



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

• Bond Issuing– States

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

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

• Bond Issuance vs. Bond Allocation



What Types of Financing are Available?

• Multi-Year

• Construction/Permanent

• Nominal Permanent Lender

• Multi-Series



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

Equity

Debt

9% LIHC Credits

Using Conventional Debt

4% Project

Using Tax-Exempt Bond Debt

Equity

Debt



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

• Reduced Credit Percentage (4% Vs 9%)

• Tax Losses Are Spread Across A SmallerAmount Of Tax Credit Dollars

• Result May Be An Increased Credit Price



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 LIHC Monthly Report and on our website!

• February 2007 = 8.11% & 3.48%

• March 2007 = 8.15% & 3.49%



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

Income Restrictions:

– 20% at 50% AMGI

• 40% at 60% AMGI



Special Rules:Good Costs vs. Bad Costs

• 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




• “Bad Costs” Include:– Costs incurred prior to Inducement

Resolution

– Intangible Assets

– Bonds Issuance Costs and Underwriting

– Loan Origination Fees Amortized over thePermanent Loan Period




• No More Than 2% Of Proceeds Can BeUsed For Bond Issuance Costs– Taxable Tails / Owner Equity



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 andLease-Up Costs




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

• What does “Financed by” mean??




CAUTION!!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



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 ExcludedFrom Eligible Basis



Is there anything easier in aTax-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



Sounds Good!!! How do I get started?

Put the Team Together:– Accountant

– Equity Partner

– Underwriter

– Local Developer’s Bond Counsel

– Credit Enhancer



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

Bond Holder

Bond IssuerBond Issuer

LIHCPartnership“Borrower”

Credit Enhancer

Trustee

Bond Bond UnderwriterUnderwriter

Bond Purchase ContractOfficial Statement

BondsBond Proceeds

Indenture

Payments ofPrincipal & Interest

Loan AgreementDeed of Trust

CreditEnhancement

ReimbursementAgreement

Deed of Trust



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




3. Issuer passes inducement resolution

4. Credit enhancement commitment

5. Private activity bond application submitted to Issuing Authority




6. Public notice of the project (2 weeks)

7. TEFRA hearing held– The Tax Equity and Fiscal Responsibility Act




8. Private activity bond application approved– Bond allocation awarded

9. Tax credit application submitted




10. 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?11. 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




12. Underwriter prices and contracts for selling the bonds

13. Bond purchase agreement

14. Bond Closing

15. Final Official Statement



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.



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.



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.



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.



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.



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.



Contact Information:

• Dan Smith Novogradac & Company LLP

303 W. Third StreetDover, OH 44622Phone: (330) 602-4600Fax: (330) 602-4601



QUESTIONS ???

For free tax credit resources:Go to

www.taxcredithousing.com

Or email us at:

[email protected]

Documents

IPED HOUSING TAX CREDITS “101”