Bonding 101

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Bonding 101 Tax-Exempt Bonds as a Way to
Finance Your Projects

• Vince ODonnell, Vice President of Affordable
  Housing Preservation
• Local Initiatives Support Corporation
• vodonnell_at_lisc.org
• 617-338-5170

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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

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TAX EXEMPT BONDS

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

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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 States bond volume cap
• TEFRA (Tax Equity and Fiscal Responsibility Act
  of 1982) public hearing held before bonds issued

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Qualified PABs with Tax Credits

• Tax credits are allocated to the LP as-of-right
• 50 Test bonds must fund 50 of projects
  depreciable basis to receive all tax credits
  otherwise LIHTC are pro-rated per fraction of
  total development cost supported.

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Combining Tax Credits and Bonds

• 4 (30 present vale) tax credit rate federally
  subsidized financing
• Project must be consistent with States QAP
• Minimum LIHTCs required for financial feasibility
• Use of bond proceeds must stay within use
  limitations (Good Costs)

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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

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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

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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
  issues price and marketability

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Bond Financing Instruments

• Mortgage documents the property lien
• Loan Agreement repayment and security
• Official Statement key business aspects

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Bond Financing Instruments

• Trust Indenture establishes bond trustees
  responsibilities and rights
• Bond Purchase Agreement basis for Underwriter
  purchasing bonds from Issuer
• Credit Enhancement Documents improves credit
  rating, reduces cost of borrowing

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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 govt
  entities)
• Not eligible for LIHTCs government owner
• Least restrictive requirements

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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.

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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.

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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

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Additional Resources

• Multifamily Rental Housing Financing With
  Tax-Exempt Bonds
• Jason Cooper, Orrick, Herrington Sutcliffe LLP
• http//www.orrick.com/Events-and-Publications/Docu
  ments/2709.pdf

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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/citicommunitycapita
  l/docs/031513_combining.pdf