UNDERSTANDING THE TAXEXEMPT FINANCING PROCESS

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UNDERSTANDINGTHE TAX-EXEMPTFINANCING PROCESS

• Presented by
• John WhitingQuarles Brady LLPOne South
  Pinckney StreetMadison, Wisconsin 53703(608)
  251-5000March 20, 2006

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General Outline

• Understanding some basic concepts
• Parties to a typical taxable financing
• Parties to a typical tax-exempt financing

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General Outline

• Who are potential issuers of tax-exempt debt?
• For what purposes may tax-exempt debt be issued?
• Who are potential purchasers of tax-exempt debt?

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General Outline

• Who are potential borrowers of the proceeds of
  tax-exempt debt?
• What restrictions do Federal tax law impose on
  tax-exempt debt?

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UNDERSTANDINGSOME BASIC CONCEPTS
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Understanding Some Basic Concepts

• Tax-exempt
• An organization which is exempt from paying state
  or federal income taxes
• Property which is exempt from paying real estate
  taxes
• Interest on a debt which is exempt from federal
  or state income taxes

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Understanding Some Basic Concepts

• Revenue bonds
• Revenue bonds are payable only from specified
  revenues
• Revenue bonds may bear interest at fixed rates or
  variable rates

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APPLICABLE SOURCESOF LAW
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Federal Tax Law

• Federal tax law determines whether the interest
  on obligations validly issued under State law is
  exempt from federal income tax.

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Wisconsin Law

• State law determines the validity of obligations.
• In limited cases, State law also determines
  whether the interest on obligations validly
  issued under State law is exempt from State
  income tax.
• Legislative proposals have been made to give a
  state tax exemption for interest on certain WHEFA
  bonds.

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PARTIES TO A TYPICALTAXABLE FINANCING
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Parties to a Typical Taxable Financing

• Borrower
• Lender

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Borrowing Purposes
Promise torepay
Lender
Borrower
Cash
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PARTIES TO A TYPICALTAX-EXEMPT FINANCING
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Parties to a TypicalTax-Exempt Financing

• Issuer
• Borrower
• Purchaser (lender)
• Trustee as representative of purchasers
• Credit enhancer

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Cash
Cash
Lender Purchaser
Issuer (Conduit)
Borrower
Promise to repay(Revenue Bond)
Promise to repay(Note)
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WHO ARE THE POTENTIAL ISSUERS OF TAX-EXEMPT DEBT?
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Potential Issuers

• Must be a governmental or quasi-governmental unit
• Wisconsin Health and Educational Facilities
  Authority (WHEFA)
• Cities, towns and villages
• Redevelopment authorities
• Housing authorities
• Community development authorities

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Why Would One Issuer Be Chosen Over Another?

• Type of projects for which it can issue bonds
• Issuers expertise
• Local politics
• Bank eligibility
• Double tax exemption

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For What Purposes May Tax-Exempt Debt Be Issued?

• The purposes for which tax-exempt debt may be
  issued varies depending on the Issuer involved.

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Wisconsin Health and Educational Facilities
Authority (WHEFA)
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WHEFA

• Hospitals
• Nursing homes
• Continuing care facilities
• Community-based residential facilities
• Private colleges and universities
• Federally qualified health center
• K-12 schools
• Legislation under consideration may permit WHEFA
  to issue bonds for cultural facilities

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Cities, Towns and Villages

• Hospitals
• Clinics
• Nursing homes
• Public utilities

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Redevelopment Authorities

• Redevelopment Authorities can be created by
  cities, towns and villages
• Blight finding required but definition is very
  broad

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Housing Authorities

• May be created by cities, towns and villages
• Elderly housing projects (generally for persons
  62 years or older)
• Low income housing projects

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Community Development Authorities

• Have all the powers of a Redevelopment Authority
  and a Housing Authority

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Cash
Cash
Lender Purchaser
Issuer (Conduit)
Borrower
Promise to repay(Revenue Bond)
Promise to repay(Note)
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WHO ARE POTENTIAL BORROWERS OF THE PROCEEDS
OFTAX-EXEMPT DEBT?
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Potential Borrowers

• Not-for-profit Section 501(c)(3) Organizations
• For-profit entities

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Potential Borrowers

• What form does a Borrowers repayment obligation
  usually take?
• Loan Agreement
• Master Trust Indenture facilitates the
• pooling of collateral
• pooling of credit
• issuance of multiple series of parity debt
• Obligation may be secured or unsecured

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Cash
Cash
Lender Purchaser
Issuer (Conduit)
Borrower
Promise to repay(Revenue Bond)
Promise to repay(Note)
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WHO ARE THE POTENTIAL PURCHASERS OFTAX-EXEMPT
DEBT (LENDERS)?
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Potential Purchasers

• Financial institutions
• Institutional investors
• Public markets
• unrated
• rated on the Borrowers credit
• rated based on a Credit Enhancers credit
• credit enhancements could be
• guaranties
• bond insurance
• bank letters of credit

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FEDERAL TAX LAW REQUIREMENTS
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Federal Tax Law Requirements

• 100 of the proceeds of the debt must produce
  property owned by Section 501(c)(3) corporations
• 95 of the proceeds of the debt must produce
  property used by Section 501(c)(3) corporations

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Federal Tax Law Requirements

• Tax-exempt debt cannot have an average maturity
  greater than 120 of the reasonably-expected
  economic life of the property financed
• Not more than 2 of the proceeds of the debt may
  be used to pay costs of issuance
• Reimbursements