Bond and Tax Credits Basics

1
Tax-Exempt Bonds and Low-Income Housing Tax
Credits
Dan Smith, CPA
2
Tax-exempt bonds (Lower interest payments)
Public/Government Sector
Private Activity Volume Cap Tax-exempt
bonds (Lower interest payments)
Multi-Family Housing
Taxable bonds (Higher interest payments)
Private Sector
3
State
Volume Cap Tax-exempt Bonds
Greater of 90/person or 273,270,000 for 2009
4
Volume Cap Tax-exempt Bonds
9 Credits!
4 Credits!
5
(City/County)
Bond Issuer
Public hearing or TEFRA requirement
6
AAA Aaa
(City/County)
?
Bond Issuer

Bond Proceeds
Interest Payments

Trustee
Bond Proceeds

Interest Payments

Project
7
50 Test
8.2 mil
E.B. 7.6 mil
7.6 mil 4 304k
Eligible Basis Tax Credit Annual Tax Credits
Aggregate Basis
8
50 Test
Tax-exempt bonds Interest Earned
50
Aggregate Basis
8.2 mil
E.B. 7.6 mil
50
Tax-exempt bonds plus Interest Earned
Aggregate Basis
9
50 Test
Tax-exempt bonds Interest Earned
5 mil
50

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Aggregate Basis
8.2 mil
8.2 mil
E.B. 7.6 mil
5 mil
50
Bonds
Tax-exempt bonds plus Interest Earned
Aggregate Basis
10
50 Test
5 mil
50
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8.2 mil
10 mil
49.999995
10 mil
10,000,001
E.B. 9.4 mil
8.2 mil
E.B. 7.6 mil
4.7 mil
7.6 mil 4 304k
Eligible Basis Tax Credit Annual Tax Credits
9.4 mil 376k
5 mil
50
50
188k!
Bonds
Tax-exempt bonds plus Interest Earned
Aggregate Basis
11

• States are asking developers to find other
  sources of financing in order to stretch the bond
  cap!

50
Tax-exempt bonds plus Interest Earned
Aggregate Basis
12
Additional Requirements of Private Activity Bonds
15 rehab requirement on acquisition
Additional Requirements of Private Activity Bonds
Portion of acquisition financed with bonds 10
mil
15
Rehab 1.5 million
13
Additional Requirements of Private Activity Bonds
2 Cost of Issuance Limitation
BIC paid from bond proceeds 100k
5 mil
Tax-exempt bonds plus Interest Earned
14
Additional Requirements of Private Activity Bonds
Good Costs/Bad Costs
95 of proceeds must be used for good costs
5 mil
4.75 mil
Tax-exempt bonds plus Interest Earned
Aggregate Basis
This 95 in 95-5 test is slightly different than
the good cost/bad cost 95, correct?
15
Additional Requirements of Private Activity Bonds
Good Costs/Bad Costs
95 of proceeds must be used for good costs
5 mil
4.75 mil
Tax-exempt bonds plus Interest Earned
Aggregate Basis
This 95 in 95-5 test is slightly different than
the good cost/bad cost 95, correct?
16
Additional Requirements of Private Activity Bonds
Inducement Resolution
95
Good Costs
60 days
5
Bad Costs

• Three dates and items
• Bond Issuance
• Intent
• Inducement Resolution
• Reimbursement Resolution
• Whats the whole 60 days thing?
• (see p. 43 of Orrick booklet)
• I think Id be fine if we were just talking about
  Reimbursement Resolution
• P. 10 of Orrick says 20 of bonds could be used
  to reimb certain soft costssee 18 months rule
  on p. 11

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9 vs. 4 Deals
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Construction Method
New Construction
Non-Federally Subsidized (Perm Loan) 9 credits
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Construction Method
New Construction Acquisition/ Rehabilitation
Non-Federally Subsidized (Perm Loan) 9 credits Acq 4 Rehab 9
Financing Method
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Construction Method
New Construction Acquisition/ Rehabilitation
Non-Federally Subsidized (Perm Loan) 9 credits Acq 4 Rehab 9
Federally Subsidized (TE bonds) 4 credits Acq 4 Rehab 4
Financing Method
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Project X
Project Y

• Eligible Basis
• x DDA/QCT
• EB adj. for DDA/QCT
• x Applicable Fraction
• Qualified Basis
• x Applicable Percentage
• Annual LIHTC

10,000,000 100 10,000,000
100 10,000,000 3.50 350,000
10,000,000 100 10,000,000
100 10,000,000 8.00 800,000
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Financing LIHTC Projects
CREDITS
9 Credits
Investors

Higher Interest
Fund / Upper tier Limited Partnership
Debt
Equity
Needed Sources
Lower Tier Operating Limited Partnership
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Financing LIHTC Projects
9 Credits
Investors
Fund / Upper tier Limited Partnership
Needed Sources
Lower Tier Operating Limited Partnership
25
Financing LIHTC Projects
CREDITS
4 Credits
Investors

Lower Interest
Fund / Upper tier Limited Partnership
Debt
Equity
Needed Sources
Lower Tier Operating Limited Partnership
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Comparing 9 Tax Credits to Bonds with 4
Credits
9 Tax Credits Bonds with 4 Credits
Financing Fees Low High to very high
Interest Rates Higher Lower to very low
Rents Lower (lt 50 AMGI) Higher (60 AMGI)
Financing Leverage Low to very low High
Amenity Costs Higher (due to competitive application requirements) Lower
Competition for Allocation/Reservation Very high Low
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