IPED HOUSING TAX CREDITS

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IPED HOUSING TAX CREDITS 101
Tax Exempt Bonds and Housing Tax
Credits presented by Dan Smith Novogradac
Company LLP
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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, whats my
  first step?
• Assemble your team early
• Accountant
• Developers Bond Counsel
• Equity Partner
• Underwriter
• Local Consultant / Political Liaison

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What are Tax-Exempt Bonds?

• 1986 IRC 103(a)
• Interest Income Federal Exemption
• State Income Exemption (Generally)
• Tax-Exempt Housing Bond interest not subject to
  AMT
• Effective Bonds issued after July 30, 2008
• Bonds Eligible For Income Exemption
• Private Activity Bonds (IRC 146)
• Governmental Bonds
• 501(c)(3) Tax-Exempt Bonds

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What do Tax-Exempt Bonds Offer?

• Economic Benefit To Buyers
• Economic Benefit To Issuers
• Interest Rate Determination
• Bond Rating
• Credit Enhancement

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Why are Developers doingTax-Exempt Bond Deals?

• Demand for Tax Credit Allocations (9 LIHC Deals)
• Uses conventional financing
• Only 2.20 Per Capita available - 2,560,000
• Limited pool of tax credits
• Developers Apply To State Allocating Agencies
• States Oversubscribed 4-6 To 1

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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
• More Mixed Income Developments

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So Are Bonds a Better Way to Go?

• Excess Demand For Bonds (85.00 Per Capita)
• 262,095,000
• Housing Competes With Other Uses
• Can be reissued to another project without
  counting against the bond volume cap
• Addition of 11 billion annually of tax exempt
  bonds available for housing for 2008-2010

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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
• Basically the Same Operational Regulations as
  LIHC
• Larger Developments In Better Markets

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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 Inducement vs. Issuance vs. Allocation

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What Types of Financing are Available?

• Multi-Year
• Construction/Permanent
• Multi-Series

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How are Tax-Exempt Bond Deals Different than
Conventional Tax Credit Deals?
9 LIHC Credits Using Conventional Debt
4 Project Using Tax-Exempt Bond Debt
Equity
Equity
Debt
Debt
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Why is there so much less Equity in a Bond Deal?

• Reduced Credit Percentage (4(actually less) Vs
  9)
• Tax Losses Are Spread Across A SmallerAmount Of
  Tax Credit Dollars
• Result May Be An Increased Credit Price

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Whats 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 Journal
  Of Tax Credit Housing and on our website!
• October 2008 (9 vs. 3.37)

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

• Income Restrictions
• 20 at 50 AMGI
• 40 at 60 AMGI

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Special RulesGood 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

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Special RulesGood Costs vs. Bad Costs

• Bad Costs Include
• Costs incurred prior to Inducement Resolution
• Intangible Assets
• Bonds Issuance Costs and Underwriting
• Loan Origination Fees Amortized over
  thePermanent Loan Period

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Special RulesGood Costs vs. Bad Costs

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

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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

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50 Financing Requirement

• If 50 of the Aggregate Basis is Financed by Bond
  Proceeds, Entire Basis Exempted From LIHC Volume
  Limitation
• What does Financed by mean??

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50 Financing Requirement

• 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

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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

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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

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Sounds Good!!! How do I get started?

• Put the Team Together
• Accountant
• Equity Partner
• Underwriter
• Local Developers Bond Counsel
• Credit Enhancer

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What does a typical Tax-Exempt Bond Structure
Look Like?
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How do I put my Deal Together?

• Find a potential property and run initial numbers
  for feasibility of the project
• Put the team together
• Accountant
• Equity Partner
• Underwriter
• Local Developers Bond Counsel
• Credit Enhancer

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How do I put my Deal Together?

1. Issuer passes inducement resolution
2. Credit enhancement commitment
3. Private activity bond application submitted to
   Issuing Authority

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How do I put my Deal Together?

• Tax credit application submitted
• Public notice of the project (2 weeks)
• TEFRA hearing held
• The Tax Equity and Fiscal Responsibility Act

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How do I put my Deal Together?

• Private activity bond application approved
• Bond allocation awarded

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How do I put my Deal Together?

• 9. 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

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How do I put my Deal Together?

• Issuer passes bond resolutionincluding the
  following
• Issuers approval of TEFRA hearing
• Private activity bond allocation
• Credit enhancement commitment
• Bond rating from agency
• Preliminary official statement

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How do I put my Deal Together?

1. Underwriter prices and contracts for selling the
   bonds
2. Bond purchase agreement
3. Bond Closing
4. Final Official Statement

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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.

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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.

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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.

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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.

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Glossary

• Rating Agency
• Agencies that determine or rate the investment
  risk of the bonds. Examples include Standard
  Poors and Moodys 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.

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Glossary

• TEFRA Hearing
• The bond issuers 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.

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Contact Information

• Dan Smith
• Novogradac Company LLP
• 303 W. Third Street
• Dover, OH 44622
• Phone [phone]
• Fax [phone]
• dan.smith_at_novoco.com

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QUESTIONS ???
For free tax credit resourcesGo
to www.taxcredithousing.com Or email us
at dan.smith_at_novoco.com