1. Tax Exempt Bonds and Housing Tax Credits
IPED HOUSING TAX CREDITS “101”
Tax Exempt Bonds and Housing Tax Credits
presented by:
James Duffy – Nixon Peabody LLP
Dan Smith – Novogradac & Company LLP
Travis Gibbs – Nixon Peabody LLP
Faith Bruins – Nixon Peabody LLP

2. 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

3. 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

4. What do Tax-Exempt Bonds Offer?
Economic Benefit To Buyers
Economic Benefit To Issuers
Interest Rate Determination
Bond Rating
Credit Enhancement

5. Why are Developers doing Tax-Exempt Bond Deals?
Demand for Tax Credit Allocations (9% LIHC Deals)
Uses conventional financing
Only $1.85 Per Capita available - $ 2,125,000
Limited “pool” of tax credits
Developers Apply To State Allocating Agencies
States Oversubscribed: 4-6 To 1

6. 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 ($80.00 Per Capita)
$ 239,180,000
Housing Competes With Other Uses
More Mixed Income Developments

7. 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

8. How do I get these Bonds and Who gives them to me?
Bond Issuing
States
Local Government Entities (Cities, Townships, Counties, HFCs)
Qualified IRC §501(c)(3) Organizations And Governmental Units (Tax-Exempt Corporations)
Bond Issuance vs. Bond Allocation

9. What Types of Financing are Available?
Multi-Year
Construction/Permanent
Nominal Permanent Lender
Multi-Series

10. Using Conventional Debt Using Tax-Exempt Bond Debt
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

11. Why is there so much less Equity in a Bond Deal?
Reduced Credit Percentage (4% Vs 9%)
Tax Losses Are Spread Across A Smaller Amount Of Tax Credit Dollars
Result May Be An Increased Credit Price

12. 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!
October 2004 = 7.98% & 3.42%
November 2004 = 7.96% & 3.41%

13. Sounds pretty good!! What are the rules and restrictions I have to follow?
Income Restrictions:
20% at 50% AMGI
40% at 60% AMGI

14. Special Rules: Good Costs vs. Bad Costs
At Least 95% Must Be Used To Pay Or Reimburse “Good Costs”
“Good Costs” Include:
Land & Depreciable Costs For Income Tax Purposes
Paid Or Incurred After The Date Of Inducement Resolution

15. Special Rules: Good 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 the Permanent Loan Period

16. Special Rules: Good Costs vs. Bad Costs
No More Than 2% Of Proceeds Can Be Used For Bond Issuance Costs
Taxable Tails / Owner Equity

17. 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 and Lease-Up Costs

18. 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??

19. 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

20. 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 Excluded From Eligible Basis

21. Is there anything easier in a Tax-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

22. Sounds Good!!! How do I get started?
Put the Team Together:
Accountant
Equity Partner
Underwriter
Local Developer’s Bond Counsel
Credit Enhancer

23. 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 Developer’s Bond Counsel
Credit Enhancer

24. How do I put my Deal Together?
Issuer passes inducement resolution
Credit enhancement commitment
Private activity bond application submitted to Issuing Authority

25. How do I put my Deal Together?
Public notice of the project (2 weeks)
TEFRA hearing held
The Tax Equity and Fiscal Responsibility Act

26. How do I put my Deal Together?
Private activity bond application approved
Bond allocation awarded
Tax credit application submitted

27. How do I put my Deal Together?
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

28. How do I put my Deal Together?
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

29. How do I put my Deal Together?
Underwriter prices and contracts for selling the bonds
Bond purchase agreement
Bond Closing
Final Official Statement

30. What does a typical Tax-Exempt Bond Structure Look Like?
Bond Holder
Bond Issuer
LIHC
Partnership
“Borrower”
Credit
Enhancer
Trustee
Bond
Underwriter
Bond Purchase Contract
Official Statement
Bonds
Bond Proceeds
Indenture
Payments of
Principal & Interest
Loan Agreement
Deed of Trust
Enhancement
Reimbursement
Agreement

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. Contact Information:
Dan Smith
Novogradac & Company LLP
303 W. Third Street
Dover, OH
Phone: (330)
Fax: (330)

38. QUESTIONS ??? For free tax credit resources: Go to
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