2. Tax-Exempt Bonds and Low-Income Housing Tax Credits Dan Smith, CPA

3. Public/Government Sector Private Sector Tax-exempt bonds (Lower interest payments) Bondholders Taxable bonds (Higher interest payments) Bondholders Multi-Family Housing Private Activity Volume Cap Tax-exempt bonds (Lower interest payments)

4. Volume Cap Tax-exempt Bonds Multi-Family Housing State Greater of $90/person or $273,270,000 for 2009 Student Loans Docks and Wharves Single-Family Housing Airports Industrial Development California Florida Nevada New York Ohio Texas $3,107,023,275 1,551,355,655 262,095,000 1,640,306,965 974,687,945 2,031,872,300 $1,144,564,324 571,487,942 96,550,479 604,255,799 359,055,260 748,500,523 Volume Cap for 2008 Additional Bonds* *IRS Notice 2008-79 California Volume Cap (2008) Indiana Volume Cap (2008) Two examples:

5. Volume Cap Tax-exempt Bonds Bond Application Tax Credit Application 4% Credits! 9% Credits!

6. Bond Issuer (City/County) Borrower Inducement Resolution Public hearing or TEFRA requirement

7. Credit Enhancer Bond Issuer Purchasers Trustee (City/County) Bond Proceeds Project Trust Indenture Interest Payments Mortgage Note Bonds DRAW Req AAA Aaa Invoices Interest Payments Bond Purchase Agreement Underwriter Loan Agreement Regulatory Agreement Lender Borrower

8. Land plus Depreciable Basis Aggregate Basis $8.2 mil E.B. = $7.6 mil $7.6 mil 4% 304k Eligible Basis Tax Credit % Annual Tax Credits 50% Test

9. Land plus Depreciable Basis Bonds Tax-exempt bonds plus Interest Earned Aggregate Basis 50% Tax-exempt bonds + Interest Earned Aggregate Basis 50% $8.2 mil E.B. = $7.6 mil 50% Test

10. $5 mil Land plus Depreciable Basis Bonds Aggregate Basis 50% Aggregate Basis = $8.2 mil $5 mil E.B. = $7.6 mil $8.2 mil = 61% Tax-exempt bonds + Interest Earned Tax-exempt bonds plus Interest Earned 50% Test50% $7.6 mil 4% $304k Eligible Basis Tax Credit % Annual Tax Credits

11. Land plus Depreciable Basis Bonds $8.2 mil $5 mil E.B. = $7.6 mil $10 mil Aggregate Basis E.B. = $9.4 mil Tax-exempt bonds plus Interest Earned 50% Test50% 50% $8.2 mil = 50% $10 mil $5 mil = 61%= $10,000,001 49.999995% $4.7 mil $188k! $7.6 mil 4% $304k Eligible Basis Tax Credit % Annual Tax Credits $9.4 mil $376k

12. States are asking developers to find other sources of financing in order to stretch the bond cap! Aggregate Basis Tax-exempt bonds plus Interest Earned 50%

13. Additional Requirements of Private Activity Bonds Portion of acquisition financed with bonds = $10 mil Rehab $1.5 million 15% rehab requirement on acquisition 15%

14. Additional Requirements of Private Activity Bonds Tax-exempt bonds plus Interest Earned 2% Cost of Issuance Limitation $5 mil BIC paid from bond proceeds $100k ($5 mil x 2%)

15. Additional Requirements of Private Activity Bonds Tax-exempt bonds plus Interest Earned Good Costs/Bad Costs $5 mil 95% of proceeds must be used for good costs This 95% in 95-5 test is slightly different than the good cost/bad cost 95%, correct? $4.75 mil Aggregate Basis Good Costs Land and depreciable costs for income tax purposes …paid or incurred after the date of the Inducement Resolution

16. Additional Requirements of Private Activity Bonds Tax-exempt bonds plus Interest Earned Good Costs/Bad Costs $5 mil 95% of proceeds must be used for good costs This 95% in 95-5 test is slightly different than the good cost/bad cost 95%, correct? $4.75 mil Aggregate Basis Bad Costs Costs incurred prior to Inducement Resolution Intangible assets Bond issuance costs and underwriting Loan origination fees amortized over the perm loan period

17. Additional Requirements of Private Activity Bonds Inducement Resolution Bonds 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 costs…see 18 months rule on p. 11 60 days Inducement Resolution Good Costs 95% 5% Bad Costs

19. 9% vs. 4% Deals

20. New Construction Non-Federally Subsidized (Perm Loan) 9% credits Construction Method

21. New Construction Acquisition/ Rehabilitation Non-Federally Subsidized (Perm Loan) 9% creditsAcq – 4% Rehab – 9% Financing Method Construction Method

22. New Construction Acquisition/ Rehabilitation Non-Federally Subsidized (Perm Loan) 9% creditsAcq – 4% Rehab – 9% Federally Subsidized (TE bonds) 4% creditsAcq – 4% Rehab – 4% Financing Method Construction Method

23. 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 Project XProject Y

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

25. Needed Sources Investors Fund / Upper tier Limited Partnership Lower Tier Operating Limited Partnership 9% Credits Financing LIHTC Projects

26. Needed Sources Investors Fund / Upper tier Limited Partnership Lower Tier Operating Limited Partnership 4% Credits CREDITS Equity Debt Lower Interest

27. Comparing 9% Tax Credits to Bonds with 4% Credits 9% Tax CreditsBonds with 4% Credits Financing Fees LowHigh to very high Interest Rates HigherLower to very low Rents Lower (< 50% AMGI)Higher (60% AMGI) Financing Leverage Low to very lowHigh Amenity Costs Higher (due to competitive application requirements) Lower Competition for Allocation/Reservation Very highLow