Agenda Introductions Overview of Tax Exempt Bonds North Carolina Specifics Tax Credits Types of Transactions Sample Transactions Questions / Discussion

The Players Issuer - governmental unit that issues bonds Purchaser – in privately placed deal, entity or bank that purchases bonds directly Underwriter - investment banking firm that structures the deal and finds buyers Trustee - bonds are sometimes issued under a trust indenture holds proceeds pending disbursement for construction costs collects debt service payments from Borrower and pays to bondholders Bond counsel – oversees entire process and issues opinion that bonds are tax-exempt Underwriter’s counsel - prepares disclosure document to sell bonds to the market place - “Official Statement” if publicly sold through an underwriter Borrower’s counsel - looks out for Borrower’s interest; generally does real estate work and opinion “Taxable tail” - if combination of bond proceeds (as approved for volume cap) plus equity from tax credits not enough to construct project, the issuer may issue additional taxable debt at the same time so long as financially feasible Issuer’s counsel – looks out for issuer’s interests Purchaser’s counsel – represents purchaser of privately placed bonds Rating Agency

Tax Exempt Bonds – What are they? Bond (debt) issued by a governmental entity (state or local housing authority, county or city - the “Issuer”) Proceeds are loaned to private entity (either for-profit partnership/LLC or nonprofit entity - the “Borrower”) Borrower uses those dollars to acquire, construct and/or rehab and equip “multifamily residential rental housing” Bonds are “private activity bonds” under Section 142 of the Internal Revenue Code - the “Code”

In North Carolina Who can Issue? NCGS 160A-456 provides that “any city council may exercise directly those powers granted by law to …municipal housing authorities, and may do so whether or not a …housing authority is in existence in such city.” Under NCGS Ch. 157, housing authorities have the power to issue bonds to “provide grants, loans, interest supplements and other programs of financial assistance to public or private developers of housing for persons of low income, or moderate income, or low and moderate income.” “Persons of low income” are those whose annual income, when adjusted for family size, is not more than 60% of local area median income as determined by HUD

What are the Rules? Rules focus on the use of the proceeds of the bonds and use of project constructed with those proceeds 95% of proceeds must be used for capitalizable costs Acquisition of existing property permitted only if an amount equal to 15% of purchase price is used for rehabilitation (structural upgrade or replacement of equipment, renovation of kitchens, etc.)

Income Restrictions Either: Or: 20% of units must be set aside for individuals whose income is 50% or less of area median income (“AMI”) Or: 40% of units must be set aside for individuals whose income is 60% or less of AMI Income limits based on HUD guidelines; subject to family size adjustment Income determination must be made at least annually Income of low income tenant continues to qualify until income reaches 140% of AMI; thereafter next available unit must be set aside for low income resident Restrictions apply for the LONGER of 15 years or life of bonds General rule is no students (some exceptions) Income restrictions apply to entire project; not done on building by building basis

Tax Credits Under Section 42 of the Code, if at least 50% of the basis of the project is financed with Section 142 tax-exempt bonds, 4% tax credits automatically apply No allocation of 4% tax credits, except in the sense that NCHFA recommends projects to which TRAC allocates volume cap (and 4% tax credits come with it) Rules are similar but not exactly the same Short term financing still produces tax credits

Volume Cap Volume cap required for many types of tax exempt bonds - Housing, Industrial Development, Solid Waste, Student Loans, Airports, Docks and wharves; each state determines allocation method amongst uses Underutilization 2007, states used 58% of volume cap 2014, states used 38% of volume cap “Double Bang for the Buck in Housing” - TAX CREDITS Credits are as of right, NOT allocated Can finance 25% to 45% of the development costs Each $1.00 of Unused Volume cap = $.50 Federal Housing Subsidy is Lost 400,000 multifamily starts in 2015 vs. 90,000 in 2009

Volume Cap in NC Allocation (2016) = greater of $302.88M or $100 per resident; North Carolina has more than $1 billion in volume cap The North Carolina Tax Reform Allocation Committee (“TRAC”) allocates volume cap generally on a first come first served basis Allocations to affordable housing transactions made based on recommendations of NC Housing Finance Agency (NCHFA) NCHFA reviews applications in two rounds (January, same timing as 9% tax credit deals, and a separate July round) Once allocation awarded, developer has until the end of the calendar year to get the bonds issued If the deal can’t get closed, TRAC and NCHFA do not permit carry forward but instead will “swap out” the following year’s cap (i.e. 2016 cap for 2015 cap) On occasion have carried forward twice, but needs to be extenuating circumstances

Types of Transactions Rehab with Minimal or no Relocation FHA 221(d)(4) FHA 223(f) LIHTC PILOT Freddie Mac TEL Fannie Mae MTEB Rehab with Relocation New Construction

Options to Consider FHA Freddie Mac Fannie Mae Direct Placement with Financial Institution

Recent Bond Transaction Structures with Sources & Uses

Transaction Costs Underwriter / Investment Banker Legal Counsel Rating Agency Seller/Servicer Issuer Remarketing Agent Credit Enhancement Liquidity Provider Interest Rate Cap Provider Miscellaneous Trustee

Panelists “The Attorney” “The Banker” Mary Nash Rusher Mahesh Aiyer McGuire Woods Citi Community Capital 919-755-6694 713-752-5046 www.mcguirewoods.com www.citibank.com mnrusher@mcguirewoods.com mahesh.aiyer@citi.com “The Equity Investor” “The Accountant” Darren Swanson Marshall Phillips Red Stone Equity Partners CohnReznick LLP 704-200-9508 704-900-2650 www.rsequity.com www.cohnreznick.com darren.swanson@redstoneequity.com marshall.phillips@cohnreznick.com