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 earlyAccountantDeveloper’s Bond CounselEquity PartnerUnderwriterLocal Consultant / Political Liaison
3 What are Tax-Exempt Bonds? 1986 IRC §103(a)Interest Income Federal ExemptionState Income Exemption (Generally)Bonds Eligible For ExemptionPrivate Activity BondsGovernmental Bonds§501(c)(3) Tax-Exempt Bonds
4 What do Tax-Exempt Bonds Offer? Economic Benefit To BuyersEconomic Benefit To IssuersInterest Rate DeterminationBond RatingCredit Enhancement
5 Why are Developers doing Tax-Exempt Bond Deals? Demand for Tax Credit Allocations (9% LIHC Deals)Uses conventional financingOnly $1.85 Per Capita available - $ 2,125,000Limited “pool” of tax creditsDevelopers Apply To State Allocating AgenciesStates 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 FeasibleCredit Enhancements AvailableHigher Credit PricesLow interest ratesExcess Demand For Bonds ($80.00 Per Capita)$ 239,180,000Housing Competes With Other UsesMore Mixed Income Developments
7 What are the Benefits of Bonds? Interest Rate BenefitBond RatingCredit EnhancementReduced Interest Rate (More Debt!)Possible To Reduce Debt Coverage Ratios“Automatic” 4% Tax Credit AllocationLess Operational Regulations Than LIHCLarger Developments In Better Markets
8 How do I get these Bonds and Who gives them to me? Bond IssuingStatesLocal 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-YearConstruction/PermanentNominal Permanent LenderMulti-Series
10 Using Conventional Debt Using Tax-Exempt Bond Debt How are Tax-Exempt Bond Deals Different than Conventional Tax Credit Deals?EquityDebt9% LIHC CreditsUsing Conventional Debt4% ProjectUsing 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 DollarsResult May Be An Increased Credit Price
12 What’s the Difference Between 9% and 4% Credits? EB x LIOP x CP x 10 = CreditsThe 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% AMGI40% 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 PurposesPaid Or Incurred After The Date Of Inducement Resolution
15 Special Rules: Good Costs vs. Bad Costs “Bad Costs” Include:Costs incurred prior to Inducement ResolutionIntangible AssetsBonds Issuance Costs and UnderwritingLoan 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 CostsTaxable Tails / Owner Equity
17 50% Financing Requirement If 50% of the Aggregate Basis is Financed by Bond Proceeds, Entire Basis Exempted From LIHC Volume LimitationAggregate Basis includes:Land And BuildingExcludes 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 LimitationWhat does “Financed by” mean??
19 50% Financing Requirement CAUTION!!States are asking developers to find other sources of financing in order to stretch bond capConstruction 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 CostsDDA / QCT130% applied to Eligible BasisIncrease in Annual Tax CreditAll 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 YearsBonds Generally Allow Larger DevelopmentGenerally Less Competition For Bond AllocationBond Transactions Have Less Social Engineering
22 Sounds Good!!! How do I get started? Put the Team Together:AccountantEquity PartnerUnderwriterLocal Developer’s Bond CounselCredit Enhancer
23 How do I put my Deal Together? Find a potential property and run initial numbers for feasibility of the projectPut the team together:AccountantEquity PartnerUnderwriterLocal Developer’s Bond CounselCredit Enhancer
24 How do I put my Deal Together? Issuer passes inducement resolutionCredit enhancement commitmentPrivate activity bond application submitted to Issuing Authority
25 How do I put my Deal Together? Public notice of the project (2 weeks)TEFRA hearing heldThe Tax Equity and Fiscal Responsibility Act
26 How do I put my Deal Together? Private activity bond application approvedBond allocation awardedTax credit application submitted
27 How do I put my Deal Together? Bond counsel drafts documents required for closing Bond IndentureLoan agreementRegulatory agreementUnderwriter-due diligencePOS preliminary official statementCredit enhancer documentsTax credit investor documentsPartnership agreement
28 How do I put my Deal Together? Issuer passes bond resolution including the following:Issuer’s approval of TEFRA hearingPrivate activity bond allocationCredit enhancement commitmentBond rating from agencyPreliminary official statement
29 How do I put my Deal Together? Underwriter prices and contracts for selling the bondsBond purchase agreementBond ClosingFinal Official Statement
30 What does a typical Tax-Exempt Bond Structure Look Like? Bond HolderBond IssuerLIHCPartnership“Borrower”CreditEnhancerTrusteeBondUnderwriterBond Purchase ContractOfficial StatementBondsBond ProceedsIndenturePayments ofPrincipal & InterestLoan AgreementDeed of TrustEnhancementReimbursementAgreement
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 GlossaryBond 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 SmithNovogradac & Company LLP303 W. Third StreetDover, OHPhone: (330)Fax: (330)
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