Supplemental Materials

Transcription

1 Novogradac Private Activity Bond and 4% Low-Income Presented by: Novogradac & Company LLP Supplemental Materials Copy of Slides Bond Financing Timeline Ecerpt from Introduction to Low-Income Housing Ta Credits: Third Edition Booklet Thursday,

2 Wayne Michael, CPA, NPCC, HCCP Director of Eternal Education Novogradac & Company LLP Matthew Bissonette Director Citi Community Capital Christine Cadman Managing Associate Public Finance Orrick, Herrington & Sutcliffe LLP Jim Shaw Eecutive Director Capital Area Housing Finance Corporation AUDIO You should be able to hear through your computer speakers or Q&A PANE Need help with audio or other technical support? Questions about webinar content for the panelists? Use the Questions Pane! If you prefer to listen on the phone, select Use Telephone, in the audio pane dial: Phone number Access code RECORDING You will receive an with information to access the recording of this webinar within 2 business days. The recording will be available for your personal viewing for one year! HANDOUT CERTIFICATE OF ATTENDANCE POST-WEBINAR SURVEY If you haven t yet downloaded the handout, the link can be found in the Handouts Pane. Log in for the entire program and respond to the polling questions Within 5 business days! Will take two minutes to complete Appears as soon as you eit the webinar the panelists (see title slide) 1

3 ADVISORY: This live webinar (and its recording) are available for viewing only to individuals who ve purchased a registration. Although individuals within an organization may choose to watch the webinar in a group, each attendee must be a paid registrant. Paid registrants must not share the link with others. To order additional registrations, go to or contact events@novoco.com the panelists (see title slide) 2

4 This Bonds and 4% LIHTC webinar now joins LIHTC 101 as our second on-demand LIHTC course! Tell your colleagues who missed today s webinar that they can still earn CPE! the panelists (see title slide) 3

5 Your handout: If you haven t yet downloaded the handout, it s available in the Handouts pane. multifamily housing bonds orrick Search 10 years Section 142(d) Section 42 Ta Liability Investor Partnership LLC S-Corp DEBT Bonds Ta Liability Developer/ Owner Total Project Costs Equity Low-Interest Debt Income limits Rent limits Suitability for occupancy Bonds Low-Income Households the panelists (see title slide) 4

6 Outline Ta-Eempt Bond Overview Players in a Bond Transaction Bond Financing Timeline 4% Low-Income Housing Ta Credits Major Bond Rules Bond Rules vs. LIHTC Rules Jim Christine Matt Wayne the panelists (see title slide) 5

7 Outline Players in a Bond Transaction Bond Financing Timeline 4% Low-Income Housing Ta Credits Major Bond Rules Bond Rules vs. LIHTC Rules Public Bonds Bondholders State Allocating Agency Interest Payments the panelists (see title slide) 6

8 Bondholders Private Bonds Interest Payments Private Sector TX population: 2016 Appro 27.5 mil 100 Appro 2.75 bil Section 142(d) Bondholders Interest Payments State Allocating Agency 2.75 bil Greater of 100 per capita OR 302,875,000 Multi-Family Rental Housing Student Loans Private Activity Ta-Eempt Bonds Single-Family Housing Industrial Development Airports IRS Notice IRS Rev. Proc the panelists (see title slide) 7

9 If the interest payout rates are equal, generally which of the following would be more attractive monetarily to bond purchasers? a. Public (ta-eempt) bonds b. Private (taable) bonds c. They re generally equally attractive the panelists (see title slide) 8

10 According to the Counsel of Development Finance Agencies (CDFA), which state used the largest amount of private activity bonds in 2014 for multifamily housing? a. California b. Illinois c. New York d. Teas the panelists (see title slide) 9

11 Outline Ta-Eempt Bond Overview Bond Financing Timeline 4% Low-Income Housing Ta Credits Major Bond Rules Bond Rules vs. LIHTC Rules Bond Application Developer/ Owner State Allocating Agency 2.75 bil Private Activity Ta-Eempt Bonds the panelists (see title slide) 10

12 (City/County) Inducement Resolution Bond Issuer Public hearing or TEFRA requirement At least 14 days prior to hearing Public Bond Issue (City/County) AAA Aaa Credit Enhancer Bonds Underwriter Bond Issuer Bond Purchase Agreement Loan Agreement Regulatory Agreement Ta Certificate Trust Indenture Bond Proceeds Bondholders Trustee Interest Payments Mortgage Note Lender Bond Proceeds DRAW Req Interest Payments Invoices Project the panelists (see title slide) 11

13 Summary of Principal Bond Documents From the Orrick Multifamily Rental Housing Ta-Eempt Bond Booklet Loan Agreement Under the Loan Agreement, the Issuer loans the bond proceeds to the Borrower to pay the costs of acquiring, constructing, rehabilitating or refinancing the project as applicable. The Loan Agreement sets out the terms of repayment of and security for the loan. Regulatory Agreement or Land Use Restriction Agreement The Regulatory Agreement is recorded against the project and restricts the use of the project so as to ensure compliance with applicable ta laws and any applicable state or local laws primarily relating to affordability restrictions. Ta Certificate The ta certificate contains covenants and agreements of the issuer and the borrower to assure that the interest on any ta-eempt bonds remains eempt for the life of the bond issue. Mortgage or Deed of Trust Recorded as an encumbrance upon the project to secure the loan. Trust Indenture The conduit bond issuer issues bonds pursuant to an indenture or trust agreement (the Indenture ) between the Issuer and a corporate trustee (the Trustee ) who holds the funds and any other collateral pledged under the Indenture to secure payment of the Bonds and, if necessary, enforces certain rights of the bondholders and the Issuer. Bond Purchase Agreement The bond purchase agreement is eecuted by the issuer, the underwriters (or bond private placement purchaser) and the borrower and sets forth the terms and conditions of the initial purchase of the bonds. Official Statement For publicly offered bonds, the official statement is often prepared by the underwriter s counsel and used by the underwriter(s) to market the bonds to potential investors. It describes the bonds, the principal legal and bond documents, the project, the Borrower, any credit enhancement or liquidity support and, in some cases, construction contracts or arrangements and operating projections. Which entity in a bond transaction holds the bond proceeds and releases them when draw requisitions are submitted (i.e. services completed)? a. Underwriter b. Issuer c. Trustee d. Borrower the panelists (see title slide) 12

14 Public Bond Issue (City/County) 0.125% Bonds AAA Aaa Credit Enhancer 1% Underwriter Bond Issuer Bond Purchase Agreement Loan Agreement Regulatory Agreement Ta Certificate Trust Indenture Trustee 0.02% Bond Proceeds Interest Payments 4% Bondholders Mortgage Note Lender Bond Proceeds DRAW Req Interest Payments 5.145% Invoices Project Direct Bond Issue (City/County) AAA Aaa Credit Enhancer Bonds Underwriter Bond Issuer Bond Purchase Agreement Loan Agreement Regulatory Agreement Ta Certificate Trust Indenture Bond Proceeds Bondholders Trustee Interest Payments Mortgage Note Lender Bondholder Bond Proceeds Bond Proceeds DRAW Req Interest Payments Invoices Project the panelists (see title slide) 13

15 Interest Fully Funded at Day One vs. Drawdown Time Interest Fully Funded at Day One vs. Drawdown Bal. Rate Bal. Rate Time Which player in a public bond issue would not be present in a direct bond issue? a. Underwriter b. Issuer c. Trustee d. Borrower the panelists (see title slide) 14

16 Outline Ta-Eempt Bond Overview Players in a Bond Transaction 4% Low-Income Housing Ta Credits Major Bond Rules Bond Rules vs. LIHTC Rules Bond Financing Period (Appro 16 wks) Preparation Period Construction Period (Appro 24 mos.) Permanent Period (15-35 yrs) the panelists (see title slide) 15

17 Assemble Bond Finance Team Kick-Off Meeting/Call Hold TEFRA Hearing Submit Substantially Final Documents to Issuer Receive Bond Volume Cap Allocation Publish TEFRA Notice Bond Application Issuer Approves Bond Resolution Close Financing Apply for Bond Volume Cap Allocation Circulate Draft Documents Sell Bonds Preparation Period Bond Financing Period (Appro 16 wks) Eample Equity Contribution Schedule Equity Contr. Equity Contr. Equity Contr. Equity Contr. Month 1 Start construction Month 12 50% Construction Completion Month 18 Temporary Certificate of Occupancy Month 24 Conversion Bond Financing Period (Appro 16 wks) Preparation Period Construction Period (Appro 24 mos.) Permanent Period (15-35 yrs) the panelists (see title slide) 16

18 Which of the following happens the latest during the bond financing period? a. Bond resolution approval b. Selling of the bonds c. TEFRA Hearing d. Receiving the bond volume cap allocation Outline Ta-Eempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Major Bond Rules Bond Rules vs. LIHTC Rules the panelists (see title slide) 17

19 10 years Section 142(d) Section 42 Ta Liability Investor Partnership LLC S-Corp 50% Test DEBT Bonds Ta Liability Developer/ Owner Total Project Costs Equity Low-Interest Debt Income limits Rent limits Suitability for occupancy Bonds Section 142(d) Section 42 Population-based pool 9% LIHTCs Bond Application Ta Credit Application State Allocating Agency Developer/ Owner Private Activity Ta-Eempt Bonds the panelists (see title slide) 18

20 Total project costs = 11 Mil Developer/ Owner Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits 10 Mil 100% 10 Mil 10 JUL % Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis 10 Mil 100% 10 Mil Annual ta credits Ten years Total ta credits 329k Mil the panelists (see title slide) 19

21 AUG % Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis 10 Mil 100% 10 Mil Annual ta credits Ten years Total ta credits 315k Mil Bond closing (By election) 3.15% Month placed in service (Default) Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis 10 Mil 100% 10 Mil Annual ta credits Ten years Total ta credits 315k Mil the panelists (see title slide) 20

22 3.15% 3.25% 3.20% Acq Rehab Month acquisition placed in service Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis 4Mil 100% 4Mil 6Mil 100% 6Mil Month rehab completed (Default) Annual ta credits Ten years Total ta credits 130k Mil 192k Mil IRC Section 42(b)(1) 3.22 Mil 3.15% 3.25% 3.20% Acq Rehab Total project costs = 11 Mil QCT = Eligible basis Applicable fraction Qualified basis 4Mil 100% 4Mil 7.8 Mil 100% 7.8 Mil Annual ta credits Ten years Total ta credits 130k Mil 250k Mil 3.80 Mil the panelists (see title slide) 21

23 30% Eligible Basis Boost Available to Projects located in Difficult Development Areas (DDAs), which are areas that have high construction, land, and utility costs relative to area median gross income. IRC 42(d)(5)(C)(iii) Projects located in Qualified Census Tracts (QCTs), which are census tracts in which 50 percent or more of the household have an income which is less than 60 percent of the area median income for such year or which has a poverty rate of at least 25 percent. IRC 42(d)(5)(C)(ii) NOT APPLICABLE TO BOND/4% DEALS: 9% projects not already in a DDA or QCT that the state allocating agency chooses to award up to the 30% basis boost so that the project may be financially feasible. Housing and Economic Recovery Act of 2008 (HERA) To arrive at the annual amount of credits for an ACQUISITION building, the building s qualified basis is multiplied by which of the following credit percentages? a. The percentage of the month the acquisition is placed in service b. The percentage of the month the bonds are issued c. The percentage of the month the rehab is deemed completed d. The calculation for each of the120 months in the ten-year credit period will be different since the ta credit percentage is updated each month the panelists (see title slide) 22

24 11 Mil Bonds >50% 3.23M Equity 29% Acq Rehab Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits 4Mil 100% 4Mil 3.25% 130k Mil 7.8 Mil 100% 7.8 Mil 3.20% 250k Mil 3.80 Mil >37% 10.7 Mil 11 Mil 5.35 Mil 50% % Fied Assets Aggregate Basis 1.61M Acq Bonds Equity14.5% Rehab Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits 4Mil 100% 4Mil 3.25% 130k Mil 7.8 Mil 100% 7.8 Mil 3.20% 250k Mil % 3.80 Mil the panelists (see title slide) 23

25 10.7 Mil 11 Mil 5.35 Mil 6M Bonds >54% 6M 3.23M Equity 29% Fied Assets Aggregate Basis Acq Rehab Total project costs = 11 Mil Eligible basis Applicable fraction Qualified basis Ta credit percentage Annual ta credits Ten years Total ta credits 4Mil 100% 4Mil 3.25% 130k Mil 7.8 Mil 100% 7.8 Mil 3.20% 250k Mil 3.80 Mil What is the penalty for failing the 50% test? a. The awardee forfeits the right to claim any credits b. The awardee can claim 4% credits on only the portion of the project financed by ta-eempt bonds c. The awardee will have to finish construction in half the time normally allotted the panelists (see title slide) 24

26 Outline Ta-Eempt Bond Overview Players in a Bond Transaction Bond Financing Timeline 4% Low-Income Housing Ta Credits Bond Rules vs. LIHTC Rules 2% Cost of Issuance Limitation 6M Bond issuance costs (BIC) paid from bond proceeds 120k (6 mil 2%) Fied Assets Aggregate Basis the panelists (see title slide) 25

27 Good Costs/Bad Costs 95% of proceeds must be used for good costs Good Costs Land and depreciable costs for income ta purposes < 25% Land 6M Fied Assets Aggregate Basis 5.7 mil Good Costs/Bad Costs 95% of proceeds must be used for good costs 300k 6M Fied Assets Aggregate Basis Bad Costs Bond issuance costs and underwriting Loan origination fees amortized over the perm loan period Other intangible assets the panelists (see title slide) 26

28 Good Costs/Bad Costs 95% of proceeds must be used for good costs Not reimbursable with bond proceeds 60 days Good Costs Land and depreciable costs for income ta purposes 95% of bond proceeds Bad Costs Bond issuance costs and underwriting, loan origination fees amortized over the perm loan period, other intangible assets < 5% of bond proceeds Outline Ta-Eempt Bond Overview Players in a Bond Transaction Bond Financing Timeline 4% Low-Income Housing Ta Credits Major Bond Rules the panelists (see title slide) 27

29 Penalty for Noncompliance Private Activity Bonds Low-Income Housing Ta Credits Interest payments to bondholders become taable! Recapture of ta credits! the panelists (see title slide) 28

30 Private Activity Bonds Reviewing Agency Low-Income Housing Ta Credits Bond Issuer (or third party appointed by Issuer) State Allocating Agency (or third party appointed by Agency) Enforcement Agency for Both IRS Ta Forms and Minimum Set-Aside Private Activity Bonds Low-Income Housing Ta Credits Form 8609 (first year) Form 8823 (hopefully never) Form 8703 (annually) the panelists (see title slide) 29

31 Ta Forms and Minimum Set-Aside Private Activity Bonds Low-Income Housing Ta Credits Minimum Set-Aside: Set aside at least 20% of units for households with incomes at or below 50% of area median income OR Set aside at least 40% of units for households with incomes at or below 60% of area median income IRC 142(d)(1) IRC 42(g)(1) Ta Forms and Minimum Set-Aside Private Activity Bonds Low-Income Housing Ta Credits 100% Applicable Fraction 90% 80% Partial Recapture 70% 60% 50% Taable interest payments! 30% 20% 10% 100% Recapture!!! IRC 142(d)(1) IRC 42(g)(1) the panelists (see title slide) 30

32 What is the penalty for violating the bond rules as outlined in IRC Section 142(d) (i.e test, land test, minimum set-aside, etc.)? a. The bonds are reclaimed by the issuer b. The interest payments to the bondholders become taable c. The bonds are now due to be paid back in full within si months of the violation being discovered d. The bonds become reclassified as public bonds Lower Lower Lower Private Activity Bonds No defined standard in 142; varies by area Imputed Household Size Income Basis Utility Allowance Rent Limits 829/mo 948/mo 1,066/mo 1,183/mo Rent Limits Imputed number of tenants BDR + 1* Unit Size BDR SRO 1 BDR 2 BDR 3 BDR Low-Income Housing Ta Credits Random County, USA 2016 limits, minimum set-aside, project PIS after 3/28/2016; bond determination letter during FY 2014 (for LIHTC rent floor) Rent Limits 844/mo 904/mo 1,084/mo 1,253/mo Lower * Common variation for bond properties the panelists (see title slide) 31

33 Private Activity Bonds Low-Income Housing Ta Credits No defined standard in 142; varies by area Imputed Household Size Random County, USA Income Basis 2016 limits, minimum set-aside, project PIS after 3/28/2016; Utility Allowance bond determination letter during FY 2014 (for LIHTC rent floor) Assume N/A for bonds Imputed number of tenants Rent Limits BDR + 1* Unit Size BDR 1.5 Rent Limits 829/mo 1 SRO 30UA 1 814/mo 948/mo 2 1 BDR 35UA /mo 1,066/mo 3 2 BDR 50UA 3 1,034/mo 1,183/mo 4 3 BDR 65UA 4.5 1,188/mo Lower Rent Limits LIHTC rent limits are reduced by a utility allowance, if applicable. Use the lesser of the LIHTC rent limit (net of utility allowance if tenants pay own utilities) or bond gross rent limit if the bond limits in your area don t account for utility allowances. Lower Lower Lower * Common variation for bond properties Rent Limits: Potential Differences for Bond Deals A property financed with ta-eempt bonds and equity from low-income housing ta credits (LIHTCs) may likely have to determine applicable rent limits for the units under two sets of criteria (and ultimately adhere to the rent limits of the lower of the two limits). Imputed household size The rent limit for LIHTC is based on the HUD-published income limit for an imputed household size based on 1.5 times the number of bedrooms in the unit. The imputed household size to calculate the rent limits for bond deals is more fleible by geographic area and is commonly based on the number of bedrooms in the unit plus 1 Income Basis LIHTC rent limits are based on HUD-published MTSP (multifamily ta subsidy project) income limits, which are held harmless if the current-year limits aren t higher than the previous high-water mark for a property; MTSP limits for LIHTC properties in service prior to 2009 also include higher HERA Special income limits; Utility Allowance If households within an LIHTC property pay their own utilities, management must reduce the amount of tenant-paid rent by an applicable utility allowance (the most common of which is published by the local public housing authority or PHA); depending on the area, rent limits for bond properties don t necessarily have to be reduced by published utility allowance amounts the panelists (see title slide) 32

34 Private Activity Bonds Rent Limits Low-Income Housing Ta Credits may decrease (state decides: MTSP, HUD, or other) will never decrease (based on MTSP income limits) IRC 142(d)(1) IRC 42(g)(1) General Rule: When you have to keep two sets of rules (that don t conflict), keep the more stringent set and you ll usually be okay. the panelists (see title slide) 33

35 Why might applicable rent limits for an LIHTC property financed in part with private activity bonds be lower than other LIHTC properties in the area that are not financed with private activity bonds? a. The methodology for computing bond rent limits may be using an imputed household size other than 1.5 number of bedrooms b. Bond limits may be using something other than MTSP and may not be held harmless at previous highs c. The rent for the bond property in the area may not need to be reduced by an applicable utility allowance d. Any or all of the above could eplain the difference Outline Ta-Eempt Bond Overview Players in a Bond Transaction Bond Financing Timeline 4% Low-Income Housing Ta Credits Major Bond Rules Bond Rules vs. LIHTC Rules the panelists (see title slide) 34

36 Upcoming LIHTC Webinars, Webinar Recordings and on-demand courses: APR HUD Rent and Income Limits and Your Ta Credit Property APR 28 QAP Fundamentals and Hot Topics Recording Initial Lease Up and Maimizing First-Year Credits Recording LIHTC Acq/Rehab Basics Recording Principles of LIHTC Eligible Basis Recording Developer-Syndicator Relationship Recording LIHTC Year 15 On-Demand Private Activity Bond and 4% Low-Income Housing Ta Credit Basics the panelists (see title slide) 35

37 Bond Financing Time Line (For discussion purposes only; not meant to be a rigid time line) Preparation Period Identify Banker/Lender, Issuer, Bond Counsel, Financial Advisor Pass Inducement Resolution Ependitures within 60 prior to this date eligible to be reimbursed with bond proceeds Bond Financing Period Week 1 Apply for Bond Volume Allocation Week 4 Week 6 Week 7 Week 9 Assemble Bond Finance Team Receive Bond Volume Allocation Kick-Off Meeting/Call Circulate Draft Documents Issuer, Bond Counsel, Lender, Investment Banker, Bond Credit Enhancer, Bond Trustee, LIHTC Ta Credit Partner Week 11 Publish TEFRA Notice Must be published at least 14 days prior to TEFRA Hearing Week 13 Hold TEFRA Hearing Week 13 Week 14 Week 15 Submit Substantially Final Documents to Issuer Issuer Approves Bond Resolution Authorizing the Sale and Issuance of the Bonds Sell Bonds Week 16 Close Financing First LIHTC Equity Contribution made

38 Construction Period Month 1 Start Construction Month 12 50% Construction Completion Second LIHTC Equity Contribution Month 18 Temporary Certificate of Occupancy Third LIHTC Equity Contribution Month 24 Conversion Fourth LIHTC Equity Contribution Permanent Period This period starts at Conversion, which occurs when the Project is built and leased up. The loan starts to amortize at this point with monthly principal and interest payments due. This period lasts for net 15 to 35 years, until debt repaid in full.

39 Ecerpt from Novogradac s Introduction to Low-Income Housing Ta Credits Third Edition A companion to the LIHTC workshops presented by Novogradac & Company LLP at its industry conferences Purchase the full booklet at VI. Big-Picture Development Timeline The bond/4 percent credit application States and local governments often finance public projects (roads, prisons, schools, etc.) through the issuance of municipal, or muni, bonds. If they are issued at the same interest pay-out rate as bonds issued by private organizations, these publicly issued bonds are more attractive to investors because the interest payments from muni bonds are ta-eempt.

40 To promote certain private activities, each state is also authorized to allow the issuance of a set amount of private-activity, volume cap, ta-eempt bonds (under IRC 142(d)). Volume cap bonds can be allocated to finance multifamily housing developments, single-family housing, student loans, industrial development and other areas. In 2015, the volume cap for each state is the greater of 100 per capita or 301,515,000 (see Rev. Proc ). Developments that are financed (whether new construction or acquisition/rehab) in part by volume cap bonds are eligible for 4 percent ta credits only. Because the interest bondholders earn is ta eempt, the interest rate the partnership pays is often lower than non-ta-eempt bonds or conventional loans. All other things being equal, the debt service for a given loan size would be lower for a loan with a lower interest rate. Conversely, most partnerships choose to instead increase the principal amount of the loan, while keeping debt service payments constant (due to the lower interest rate). Developments financed by these ta-eempt bonds cannot be rewarded with lower interest payments and 9 percent credits (which would be the best of both worlds), so they are simply ineligible for 9 percent credits. Not only are the interest payments to the bondholders ta eempt for income ta purposes, HERA made it so those payments are also no longer subject to AMT. There is no limited pool for the 4 percent ta credit. If developers want to use bonds (which we ll address in more depth later) they won t have to go through the rigorous competition for credits from the 9 percent pool but they also won t get to use the higher tier of credit percentage in their calculation they ll have to use the lower, 4 percent credit. To obtain ta credits, these developers must first apply to the state bond allocating agency for an allocation of private-activity, volume-cap ta-eempt bonds. Upon approval of bond issuance, the developer will submit a non-competitive ta credit application to the state allocating agency.

41 The 50 percent test for 4 percent developments Even though there is no specific ceiling for the amount of 4 percent credits a state can allocate, the 4 percent ta credits are not unlimited. At least 50 percent of the development s aggregate basis (essentially land plus depreciable assets) must be financed by volume cap ta-eempt bonds (plus interest earned on the bonds) for the property to be eempt from the state allocating agency s competitive 9 percent ta credit allocation process. If only percent of a development s aggregate basis is financed with volume cap ta-eempt bonds, the development has failed the 50 percent test. Only percent of the development s eligible basis is shielded from the competition for 9 percent credits and the developer can only use percent of the eligible basis for calculation of 4 percent credits. This means that percent of the eligible basis is NOT shielded from the competitive allocation process. Ineligibility of percent of otherwise eligible basis translates into a percent forfeiture of 4 percent ta credits (see IRC 42(h)(4)(B)) and a loss of percent of the equity. So mathematically, because the aggregate basis cannot be more than twice as large as the bond proceeds and earned interest, the amount of bonds allocated to a property effectively limits the potential amount of ta credits a bond development could produce, because aggregate basis is close to the amount of eligible basis and a set eligible basis can produce only so many ta credits even if it is in a DDA and has a 100 percent applicable fraction.

42 VIII. Utilizing Ta-Eempt Bonds The following eample depicts a common model for issuing bonds under a public bond offering. Bonds: the big picture When an operating partnership (the borrower) chooses to finance a LIHTC property using volume cap ta-eempt bonds, the partnership needs another entity to issue the bonds on its behalf. Therefore, the partnership approaches a potential issuer (typically a city, county or housing authority) to petition the state authority to issue a portion of the state s volume cap of private activity bonds. A regulatory agreement between the borrower and the issuer establishes the borrower s responsibilities regarding the rent and income restrictions and other aspects of leasing the apartment units. The purchasers of the bonds are typically individuals or entities who simply want to make a good return on their investment. They will likely not know the identity of the specific borrower. Eecuting a bond purchase agreement with the issuer, the underwriter markets the bonds to potential purchasers and acts as a middleman between purchasers and the other parties. The underwriter will typically advise the borrower on selecting the appropriate Issuer and on the process for obtaining the volume cap bonds in the first place. Because the financial security of the borrower may be unknown, a financial institution with a superior credit rating (AAA or Aaa) commonly steps in as a credit enhancer to guarantee that the purchasers will receive a return of their initial capital as well as timely interest payments.

43 Confident in the AAA or Aaa rating attached to the bonds, the purchasers buy the bonds through the underwriter. The bond proceeds do NOT go directly to the borrower, issuer or underwriter but instead to a trustee, where they are held in trust according to the provisions of a trust indenture, an agreement between the trustee and the issuer that outlines the terms for repayment of proceeds. The borrower enters into a mortgage note with a lender affiliated with the credit enhancer. If the borrower defaults on the loan, the credit enhancer has claim to the property because the credit enhancer is still obligated to pay the purchasers. Contractors and other vendors periodically submit invoices to the borrower. Typically monthly, the borrower aggregates the invoices, attaching them to a draw requisition for funds to be released to the vendors. As construction progresses, the bond proceeds are slowly depleted and eventually the development is completed. During this time, the borrower continues to pay interest on the full value of the bond loan and will, at some point, be required to pay back the principal. The underwriter, credit enhancer and trustee and each entity s respective legal counsel all work for a fee. The participation of so many fee-earning parties makes financing costs of ta-eempt bond deals relatively high. Additional bond details and rules In addition to the 50 percent test, which if failed will lead to a drop in credits of 50 percent or more, bond deals are subject to additional rules regarding the ta-eempt status of the bonds. Failure to adhere to any of the following rules can lead to the revoke of the interest payments to bondholders being ta eempt, which would undoubtedly lead to litigation. 15 percent rehab requirement Rehab must be 15 percent or more of that portion of the cost of buildings and fitures financed with bonds. For properties financed with bonds and claiming credits, HERA requires rehabilitation ependitures to eceed the greater of 6,000 per unit (increased by an inflation factor) or 20 percent of the adjusted basis of the building (see IRC 42(e)(3), which is a higher standard than the 15 percent required for bond-only developments. Inducement resolution Bonds must be issued pursuant to an inducement resolution, the first official action passed by the Issuer communicating intent to issue bonds for a specific activity. Any ependitures occurring earlier than 60 days prior to the inducement resolution cannot be reimbursed with the bond proceeds. Cost of issuance limitation No more than 2 percent of bond proceeds may be used to pay costs associated with issuing the bonds. Costs of issuance beyond 2 percent of the bond proceeds can be part of a bond-financed development, but those costs must be paid from other sources of funds. Public hearing or TEFRA requirement According to the Ta Equity and Fiscal Responsibility Act of 1982 (TEFRA), the issuer of the bonds and an elected official in the jurisdiction in which the development will be located must approve the bonds. They must also hold a public hearing (TEFRA hearing) and give notice of the hearing in writing and published in an appropriate journal or publication at least 14 days prior to the hearing (basically to give members of the community ample opportunity to attend). The TEFRA hearing is typically part of a city/county council meeting or board meeting of the issuer. The public hearing requirement can open up not-in-my-backyard (NIMBY) issues from those in the community who may oppose construction of affordable housing.

44 Good costs versus bad costs - At least 95 percent of bond proceeds must be used to pay or reimburse good costs. Good costs include land and depreciable costs for income ta purposes that are paid or incurred after the date of inducement resolution. Bad costs include costs incurred prior to inducement resolution (that otherwise would have been considered good costs), intangible assets, bond issuance costs and underwriting, as well as loan origination fees amortized over the permanent loan period. No bond proceeds may be used to reimburse costs incurred prior to 60 days before the inducement resolution.