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Copyright © 2012 Novogradac & Company LLP1
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Panelists:
John Kelley, Esq.Holland & Knight, LLP
Benathan UpshawCB Emmanuel
Learn the Basics:Tax Exempt Bonds
Moderator/Presenter:
Charles A. Rhuda, IIINovogradac & Company LLP
Copyright © 2012 Novogradac & Company LLP2
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements
Copyright © 2012 Novogradac & Company LLP3
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements
Copyright © 2012 Novogradac & Company LLP4
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Can you lower your rent to $400/month?
Developer/Owner
Sorry.
“Affordable Housing”
DEBT
Total Project Costs
Copyright © 2012 Novogradac & Company LLP5
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
InvestorTax Liability
Section 42
“Low Income Housing Tax Credit”
Developer/Owner
x 10 years
• Income limits• Rent limits
• Partnership• LLC• S-Corp
Tax LiabilityEquity
Total Project Costs
DEBT
Copyright © 2012 Novogradac & Company LLP6
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
InvestorTax Liability
Section 42
“Low Income Housing Tax Credit”
Developer/Owner
x 10 years
• Income limits• Rent limits
• Partnership• LLC• S-Corp
Tax LiabilityEquity
Bonds
Total Project Costs
Bonds
Low-Interest Debt
DEBT
Copyright © 2012 Novogradac & Company LLP7
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
NY population: 2012ApproxxApprox
19.47 mil$95
$1.85 bil
NY population: 2012ApproxxApprox
Private ActivityTax-Exempt Bonds
19.47 mil$2.20
$42.8 mil
Section 42
State Allocating Agency
LIHTCs
LIHTCs
Greater of $95 per capita OR $284,560,000$1.85B
Copyright © 2012 Novogradac & Company LLP8
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
4% credits
*x 10 =$108 Mil*
mathematical potential if nearly all bonds were issued for affordable housing;actual credits utilized will be far less than $108 million
Private ActivityTax-Exempt Bonds
Section 42
State Allocating Agency
LIHTCs
LIHTCs
9%, per capita, “competitive” credits
$1.85BLIHTCs
Developer/Owner
Copyright © 2012 Novogradac & Company LLP9
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
x
x
x
x
x
x 10$1.44 Mil
$5.86 Mil75%
$4.40 Mil3.28%$144k
10$1.54 Mil
$4.81 Mil100%
$4.81 Mil3.20%$154k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
B
= $10.67 Mil
$2.98 Mil
A
Total project costs = $11.2 Mil
Developer/Owner
Copyright © 2012 Novogradac & Company LLP10
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
9%$433k
9%$396k
$3.96 Mil $4.33 Mil
x
x
x
x
x
x 10
$5.86 Mil75%
$4.40 Mil
10
$4.81 Mil100%
$4.81 Mil
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
B
= $10.67 Mil
A
Total project costs = $11.2 Mil
Developer/Owner
$8.29 Mil
Copyright © 2012 Novogradac & Company LLP11
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Developer/Owner
Copyright © 2012 Novogradac & Company LLP12
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Developer/Owner
InvestorTax Liability
Fund “Upper Tier”
“Lower Tier”
LP
Copyright © 2012 Novogradac & Company LLP13
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Developer/Owner
InvestorTax Liability
Fund
Syndicator
LP
GP
GP LP
Copyright © 2012 Novogradac & Company LLP14
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
$3.96 Mil $4.33 Mil
x
x
x
x
x
x 10
$5.86 Mil75%
$4.40 Mil
10
$4.81 Mil100%
$4.81 Mil
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
B
= $10.67 Mil
A
Total project costs = $11.2 Mil
9%$396k
9%$433k
$8.29 Mil
$7.0M
$11.2 Mil
Equity 63%
x
Copyright © 2012 Novogradac & Company LLP15
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
BA
Total project costs = $11.2 Mil
$2.5M
$11.2 Mil
Equity 22%
x
x
x
x
x
x
x 10$1.44 Mil
$5.86 Mil75%
$4.40 Mil3.28%$144k
10$1.54 Mil
$4.81 Mil100%
$4.81 Mil3.20%$154k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
= $10.67 Mil
$2.98 Mil
Why go the bond route?
Copyright © 2012 Novogradac & Company LLP16
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
BA
Total project costs = $11.2 Mil
$2.5M
$11.2 Mil
Equity 22%
x
x
x
x
x
x
x 10$1.44 Mil
$5.86 Mil75%
$4.40 Mil3.28%$144k
10$1.54 Mil
$4.81 Mil100%
$4.81 Mil3.20%$154k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
= $10.67 Mil
$2.98 Mil
Why go the bond route?
Bonds >50%
Copyright © 2012 Novogradac & Company LLP17
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
BA
Total project costs = $11.2 Mil
$11.2 Mil
$3.3M Equity 29%
x
x
x
x
x
x
x 10$1.87 Mil
$7.62 Mil75%
$5.71 Mil3.28%$187k
10$2 Mil
$6.25 Mil100%
$6.25 Mil3.20%$200k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
= $13.87 Mil
$3.87 Mil
Bonds >50%
“QCT” =
Copyright © 2012 Novogradac & Company LLP18
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements
Copyright © 2012 Novogradac & Company LLP19
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Public BondsBondholders
State Allocating Agency
Copyright © 2012 Novogradac & Company LLP20
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Public Bonds
Interest Payments
BondholdersPrivate Bonds
Interest Payments
Private Sector
Copyright © 2012 Novogradac & Company LLP21
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Airports
StudentLoans
Single‐FamilyHousing
Industrial Development
Bondholders
Interest Payments
State Allocating Agency
Multi‐FamilyRental Housing
Private ActivityTax-Exempt Bonds
$1.85B
Copyright © 2012 Novogradac & Company LLP22
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements
Copyright © 2012 Novogradac & Company LLP23
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
State Allocating Agency
Developer/Owner
BondApplication
Private ActivityTax-Exempt Bonds
Section 42
$1.85B
Copyright © 2012 Novogradac & Company LLP24
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Bond Issuer
(City/County)
Borrower
InducementResolutionInducementResolution
Public hearing or “TEFRA” requirement
P’ship
Copyright © 2012 Novogradac & Company LLP25
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Credit Enhancer
Purchasers
Trustee
Bond Proceeds
Bond Proceeds
Project
Trust IndentureTrust
Indenture
Interest Payments
MortgageNote
MortgageNote
BondsBonds
DRAW ReqDRAW Req
“AAA”“Aaa”
InvoicesInvoices
Interest Payments
Bond Purchase Agreement
Bond Purchase Agreement
Underwriter
Loan Agreement
Loan Agreement
RegulatoryAgreement
RegulatoryAgreement
Lender
Bond Issuer
(City/County)
Copyright © 2012 Novogradac & Company LLP26
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements
Copyright © 2012 Novogradac & Company LLP27
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Types of Bond Issues1. “Essential Function” or “Governmental Purpose” Bonds issued
under Section 103 -- project to be owned by a public body– Good news: Much less restrictive rules than either
of 2 other categories
– Bad news: Not eligible for 4% LIHTC
2. “501(c)(3)” Bonds issued under Section 145
– For charitable organization having a designation under IRC Section 501(c)(3) in order to:
• Provide affordable housing for persons of lower income, or
• Provide appropriate housing for the elderly or handicapped
– Good news: Don’t need private activity bond volume allocation
– Bad news: Not eligible for 4% LIHTC
Copyright © 2012 Novogradac & Company LLP28
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Types of Bond Issues3. Private Activity Bonds issued under IRC Section 142(d) -- for profit-
motivated owner
– Usually combined with 4% LIHTC
– This is the most common “new money” category – generally represents 85-90% of “new money” deals
– Main requirements include:• Lower income targeting – 20% at 50% AMI or 40% at 60% AMI• Private activity bond volume allocation (“volume cap”)
“Refunding” Bonds– Proceeds used to pay off bonds previously issued to finance a
multifamily rental housing project– Used to reduce interest rates or change credit enhancement
BondApplication
Private ActivityTax-Exempt Bonds
Copyright © 2012 Novogradac & Company LLP29
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Financing Alternatives
DSC LTV Amort. C/E Fees Timeframe Variable?
Credit Enhancement Alternatives• FHA / GNMA 1.11 90%+ 35-40 Low 90-150 No
• Fannie Mae and Freddie Mac 1.15-1.20 80% 30-35 Mid 60-90 Yes
• Bank Letters of Credit 1.15-1.25 75-85% 25-30 High 60-90 Yes
Non-Credit Enhanced Executions• Stand-Alone Bond Rating 1.45 n/a 30 Mid-to-High 60-90 No
• Conduit Bond Lender 1.15-1.20 80-85% 30-35 n/a 60 Maybe
Copyright © 2012 Novogradac & Company LLP30
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements
Copyright © 2012 Novogradac & Company LLP31
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
$2.5M
BA
Total project costs = $11.2 Mil
$11.2 Mil
Equity 22%
x
x
x
x
x
x
x 10$1.44 Mil
$5.86 Mil75%
$4.40 Mil3.28%$144k
10$1.54 Mil
$4.81 Mil100%
$4.81 Mil3.20%$154k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
= $10.67 Mil
$2.98 Mil
“Aggregate Basis”Fixed Assets
50%
Equity
Copyright © 2012 Novogradac & Company LLP32
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
$5.45 Mil
$1.9M
BA
Total project costs = $11.2 Mil
$11.2 Mil
x
x
x
x
x
x
x 10$1.44 Mil
$5.86 Mil75%
$4.40 Mil3.28%$144k
10$1.54 Mil
$4.81 Mil100%
$4.81 Mil3.20%$154k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
= $10.67 Mil
$2.98 Mil
“Aggregate Basis”Fixed Assets
$10.9 Mil
11%Equity49.9999%
49.9999%
Bonds
Copyright © 2012 Novogradac & Company LLP33
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
BA
Total project costs = $11.2 Mil
$2.5M
$11.2 Mil
Equity 22%
x
x
x
x
x
x
x 10$1.44 Mil
$5.86 Mil75%
$4.40 Mil3.28%$144k
10$1.54 Mil
$4.81 Mil100%
$4.81 Mil3.20%$154k
Ten yearsTotal tax credits
Eligible basisApplicable fractionQualified basisTax credit percentageAnnual tax credits
= $10.67 Mil
$2.98 Mil
Bonds 54%
“Aggregate Basis”
$6M
Fixed Assets
$10.9 Mil
$6M$5.45 Mil
100%
Copyright © 2012 Novogradac & Company LLP34
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
“Aggregate Basis”Fixed Assets
Bond issuance costs (BIC) paid from bond proceeds ≤ $120k
2% “Cost of Issuance Limitation”
$6M($6 mil x 2%)
Copyright © 2012 Novogradac & Company LLP35
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
“Aggregate Basis”Fixed Assets
$6M
“Good Costs/Bad Costs”95% of proceeds must be used for “good costs”
$5.7 mil
Good CostsLand and depreciable costs for income tax purposes
…paid or incurred after the date of the Inducement Resolution
Copyright © 2012 Novogradac & Company LLP36
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
“Aggregate Basis”Fixed Assets
$6M
“Good Costs/Bad Costs”95% of proceeds must be used for “good costs”
≤ $300kBad Costs
Costs incurred prior to Inducement Resolution
Intangible assets
Bond issuance costs and underwriting
Loan origination fees amortized over the perm loan period
Assumed debt
Copyright © 2012 Novogradac & Company LLP37
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
95% of proceeds must be used for “good costs”
60 days
“Good Costs”“Bad Costs”
“Good Costs/Bad Costs”
Copyright © 2012 Novogradac & Company LLP38
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Copyright © 2012 Novogradac & Company LLP39
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Copyright © 2012 Novogradac & Company LLP40
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Copyright © 2012 Novogradac & Company LLP41
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Copyright © 2012 Novogradac & Company LLP42
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Questions?
John Kelley, Esq.Holland & Knight, LLP
[email protected].(617) 305-2042
Benathan UpshawCB Emmanuel
[email protected](716) 310-9136
Charles A. Rhuda, IIINovogradac & Company [email protected]
(617) 330-1920
Copyright © 2012 Novogradac & Company LLP43
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Free Tax Credit Resources:www.taxcredithousing.com
Copyright © 2012 Novogradac & Company LLP44
Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012Building an Affordable New YorkThursday, May 12, 201113th Annual ConferenceWednesday, May 16, 2012
Outline
How Tax Credit Financing Works
Tax-Exempt Bond Overview
Players in a Bond Transaction
Types of Bond Issues
50% Test and Other Bond Requirements