Tax-Exempt Bonds and Low-Income Housing Tax Credits

Dan Smith, CPA

Public/Government Sector

Private Sector

Tax-exempt bonds(Lower interest payments)

Bondholders

Bondholders

Taxable bonds(Higher interest payments)

BondholdersMulti-Family

Housing

Private Activity “Volume Cap” Tax-exempt bonds

(Lower interest payments)

“Volume Cap”Tax-exempt

Bonds

Multi-FamilyHousing

State

Greater of $90/person or $273,270,000 for 2009

StudentLoans Docks and WharvesSingle-Family

Housing

Airports

Industrial Development

CaliforniaFloridaNevadaNew YorkOhioTexas

$3,107,023,2751,551,355,655

262,095,0001,640,306,965

974,687,9452,031,872,300

$1,144,564,324571,487,942

96,550,479604,255,799359,055,260748,500,523

Volume Capfor 2008

AdditionalBonds*

*IRS Notice 2008-79

California Volume Cap (2008)

Indiana Volume Cap (2008)

Two examples:

“Volume Cap”Tax-exempt

Bonds

BondApplication

Tax Credit Application

4% Credits! 4% Credits!

9% Credits! 9% Credits!

Bond Issuer

(City/County)

Borrower

InducementResolution

Public hearing or “TEFRA” requirement

Credit Enhancer

Bond Issuer

Purchasers

Trustee

(City/County)

Bond Proceeds

Bond Proceeds

Project

Trust Indenture

Interest Payments

MortgageNote

Bonds

DRAW Req

“AAA”“Aaa”

Invoices

Interest Payments

Bond Purchase

Agreement

Underwriter

Loan Agreement

RegulatoryAgreement

Lender

Borrower

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

Land plus Depreciable Basis

Bonds Tax-exempt bonds plus

Interest Earned

“Aggregate Basis”

≥ 50%

Tax-exempt bonds +

Interest Earned

“Aggregate Basis”

50%50%

$8.2 mil

E.B. = $7.6 mil

50% Test

$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% Test

50%50%

$7.6 mil

4%

$304k

Eligible Basis

Tax Credit %

Annual Tax Credits

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% Test

50%50%50%50%

$8.2 mil= 50% $10 mil

$5 mil= 61%

=

$10,000,00149.999995%

$4.7 mil

$188k!

$7.6 mil

4%

$304k

Eligible Basis

Tax Credit %

Annual Tax Credits

$9.4 mil

$376k

States are asking developers to find other sources of financing in order to stretch the bond cap!

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%50%

Additional Requirements of Private Activity Bonds

Additional Requirements of Private Activity Bonds

Portion of acquisition financed with bonds = $10 mil

Rehab ≥ $1.5 million

15% rehab requirement on acquisition

15%

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%)

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”

$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

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”

$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

Additional Requirements of Private Activity Bonds

Inducement ResolutionBonds

60 days

InducementResolution

“Good Costs”95%

5%“Bad Costs”

9% vs. 4% Deals9% vs. 4% Deals

NewConstruction

Non-FederallySubsidized(Perm Loan)

9% credits

Construction Method

NewConstruction

Acquisition/Rehabilitation

Non-FederallySubsidized(Perm Loan)

9% credits Acq – 4%Rehab – 9%

Fin

an

cing

Meth

od

Construction Method

NewConstruction

Acquisition/Rehabilitation

Non-FederallySubsidized(Perm Loan)

9% credits Acq – 4%Rehab – 9%

FederallySubsidized(TE bonds)

4% credits Acq – 4%Rehab – 4%

Fin

an

cing

Meth

od

Construction Method

Eligible Basis Eligible Basis

x DDA/QCTx DDA/QCT

EB adj. for DDA/QCT EB adj. for DDA/QCT

x Applicable Fractionx Applicable Fraction

Qualified BasisQualified Basis

x Applicable Percentagex Applicable Percentage

Annual LIHTC 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 X Project Y

Financing LIHTC ProjectsFinancing LIHTC Projects

Needed Sources

Investors

Fund / Upper tier Limited Partnership

Lower Tier Operating Limited Partnership

9% Credits

CREDITS

Equity

Debt

Higher Interest

Needed Sources

Investors

Fund / Upper tier Limited Partnership

Lower Tier Operating Limited Partnership

9% Credits

Financing LIHTC ProjectsFinancing LIHTC Projects

Financing LIHTC ProjectsFinancing LIHTC Projects

Needed Sources

Investors

Fund / Upper tier Limited Partnership

Lower Tier Operating Limited Partnership

4% Credits

CREDITS

Equity

Debt

Lower Interest

Comparing “9%” Tax Credits to Bonds with “4%” Credits

“9%” Tax Credits Bonds with “4%” Credits

Financing Fees Low High to very high

Interest Rates Higher Lower to very low

Rents Lower (< 50% AMGI) Higher (60% AMGI)

Financing Leverage Low to very low High

Amenity CostsHigher (due to competitive application requirements)

Lower

Competition for Allocation/Reservation

Very high Low