“Twinning” a 9% Credit Project with a Tax Exempt Bond/4% Project

ERIK T. HOFFMAN EHoffman@kleinhornig.com

1325 G Street NW | Suite 770 | Washington DC 20005

D 202 842 0125 www.kleinhornig.com

Twinning

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Twinning 9s with TE Bonds and 4s

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1. Overview—What is it?

2. The Evil “Taint”

3. Structuring Issues

1. The Overview of Twinning

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• Pre- versus Post HERA (2008)

• Twinning: Combining these 2 Sources by Separating a Single Project into Two Distinct Projects (similar to NMTC-LIHTC)

The EVIL TAINT

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IRC §42(i)(2) provides that a new building is treated as "federally subsidized" if the proceeds of a tax-exempt bond are used (directly or indirectly) with respect to the building or its operation. . . The applicable percentage for these buildings is limited to the 30% applicable percentage under IRC §42(b) (1) (B) (ii).

The BAD of Twinning—the TAINT

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The Risk

• Allocation: $1,000,000 • Total Credits: $10 million • $1.00 Price, 100%@60%, all in adjusted basis • Credit Rates 7.51%-3.22% Pre-taint Equity = $7.51 MM Post-taint = $3.22M Adjuster of $4.29MM + penalties and interest Repurchase

The BAD of Twinning—the TAINT

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IRS Guidance (scant)

1995—IRS rules that multiple building project with TE bonds in some buildings will taint 9% in same project, citing collateralization among reasons.

2000—IRS finds that TE bonds and 4% for acquisition and 9% for rehabilitation taints 9% due to ‘single plan of financing’ (independent would be ok)

Twinning and Structuring

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IRS Guidance

IRS Notice 88-91—recognizes condominium units as a separate tax credit ‘building’

IRC provisions on adjusted basis and “reasonable method” allocations for common areas, commercial space, parking, etc.

Specific carve outs to the ‘taint’ in IRC 42(i)

Twinning and Structuring

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Structuring Issues—The Real Estate • Subdivide, ground lease, condo

• Ground Leases – HUD-FHA Form Rider – VHDA Bond Financing and Control of Casualty/Condemnation Proceeds – Subsidy for leasehold interest

• VA Condominium Act

– Engineer/Surveyor: Substantially Completed versus ‘Not Yet Completed’ & Volumetric Air Rights Units

* Alternative Structures without Condos—Sequencing – Condos and Local Taxes – Agency & Lender Concerns (security, silo versus checkerboard approach) – BINs Galore! – Voting Rights – Declarant during Construction

• Common Areas, Shared Amenities, Cost Sharing

Twinning and Structuring

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Structuring Issues—The Financing • TWO Plans of Financing = Two Separate Deals • The Noah’s Arc Deals (twos of everything)

– GMP, Architects, Accounting, Legal, Property Mngmt.

• Two Loans (smaller sizes may impact rates) • 50% Test Issues for a Condo Unit

• TE Bond Issuance Timing—locking the 4% rates • Cross Subsidizification

Case Study: Residences at Government Center

• Closed in March 2015—total of $60 MM financing – 270 affordable units, including very low income units – New Construction, included Preservation Project (nearby homes of longtime resident beavers) – LEED® for Homes certified project – Approximately nine acres with a multi-level, above-grade parking garage.

• Originally structured as 100% TE Bond and 4% Credit Project; then Market Shift

with Spiked Interest Rates & Constr. Costs (2007, again 2009/2010, and 2013)

• Considered “Phasing” with Multiple 9% Round Apps or Split Applications to Distinct Pools—needed simultaneous financing

• Restructured as Two Projects and Financing Plans for TE Bonds-4% & 9% LIHTC

– HUD-FHA prohibits Cross Collateralization; Avoiding Evil Taint – Single Ground Lease from County was Bifurcated – Two Condominium Regimes to legally divide property for ownership

• Condo A consists of 150 units (Buildings 1, 2, 3 and cellar spaces of Buildings 4 and 5) – Applied for and allocated 9% LIHTC

• Condo B consists of 120 units (Building 4 and 5) – 4% LIHTC & Tax-Exempt Bonds

Government Residences Site

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Government Residences Site

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Case Study: Residences at Government Center

• Using Taxable-Tax exempt financing structure

– Tax-exempt bonds are issued allowing project to leverage 4% LIHTC equity

– Bonds are outstanding only through the end of the construction period (approximately 24 months)

– Condo B will be financed using tax-exempt bonds that are fully cash collateralized by the proceeds of a 221(d)(4) FHA loan.

Twinning: What is it in Virginia?

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VHDA’s QAP “Any applicant for a development which, pursuant to a common plan of development, is part of a larger development located on the same or contiguous sites, financed in part by tax exempt bonds.” • Common Plan of Development • Same or Contiguous “Site”—Condo, Ground Lease,

Subdivision

• 30%, 40%, 50% of Aggregate units funded by Tax-Exempt Bonds

Questions?

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