Tax Exempt Bonds with 4% LowIncome Housing Tax Credits
September 3, 2014
Presented by:
KENT S. NEUMANN, ESQ.
kneumann@ennbonds.com
(202) 973-0107
EICHNER NORRIS & NEUMANN PLLC
1225 19th Street, N.W., 7th Floor
Washington, D.C. 20036
website: www.ennbonds.com
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A housing subsidy program for rental housing
created in 1986 under Section 42 of the Internal
Revenue Code
Accounts for approximately 90% of all affordable
rental housing in the United States
Each state receives an amount of tax credits
annually to allocate to affordable housing projects
Generally administered by each state’s housing
finance agency (VHDA in VA)
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Applicable for rental units with tenants earning no
more than 60% of area median income
Investors earn dollar-for-dollar credits against
their federal tax liability and also get tax benefits
from losses
Generally, tax credits are received over the first 10
years of operation
Some tax credits are recaptured by the IRS if the
project does not comply for 15 years after placed
in service
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Occupancy Restricted - Who can live there?
 At least 40% of the units must be set aside for
families earning below 60% of Area Median
Income (AMI) based published HUD data
(adjusted for family size). 20/50 election also
available.
Rent Restricted – How much can tenants pay?
 Rents and utilities – limited to 30% of threshold
income
 Allowable rent based on size of unit
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No Tax Credit/
No Deduction
Net Income from
Operations
Deduction
Tax Credit
1,000,000
1,000,000
1,000,000
none
(300,000)
none
Taxable Income
1,000,000
700,000
1,000,000
Tax Liability:
Tax at 40% tax rate
$400,000
280,000
400,000
none
none
(300,000)
$400,000
$280,000
$100,000
Taxable Deductions
Low-Income Housing Tax
Credits
Net Tax Liability
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9% New Construction/ Rehab Credit - Provides
~70% of financing subsidy for a Project.
 Very competitive (extremely limited annual supply) – scored
based on states qualified allocation plan (QAP)
 Can’t use tax-exempt bonds
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4% New Construction/ Rehab Credit - Provides
~30% of financing subsidy for a Project.
 Allocated on a non-competitive basis (not limited)
 Must be used with tax-exempt bonds
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In Virginia, Tax Exempt Bonds can be issued
through:
 the State (Virginia Housing Development Authority) or
 a local Redevelopment Housing Authority
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Eligible for 4% credits
 No separate allocation of 4% credits needed. In VA, VHDA
is the allocation administrator of the credits.
 Tax Exempt Bond amount must exceed 50% of aggregate
basis (50% test)
 Bonds must remain outstanding at least until the Project
is placed in service (i.e. construction completion)
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Community Reinvestment Act (“CRA”) and the
Recapitalization of Large Commercial Banks has resulted in
the rise of private placement bond executions.
Relatively High 4% LIHTC Pricing: $0.90 – $1.10 per dollar
of tax credit
Historically low long-term taxable rates combined with
innovative bond structures: provide all in borrowing costs
of 4.00% – 5.25%.
Relatively Steep Yield Curve pushing structures that help
minimize construction period negative arbitrage (see next
page).
“Preservation” of first-generation LIHTC deals which are
now exiting their 15-year compliance period is providing
more transactions into the market.
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4.00%
3.50%
3.38%
3.00%
3.10%
2.50%
2.55%
2.00%
2.15%
1.50%
1.66%
1.00%
0.93%
0.50%
0.46%
0.10%
0.00%
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Assumed: $10,000,000 Bond Deal with 2-Year
Construction Period and 24 level draws.
Annual Bond Rate:
Interest Due on Bonds
(24 months):
Mortgage Rate:
Short Term
Fixed Rate
Fully Funded
Variable Rate
Draw Down
Long Term
Fixed Rate
Fully Funded
0.50%
2.75%
5.50%
$100,000
$275,000
$1,100,000
$275,000
$1,100,000
4.00%
Additional Interest:
$400,000
Total Interest:
$500,000
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Bank Private Placements
Short-Term Fixed Rate Bonds with Taxable
Credit Enhanced Loans (FHA/GSE/Rural
Development)
VHDA Long-Term Fixed Rate Bond
Transactions
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Bonds are generally issued locally through an RHA
Variable rate drawdown structure during construction period eliminates construction
period negative arbitrage and lowers capitalized interest requirements
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Lower Costs of Issuance: No credit enhancement, rating or remarketing costs
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Faster Execution Time: 90-150 days
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Underwriting: 80% LtV; 1.15-1.20 DSCR; 30-35 year amortization w/ 18 year term
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Recourse guarantees typically required during construction and lease up
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Mostly available in CRA markets
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Potential tax implications if bond purchase is related to 4% tax credit investor (see
§1.148 program investment regulations)
Estimated Construction/Perm Interest Rate Stack
Bond Rate – Construction (VR): LIBOR + ~2.50 (draw-down)
2.70%
Bond Rate – Permanent (FR): 10-year LIBOR Swap Rate + ~2.00
5.25%
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Taxable MBS Markets continues to deliver historically low pricing:
◦ FHA/GNMA: 223(f)/221(d) GNMA sales currently provide 3.5% - 4.0% all-in borrowing
rate with no negative arbitrage and 35-40 year amortization
◦ RD 538/GNMA loans provide similar pricing to corresponding FHA/GNMA loans
◦ Fannie/Freddie loans with no construction period (i.e. immediately funded
transactions w/ mod-light rehab) currently provide 4.0% - 4.5% all in borrowing rate
with 30-35 year amortizations.
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Short Term Bonds are issued locally through an RHA to meet the 50% test and
significantly reduce construction period negative arbitrage
Execution Time: 90-150 days for GSE; 180-270 days for FHA
Underwriting: 80% LtV; 1.15-1.20 DSCR; 30-35 year amortization w/ 18 year term for
GSE; 85% LtV; 1.15 DSCR; 35-40 year amortization and term for FHA/RD
Recourse guarantees typically required during construction and lease up
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Bond Payoff
~2-Yr Bonds
(after Project is placed
in service)
Trustee
1
6
Bond
Purchaser
2
Bond
Proceeds
Bond
Proceeds
Account
Escrow
Account
MBS
Proceeds
MBS
Purchaser
7
Bond Proceeds
5
3
Borrower
4
Draw Request
Sale of
Taxable MBS
FHA/GSE/RD
Lender
Loan Funding
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Bond Amount > Taxable Loan Amount:
◦ Other sources of funds (i.e. Equity, Subordinate loan, etc.) needed to cover
the differential. Timing of funding is crucial
◦ Additional Rating Agency requirements on publically offered transactions
Bridging Equity:
◦ Limited collateral available for bridge financing
◦ Seller Note can occationally be used to help with timing of funds
Publically Offered vs. Privately Placed:
◦ Timing; Cost; Issuer requirements
◦ Potential tax implications if Bond Purchaser is “related” to the Borrower
(see §1.148 program investment regulations)
Bond Interest &Third Party (Bond Related) Fees
◦ Typically escrowed at closing with Trustee for full term of Bonds
◦ Possible limitation on Issuer Fees due to short maturity and Loan Yield
limitations
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