Bonding 101 – Tax-Exempt Bonds as a
Way to Finance Your Projects
Vince O’Donnell, Vice President of
Affordable Housing Preservation
Local Initiatives Support Corporation
vodonnell@lisc.org
617-338-5170
Tax Exempt Bonds
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TAX EXEMPT BONDS
Three kinds of tax-exempt bonds are issued
by public housing finance entities
 Private Activity Bonds for for-profit entities
 Private Activity Bonds for 501(c)(3)
organizations
 Essential Purpose Bonds issued for various
activities that may include housing
Tax Exempt Bonds
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TAX EXEMPT BONDS
Combining tax credits and tax-exempt
bonds
What additional parties are involved?
What are the additional documents
needed?
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Qualified PABs with Tax Credits
Use Limited Partnership or LLC structure
Available to both for-profit and nonprofit
developers
Interest on these bonds is tax exempt if:
 Bond amount is within State’s bond volume cap
 TEFRA (Tax Equity and Fiscal Responsibility Act of
1982) public hearing held before bonds issued
Tax Exempt Bonds
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Qualified PABs with Tax Credits
Tax credits are allocated to the LP “as-ofright”
“50% Test” – bonds must fund 50% of
project’s depreciable basis to receive all tax
credits; otherwise LIHTC are pro-rated per
fraction of total development cost supported.
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Combining Tax Credits and Bonds
4% (30% present vale) tax credit rate –
federally subsidized financing
Project must be consistent with State’s QAP
Minimum LIHTCs required for financial
feasibility
Use of bond proceeds must stay within use
limitations (“Good Costs”)
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Combining Tax Credits and Bonds
Meeting the “50% test” is critical
Tax credit tenant income rules apply.
Needed for
 Exemption of interest from Federal income
taxes
 Compliance with LIHTC requirements
Can transfer ownership to tenants at year 16
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Additional Parties in a T.E. Bond Issue
Bond Issuer – government
agency/entity/PHA
Bond Counsel – determines compliance
with laws
Bond Trustee – protects interests of
bondholders
Underwriter – structures bonds for market
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Additional Parties in a T.E. Bond Issue
Financial Advisor – does feasibility analysis
Credit enhancement provider – increases
marketability of the bonds
Bond Rating Agency – rating influences the
issue’s price and marketability
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Bond Financing Instruments
Mortgage – documents the property
lien
Loan Agreement – repayment and
security
Official Statement – key business
aspects
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Bond Financing Instruments
Trust Indenture – establishes bond
trustee’s responsibilities and rights
Bond Purchase Agreement – basis for
Underwriter purchasing bonds from
Issuer
Credit Enhancement Documents –
improves credit rating, reduces cost of
borrowing
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Other Housing Tax Exempt Bonds Without Tax Exempt Bonds
501(c)(3) Qualified PABs
 Not eligible for LIHTCs – nonprofit owner
 Less restrictive income, use restrictions
Essential Function Bonds (issued by gov’t
entities)
 Not eligible for LIHTCs – government owner
 Least restrictive requirements
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Response to Current Market Conditions
Issues:
Flight of capital to U.S. Treasuries and
other “safe” instruments.
High rates of tax-exempt municipal bonds.
Low rates on taxable bonds using FHA and
GNMA
Infeasible to meet 50% test for 4%
LIHTCs using traditional permanent debt
structure.
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Response to Current Market Conditions
(continued)
Solution:
Short-term cash-collateralized tax-exempt
bonds for 50% of TDC.
Replace drawdowns of tax-exempt bond
proceeds with FHA-GNMA-insured loan
proceeds.
Repay tax-exempt bonds after placed-inservice debt.
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Response to Current Market Conditions
(continued
Solution (continued):
Credit Enhancement:
– FHA §223(f) – including LIHTC Affordable
Pilot Program
– FHA §221(d)(4) New Construction –
Substantial Rehab.
– USDA §538
Savings: 100-150 basis points
Reduced claim on bond cap
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Additional Resources
Multifamily Rental Housing: Financing With
Tax-Exempt Bonds
Jason Cooper, Orrick, Herrington & Sutcliffe LLP
http://www.orrick.com/Events-andPublications/Documents/2709.pdf
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Additional Resources
Combining Short-term Cash Backed Taxexempt Bonds With Taxable GNMA Sales
For Affordable Housing Projects Using
FHA Insurance
R. Wade Norris, Esq., Eichner Norris &Neumann PLLC
March 15, 2013
http://www.citibank.com/icg/sa/citicommunitycapital/docs/031513_c
ombining.pdf
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