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Creating Partnerships for Tax-Exempt Multifamily Housing Bonds and 4% Tax Credits

Learn how tax credit financing works with tax-exempt bonds, the players in a bond transaction, bond financing timeline, types of bond issues, requirements, and how to get deals done.

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Creating Partnerships for Tax-Exempt Multifamily Housing Bonds and 4% Tax Credits

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  1. Creating Partnerships for Tax-Exempt Multifamily Housing Bonds and 4% Tax Credits Jim Shaw Capital Area Housing Finance Corporation Matthew Bissonette Citi Community Capital George Littlejohn Novogradac & Company

  2. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  3. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  4. Affordable Housing Overview

  5. Affordable Housing Overview “Affordable Housing” $6.38M DEBT Can you lower your rent to $400/month? Sorry. $700 Total Project Costs $400 Developer/Owner

  6. Basic Zoom (out) Intro to LIHTC and Section 42 IRS Section 42 ‘86 x 10 years IRC Tax Liability Investor $ “Low Income Housing Tax Credit” DEBT Equity DEBT • Partnership • LLC • S-Corp Bonds DEBT TAX CREDITS Total Project Costs Low-Interest Debt • Income limits • Rent limits Developer/Owner Bonds Tax Liability

  7. Tax Credit Calculation: Eligible Basis Section 42 9%, per capita, “competitive” credits IRC 25.67 mil $2.20 $56.5 mil Texas population: 2012 Approx x Approx x 10 = $565 Mil LIHTCs $56.5 mil LIHTCs 25.67 mil $95 $2.44 bil Texas population: 2012 Approx x Approx 4% credits State Allocating Agency Greater of $95 per capita OR $284,560,000 Developer/Owner $2.44B $100 Mil* x 10 = $1 Bil LIHTCs LIHTCs Private Activity Tax-Exempt Bonds Private Activity Tax-Exempt Bonds * mathematical potential if nearly all bonds were issued for affordable housing; actual credits utilized will be far less than $100 million 2,439,100,000

  8. Tax Credit Calculation: Eligible Basis A B Total project costs = $11.2 Mil Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits = $10.67 Mil $5.86 Mil 75% $4.40 Mil 3.28% $144k 10 $1.44 Mil x x x 10 $1.54 Mil $4.81 Mil 100% $4.81 Mil 3.20% $154k x x x Developer/Owner LIHTCs $2.98 Mil Private Activity Tax-Exempt Bonds 2,439,100,000

  9. A B Total project costs = $11.2 Mil Ten years Total tax credits Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits = $10.67 Mil 9% $396k $5.86 Mil 75% $4.40 Mil 3.28% $144k $3.96 Mil 10 $1.44 Mil x x x 9% $433k $4.33 Mil 10 $1.54 Mil $4.81 Mil 100% $4.81 Mil 3.20% $154k x x x Developer/Owner LIHTCs $2.98 Mil $8.29 Mil Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  10. Developer/Owner LIHTCs Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  11. Developer/Owner LIHTCs Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  12. LP LP Tax Liability Investor $ GP GP Syndicator Credits $ $ Losses Fund “Upper Tier” $ $ $ Credits “Lower Tier” Losses $ Developer/Owner LIHTCs Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  13. Tax Liability Investor $ ? $8.29 mil Fund $ 65¢-95¢ 85¢ $8.29 mil Developer/Owner LIHTCs Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  14. $8.29 mil $8.29 mil LIHTCs Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  15. $11.2 Mil $8.29 mil 63% $8.29 mil Equity $7.0M x 85¢ A $7.0 mil B Total project costs = $11.2 Mil Ten years Total tax credits Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits = $10.67 Mil $5.86 Mil 75% $4.40 Mil 9% $396k $3.96 Mil 10 x x x 10 $4.33 Mil 9% $433k $4.81 Mil 100% $4.81 Mil x x x LIHTCs $8.29 Mil Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  16. $11.2 Mil $2.98 mil >50% 22% Equity $2.5M $2.98 mil Bonds x 85¢ A $2.5 mil B Total project costs = $11.2 Mil Ten years Total tax credits Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits = $10.67 Mil 10 $1.44 Mil $5.86 Mil 75% $4.40 Mil 3.28% $144k x x x $4.81 Mil 100% $4.81 Mil 3.20% $154k 10 $1.54 Mil x x x ? Why go the bond route? LIHTCs $2.98 Mil Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  17. $11.2 Mil $2.98 mil >50% 22% Equity $2.5M $2.98 mil Bonds x 85¢ A $2.5 mil B Total project costs = $11.2 Mil 30% Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits = $10.67 Mil 10 $1.44 Mil $5.86 Mil 75% $4.40 Mil 3.28% $144k x x x 10 $1.54 Mil $4.81 Mil 100% $4.81 Mil 3.20% $154k x x x “QCT” = LIHTCs $2.98 Mil Private Activity Tax-Exempt Bonds “DDA” 2,439,100,000 $56.5 mil LIHTCs

  18. $11.2 Mil $2.98 mil >50% 22% Equity $2.5M $2.98 mil Bonds x 85¢ A $2.5 mil B Total project costs = $11.2 Mil 30% Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits = $13.87 Mil 10 $1.87 Mil $7.62 Mil 75% $5.71 Mil 3.28% $187k x x x 10 $2 Mil $6.25 Mil 100% $6.25 Mil 3.20% $200k x x x “QCT” = LIHTCs $3.87 Mil Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  19. $11.2 Mil $3.87 mil >50% 29% Equity $3.87 mil Bonds $3.3M x 85¢ A $3.3 mil B Total project costs = $11.2 Mil 30% Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits Ten years Total tax credits = $13.87 Mil 10 $1.87 Mil $7.62 Mil 75% $5.71 Mil 3.28% $187k x x x 10 $2 Mil $6.25 Mil 100% $6.25 Mil 3.20% $200k x x x “QCT” = LIHTCs $3.87 Mil Private Activity Tax-Exempt Bonds 2,439,100,000 $56.5 mil LIHTCs

  20. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  21. 4% Tax Credits Section 42 IRC State Allocating Agency Developer/Owner $2.44B Private Activity Tax-Exempt Bonds

  22. Private Activity Tax-Exempt Bonds Bondholders Taxes $ $ Private Bonds Public Bonds Private Sector $ Interest Payments Interest Payments $ $ Bonds Interest Payments $ State Allocating Agency $2.44B Multi-Family Rental Housing Student Loans Private Activity Tax-Exempt Bonds Single-Family Housing Industrial Development Airports http://www.ohfa.org/housingdev/mfb.htm

  23. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  24. 4% Tax Credit Calculation Section 42 Bond Application IRC State Allocating Agency Developer/Owner $2.44B 4% Credits Private Activity Tax-Exempt Bonds http://www.ohfa.org/housingdev/mfb.htm

  25. Inducement Resolution ! (City/County) Bond Issuer Public hearing or “TEFRA” requirement P’ship Borrower

  26. Credit Enhancer Underwriter Bond Purchase Agreement Bonds Trust Indenture Purchasers $ $ RegulatoryAgreement Loan Agreement Mortgage Note Lender DRAW Req Invoices “AAA” “Aaa” (City/County) ? Bond Issuer $ Bond Proceeds Interest Payments $ Trustee Bond Proceeds $ Interest Payments $ Project

  27. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  28. Bond Financing Time Line (separate handout provided)

  29. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  30. Types of Bond Issues • “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 eitherof 2 other categories • Bad news: Not eligible for 4% LIHTC • “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

  31. Types of Bond Issues Bond Application • 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 issuedto finance a multifamily rental housing project • Used to reduce interest rates or change credit enhancement 4% Credits Private Activity Tax-Exempt Bonds

  32. Financing Alternatives

  33. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  34. $11.2 Mil ! $2.98 mil 22% Equity $1.9M Equity $2.5M $2.98 mil x 85¢ A $2.5 mil B Total project costs = $11.2 Mil Ten years Total tax credits Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits = $10.67 Mil 10 $1.44 Mil $5.86 Mil 75% $4.40 Mil 3.28% $144k x x x $4.81 Mil 100% $4.81 Mil 3.20% $154k 10 $1.54 Mil x x x ! 17% LIHTCs $2.98 Mil Private Activity Tax-Exempt Bonds 100% 2,439,100,000 $56.5 mil LIHTCs

  35. $11.2 Mil $10.9 Mil ! $1.49 mil $2.98 mil 50% $5.45 Mil ! 49.9999% 22% Equity $1.9M 11% Equity $2.5M $1.49 mil $2.98 mil Bonds Fixed Assets x “Aggregate Basis” 85¢ A $1.25 mil $2.5 mil B Total project costs = $11.2 Mil Ten years Total tax credits Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits = $10.67 Mil 10 $1.44 Mil $5.86 Mil 75% $4.40 Mil 3.28% $144k x x x $4.81 Mil 100% $4.81 Mil 3.20% $154k 10 $1.54 Mil x x x LIHTCs $2.98 Mil 49.9999% Private Activity Tax-Exempt Bonds $1.49 mil 100% 2,439,100,000 $56.5 mil LIHTCs

  36. $11.2 Mil $10.9 Mil $2.98 mil 54% $6M $5.45 Mil 100% $6M 22% Equity $2.5M $2.98 mil Bonds Fixed Assets x “Aggregate Basis” 85¢ A $2.5 mil B Total project costs = $11.2 Mil Ten years Total tax credits Eligible basis Applicable fraction Qualified basis Tax credit percentage Annual tax credits = $10.67 Mil 10 $1.44 Mil $5.86 Mil 75% $4.40 Mil 3.28% $144k x x x $4.81 Mil 100% $4.81 Mil 3.20% $154k 10 $1.54 Mil x x x $2.98 Mil

  37. 2% “Cost of Issuance Limitation” Fixed Assets “Aggregate Basis” Bond issuance costs (BIC) paid from bond proceeds ≤ $120k $6M ($6 mil x 2%)

  38. “Good Costs/Bad Costs” 95% of proceeds must be used for “good costs” Good Costs Land and depreciable costs for income tax purposes …paid or incurred after the date of the Inducement Resolution $5.7 mil $6M Fixed Assets “Aggregate Basis”

  39. “Good Costs/Bad Costs” 95% of proceeds must be used for “good costs” Bad Costs Costs incurred prior to Inducement Resolution Intangible assets Bond issuance costs and underwriting Loan origination fees amortized over the perm loan period Bad Costs Costs incurred prior to Inducement Resolution Intangible assets Bond issuance costs and underwriting Loan origination fees amortized over the perm loan period ≤ $300k $6M Fixed Assets “Aggregate Basis”

  40. Inducement Resolution “Good Costs/Bad Costs” 95% of proceeds must be used for “good costs” “Good Costs” “Bad Costs” 60 days

  41. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  42. Soft Debt • When does subordinate debt come in? • Lien priority • Senior/subordinate lender • “Hard debt” vs. “soft debt” • Combining with new markets or other tax credits? Equity Bonds Deferred Developer Fee Grant, “Soft Loan” Total Project Costs

  43. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

  44. ? done So, how are deals getting

  45. City View Apartments

  46. City View Apartments

  47. City View Apartments • Condominium Agreement – Affordable Unit, Market Unit • 245 Units Total • 49 PH Units, 12 Affordable Units • 184 Units, or 75% Market Rate • Financing: • HOPE VI • Tax Exempt Bonds • SAHA Construction Loan • City of San Antonio HOME loan • Other Soft Loans • Tax Credit Equity • Deferred Developer Fee

  48. Outline How Tax Credit Financing Works Tax-Exempt Bond Overview Players in a Bond Transaction Bond Financing Timeline Types of Bond Issues 50% Test and Other Bond Requirements Soft Debt How to Get Deals Done

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