tax exempt bonds with 4% low-income housing tax credits september 3, 2014

Tax Exempt Bonds with 4% Low-Income Housing Tax Credits

September 3, 2014

Presented by:

KENT S. NEUMANN, [email protected]

(202) 973-0107EICHNER NORRIS & NEUMANN PLLC

1225 19th Street, N.W., 7th FloorWashington, D.C. 20036

website: www.ennbonds.com

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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The Low Income Housing Tax Credit Program

Eichner Norris & Neumann PLLC 202-973-0107

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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How Do Housing Tax Credits Work?


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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Unit Restrictions


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Tax Credits vs. Tax Deductions

No Tax Credit/ No Deduction

Deduction Tax Credit

Net Income from Operations

1,000,000 1,000,000 1,000,000

Taxable Deductions 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

Low-Income Housing Tax Credits none none (300,000)

Net Tax Liability $400,000 $280,000 $100,000


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

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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Types of Low Income Housing Tax Credits:


In Virginia, Tax Exempt Bonds can be issued through:

the State (Virginia Housing Development Authority) or a local Redevelopment Housing Authority

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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Tax Exempt Bonds with 4% LIHTCs


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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CURRENT MARKET FACTORS DRIVING 4% BOND STRUCTURES


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Constant Maturity Treasury Yield Curve

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 300.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

0.10%

0.46%

0.93%

1.66%

2.15%

2.55%

3.10%

3.38%


Assumed: $10,000,000 Bond Deal with 2-Year Construction Period and 24 level draws.

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Negative Arbitrage Savings Example


Short TermFixed Rate

Fully Funded

Variable Rate Draw Down

Long TermFixed Rate

Fully Funded

Annual Bond Rate: 0.50% 2.75% 5.50%

Interest Due on Bonds (24 months): $100,000 $275,000 $1,100,000

Mortgage Rate: 4.00%

Additional Interest: $400,000

Total Interest: $500,000 $275,000 $1,100,000

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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CURRENT TAX EXEMPT MULTIFAMILY HOUSING BONDS STRUCTURES


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

Lower Costs of Issuance: No credit enhancement, rating or remarketing costs

Faster Execution Time: 90-150 days

Underwriting: 80% LtV; 1.15-1.20 DSCR; 30-35 year amortization w/ 18 year term

Recourse guarantees typically required during construction and lease up

Mostly available in CRA markets

Potential tax implications if bond purchase is related to 4% tax credit investor (see §1.148 program investment regulations)

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Private Placement Bond Structure


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%

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.

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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LONG TERM TAXABLE LOANS WITH SHORT-TERM TAX-EXEMPT BONDS AND 4% LIHTC


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COMBINED TAXABLE LOAN WITH TAX EXEMPT BONDS


Borrower

MBS Purchas

er

Draw Request

Loan Funding

Trustee

BondPurchas

er

Bond ProceedsAccount

~2-Yr Bonds

BondProceeds

Bond Payoff(after Project is placed

in service)

MBSProceeds

3

4

Sale of Taxable MBS

7

5

6

8

1

2

Bond Proceeds

EscrowAccount

FHA/GSE/RD Lender

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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RELATED QUESTIONS


tax exempt bonds with 4% low-income housing tax credits september 3, 2014

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