Enhancing Private Activity Bonds for Housing

and everyone and thank you for joining us this is our annual presentation for local communities and really anyone else interested in the basics of private activity bond caps enhancing today's speakers are scheduled to be wayne fret wayne McCleary housing development specialists from the division of housing state Dola office had a family emergency so i will cover his portion we do have allison O'Kelly available on the call from the state division of housing in the event and you have questions that i'm unable to answer my name is shannon Friedel and i'm a tax credit officer with chavez community development team we also have Karen Harkin who is our community relations manager at chafa and Karen is located in our Grand Junction office lastly we have Fred Marin Thal who's an attorney and partner with COO tech rock and he will wrap up the presentations today with his legal perspective of financing projects using private activity bonds again I'll be covering for Wayne so we won't have the benefit of this good looking guy today so let's jump in what our private activity bonds they're a special set of bonds with special requirements and limitations and it's important to note that it's not money it's not cash there's not a cheque issued unfortunately to municipalities tax-exempt bonds are issued for privately developed projects you're likely everybody's probably familiar with municipal bonds and those are issued by municipalities for public purposes and our focus today is going to be tax-exempt bonds that are issued for privately developed projects you'll also hear today reference to the words cap or capacity or volume cap and all of that refers to the IRS cap or limit on the amount of private activity bonds that are available to a state municipalities and often authorities issue the bonds but they have no obligation of repay the investors and that the general structure in a typical deal is that investors buy the bonds and underwriters use the bond proceeds or the money that comes in from the investors to make a loan to the project the project will pay back the loan there's no obligation for the city or county directly to pay back the loan and the investors get repaid of course plus interest importantly to do a 4% tax credit or what you'll hear referred to as lytec low-income housing tax credit project these rental developments require 4% as part of the financing stack so this is a very valuable resource for affordable housing and we'll talk a little bit more about light check later so every year on a calendar basis Colorado receives an allocation of volume tab and how this volume capacity is calculated is they take the population and multiply it by 105 per capita per person so for 2018 that resulted in a little over 588 million in bond cap tax-exempt on cap so the state the Colorado State statue calls for 50% of the allocation to go to statewide authorities that includes chafa as well as the AG Development Authority and that the AG Development Authority does not use a lot of volume cap and they're there a program designed to help beginning farmers the other 50% on the right-hand of the slide is allocated to local government and the statute says and that the local government must receive a minimum of a million and cap so effectively any local municipality needs to have about 20,000 persons or more the remaining portion which is which is a small portion stays with the state and is referred to as the statewide balance so at the beginning of this year in January 2018 this this is a pie chart representing where the CAF went so chafa received 48 percent local issuers received 47 percent you'll see that tiny gray sliver of the AG Authority and then 3 percent went to the state Dola statewide balance and you'll see a web link there at the bottom and this is kind of a this will direct you to a sheet a one-page sheet put together by the division of housing that lists all the municipalities the 53 local issuers and what amount of bond cap our volume tap each municipality receives so that's a helpful link for developers and issuers local issuers and statewide authorities will receive their allocation by January 15th and it's the job of the local issuers the local governmental agencies to decide what they want to do with the cap and there are a couple of options available and you need to pick the issuers need to pick one of these options act on it by September 15th that's an important deadline for today's discussion so firstly you can issue the bond and closed on an eligible project by December 23rd or if you don't have a project closed in that period on that first year you can carry forward the bond cap for another eligible purpose and close within a three-year period this will require filing some paperwork with the IRS you'll also need to notify in watts or Wayne McCleary at Dola of your intent if you don't do anything the allocation your direct allocation will automatically be relinquished to the state white balance another thing you can do is assign it to another issuer for an eligible purpose so in summary the options available to issuers your choices when you receive an assignment is that you can issue it and close on the bond you can carry it forward or it will automatically relinquish by September 15 and forgive me you can also assign it to another issuer for analytical purpose this next pie chart is after September 15 of last year and this will show you how things looked as you can see things moved around a bit Kappa ended up with 56% so we had a number of local governments assign their volume cap to chafa 22% was with local issuers and the remaining 21 percent of seventy million went to the statewide balance SMI on how to assemble the required bond cap for your project so firstly identify your issuer and and this is going to be where your project is to be built you'll want to talk with local governments and the city and the county you'll want to understand if your issuer has current year cap available and also understand that they have to make an election by September 15th you'll also want to know if there's any delegated cap that the issuer has carried forward and for what purpose they've carried forward that cap and likely you're going to want to talk to Chapa and please feel free to give me a call directly especially if you want chafa to be the issuer you can also talk with division of housing and you can apply to the statewide balance this this last note here is an important one so please note that that Dola actually as well as chafa does limit the cap to a specific project to 55 percent of the aggregate basis this isn't an IRS rule this is just a practice that both agencies employ and the reason that we do this is so that we're effectively deploying cap throughout this state and and be really efficient about it so Wayne asked that I emphasize this slide so all participants on the call today on our webinar are aware of the states deadlines so dole it receives an allocation by January 15th and relinquished bond cap deadline is September 15 so keep in mind that March through November Dola will accept applications to the statewide balance or the $750 fee associated with that and also keep in mind that the applicant is not a developer the applicant is going to be the agency that will issue the bonds and that any agency or issuer that's going to issue the bonds needs to be sure that they've already used all their direct allocation before applying to the statewide balance it's about an eight week process and the issuer will receive an award letter at the end in November after the round and and I imagine that this round for the state has become more competitive so thinking about that the state cannot directly issue and they can't carry forward that's why we have the statewide balanced application process and it's the state's job to really deploy all the cap annually all the deals need to close by December 23rd and the next two bullet points just to subscribe the issuance fee is associated with statewide balance Awards as well as direct allocations and I'd like to make a note here an important one that if you're a local issuer and you still have 2015 cap that you've carried forward it does expire at the end of this year it will be eliminated it's gone so it may make sense to touch base with the state other issuers and definitely Chapa so we can be sure that we don't have any loss of cap statewide so what is the state looking for on a statewide balanced application it's it's probably often the same as what the local issuer wants to see if the developers knocking on the issuers door asking for cap so the state wants to see a demonstrated local need and support in the form of an inducement resolution from the local issuer another thing that's a foundation of how Dola looks at applications to the statewide balance is to see if there's local financial subsidies being pledged for the benefit of the project all projects need to show a demand in the market there needs to be a viable demand for the project and Aneta seing that since it is becoming more competitive in doulas statewide balance process is the level of housing affordability so Dola prefers to see projects that have deeper affordability that go beyond the IRS requirements and Fred Marin saw from Khoo Teck we'll spend some time explaining these minimum requirements in his presentation and other things to include in your application to Dola it needs to be a viable deal it needs to have reasonable costs for the development in its operations there's a test for readiness to proceed you need to have site control zoning planning approved if you're going to have some sort of credit enhancement like FHA insurance that needs to be secured and the tax credits need to be reserved obviously it needs to be financially sound reasonable income and expenses appropriate underwriting ratios and you wouldn't believe it but on occasion we do see projects whereby the sources and uses do not balance so the state would like to see the sources and use is balanced and that there are no gaps also chafa and the state want to see development team experience so we want to we want to see experienced developers that have done tax credit deels and also we look at capacity just that the developer is isn't overtaxed with the number of deals that they have going on and has the capacity for the successful completion of the project they're proposing the next bullet point talks about typical bond issuance sizes and number of units and I would say here we have 50 to 210 units and I would probably say the cost of issuance would preclude you from a 50 unit project and your 4% bond deal very likely needs to be at least a minimum of a hundred units to make sense this gives you a sense of previous award winners again it's stolid job to get everything allocated out by your end the folded items are specific projects and the unfolded items such as denver housing programs Loveland Housing Authority etc are municipalities that came in had issued all of their allocation and asked for they had a list a pipeline of deals and they received an allocation for their pipeline I imagine based on demand that Dola may see less of just an overall pipeline list and more specific project yield so I'll conclude here with the Dola presentation and this is Wayne's contact information and you're also welcome to contact and what whom I'm sure you're all familiar with because she sends your issuer letters to you and please feel free to contact and watch as well and please send in any questions on this portion of the present in your chat box I believe we'll also have an opportunity for Q&A at the end of this webinar do we have any questions at this point you know we don't have any questions okay then I will move right along and again if you if you think of something from the first presentation and the state's presentation please feel free to send those in and we'll capture those at the end of our webinar today so this next section is my presentation and my presentation focuses exclusively on using private activity bonds for multifamily rental housing which is a qualified use of private activity bonds so I'm at Chava I'm responsible for pairing private activity bond cap with 4% non-competitive projects as well as our 4% state competitive projects if you're a local issuer and want to support a project or developer who needs private activity bonds for future project please feel free to give me a call directly so we can chat about it and I'll talk a little bit about 4% tax credits or what we call lytec as they are required to use private activity bonds as a source of financing for those new to chafa we are different from the state from division of housing we are a quasi governmental agency chafa was created in 1973 and by the General Assembly specifically to address the need for affordable housing in the state of Colorado in later years our Authority was expanded to include economic development and although we're not a state agency our board is appointed by the governor of Colorado mission is to strengthen Colorado by investing and affordable housing as well as Community Development and today approximately 17 billion has been raised and invested in Colorado by chafa and that and that 17 billion is a really awesome number to see and this is one of those things that's really great about the work that we all do because when we're issuing bonds we're investing in affordable and economic develop we're investing in affordable housing as well as economic development in Colorado and furthermore these activities have a really a powerful ripple effect by creating and supporting jobs as well as creating housing and spurring economic development I do have a question Shannon can we use this with opportunity's own funds or an opportunities own project Fred do you know that I don't know the answer to that okay we will look into that and have that as well have an answer to that question as part of what we send out after the after the webinar good question thank you so again private activity bonds are used to finance affordable privately owned multifamily rental housing we there are a couple of eligible project types new construction acquisition and ACT rehab we also have seen a few adaptive reuse projects in the last few years the Inc for more it's free to the investor so that that's the big benefit and the investors for that benefit are willing to take a lower yield because the tax rate interest earned on the bonds and that the tax-free nature of the bonds creates a benefit not only for the bond investors but ultimately for the underlying project the bond support so in really simple terms these are the financing dilemmas that developers and municipalities are faced with when developing affordable housing so as we all know the lower the rents there are results and lower revenue lower revenue means lower cash flow and lower cash flow results and lower debt capacity therefore really to build affordable housing you need to subsidize the revenue often in the form of vouchers or subsidize the asset by using tax credits and private activity bonds although this is not a tax credit webinar I want to give a little background on lytec for the private activity bond financing to make sense so traditionally there are two types of federal light tech there is a nine percent tax credit which yields a 70 percent or 70 percent present value credit it is a very competitive award process its population-based and it provides a deep subsidy to the capital stack the next one is a 4% light tech to 30% present value credit essentially the non-competitive award process this is a year-round allocation process it's not subject to around with the exception of the month of July and December when Chapa does not accept or a process for % applications and has a shower shallower subsidy and there are requirements for the 50% test with private activity bonds so let me be a little more specific about this 50% test because it's an important feature at least 50% of the project's aggregate basis which is typically land plus depreciable assets must be financed by volume cap tax exempt private activity bonds so and even if your project meets the test and is at forty nine point nine nine nine repeating percent if they don't meet the fifty percent test they forfeit the four percent credits so developers and investors are always watching this percentage closely to create a cushion and for cost overruns kapha as well as jolla will allow the project to go up to fifty five percent of the aggregate basis also in colorado we've paired our state credit with four percent tax credits and bonds and this is a competitive round a little more about the what we call a chaff of a state round and four percent state round so is renewed again in 2018 it extends and the state light tech program for five more years which is terrific there's five million in annual state light tech available and chaff is using the state light tech to help finance the gaps in four percent bond transactions and both new construction and rehab deals are eligible for the state credit so it really pairs three financing sources and you have four percent federal credit state credit and private activity vodka this is a typical system of the affordable housing financing tools that are available you can have standard bank financing credit enhancements such as an FHA loan there Austin will cease soft funds in the capital stack home funds Community Development Block Grant funds there's also lytec and tax credits we have 4% non-competitive 9% competitive which cannot use private activity bonds and then the 4% and state competitive though not on this slide and there are limited soft funds available from Chapa and I'll mention those briefly we have the capital magnet fund the Housing Opportunity Fund and a healthy housing fund we also have a new 4% loan present non-competitive bond transaction so if you'd like more details on this please call me and I can put you in touch with Terry Bernard who is in charge of our lending team and he also manages these limited soft funds that might be available for a 4% project with Chavez 4% loan product so this next diagram illustrates what we just talked about about parrying the PAB financing with the 4% non-competitive and state credit state credits we're looking at capital stacks three different capital stacks for typical deal types in the left hand conventional column the debt in this example would likely come from a bank or private lender their owner would contribute about 25% of their own cash to the project and they would likely charge market rents and you'll see the the rent line sweeping across this slide and the higher rents are on the conventional project in the far right column the 9% light tech model this really is the ideal model for most affordable housing projects because in this model the sale of this tax credits provides more than 60% of the total project cost as equity so there's a lot of equity that flows into a 9% deal don't very likely also be soft funds from Grants you know in a limited amount of debt which would make up the rest of the capital stack because this model uses the lowest amount of repayable debt the rents can be the lowest and please note that the 9% is a very competitive product and perhaps one of the reasons that Chapa is experiencing higher demand for the 4% credits the blend of these financing options is our middle column here where the 4% non-competitive credits are used with more soft funds and state tax credits the debt comes from the proceeds from the sale of the private activity bonds which results generally in lower loan rates depending depending on the interest rate environment and the lower loan rates are because of the tax-exempt nature of the bonds okay so these are the bond transactions and structures that we typically see and construction construction perm perm only the bond structures that Chapa typically sees is conduit financing we're kind of it financing in Chapa terms just means that we are issuing the bonds but we are not a lender in those situations there may be a public offering or there might be a private placement with a traditional bank the other scenario might be that Chapa is the issuer as well as the lender as well as the tax credit provider and that does provide some efficiencies and cost reduction for the developer I'd like to point out a few challenges of doing a 4% lytec bond deal first and foremost it's the limited availability of private activity bonds this is new in the last four years and we're definitely feeling the crunch at chafa and you may be feeling the crunch or demand as a local issuer on your private activity bond resources and these are complex transactions a lot of technical expertise is required and you need to have well-versed jurisdictional staff there are a lot of development partners involved in the deal there will be a lender or lenders more definitely lots of lawyers and bond counsel and other professionals which makes can make for an expensive transact an expensive transactional cost so really be thoughtful about the cost of the bond issuance when you're comparing that to the property size of a proposed project because it may high transaction costs may preclude smaller projects from making sense so for example a 50% our fifty unit project probably is not going to make sense as a bond deal but a hundred and fifty unit project likely will this graph I'm including because I wanted to show you Chavez issuance levels so you can see for a number of years through 2014 we had low levels of issuance however in 2015 things really started to spike up year-over-year and we continue we continue to see real study demand for the 4% on program the last column is our year-to-date for this year 2018 so starting at the bottom on the far right the blue section are the bonds we have issues so these are closed deals and if you if you can cannot read that that represents 103 million that we've issued and closed the orange section are active closings that we're working on that will need PA B so these are deals that have already received a text credit award and the bond cap needs in this category equal about 165 million the top section the gray section is our pipeline and it's what we call our PA be asked so these are deals that have submitted an LOI to chafa or an application that have not received an award of tax credits as of yet and that represents and about a hundred and sixty-six million one other thing that I'd like to point out is that due to the demand on our tap one thing Chapa changed in 2018 and more effectively managed the cap is that we no longer issue an inducement resolution which can also sometimes be referred to as a reimbursement resolution so what we do instead is we go straight from a tax credit award to then seek an authorizing resolution from our board of directors so once you receive a tax credit award you'll need to start working with fund council and your financing team to start your fancy calls work through the tephra process and once we have substantially complete documents we have the ability to take the request the project's request for an authorizing resolution to chaffetz board of directors I do want to say though we always want to be flexible here at chafa and do what makes sense so if there's a very special circumstance whereby the project does need an inducement resolution before the final resolution please give me a give me a call and we can we can talk about it and again if there's a compelling reason to do that we can we can certainly do that and want to be flexible this next slide you may already be from here with this national organization it's the Council of development and finance agencies and this is their annual report on volume cap which is published in September of every year and the reason that that I point this out is that as you can see on on the top section chafa was in the top ten of the largest amounts of private activity bonds in 2016 issue for multifamily housing so we were a big player in 2016 I imagine when they published the report in September of this year with 2017 data we may well be on that top 10 list as well of course California New York came in as one and two but Colorado made it to number ten and I think that demonstrates how much demand and real estate development growth we have happening in the affordable housing field in Colorado one important thing that this report also discloses is which states let cap expire so everyone on the call and all of our issuers can be congratulated along with Dola because in 2017 Dola reported that no cap expired so that that was great for the state of Colorado it makes us look good not only are we using our tab and effectively efficiently managing it we are also one of the biggest issuers so that's that's everybody's to be congratulated there one of the things that I've been Chaves been tasked with this year is preserving our precious resource we have a private activity on volume cap so the theme for the today really is that Colorado is experiencing tremendous demand for this resource we although not required I'd like to really encourage issuers when it makes sense to limit the bond cap to 55 percent of the aggregate basis one of the strategy strategies that chaff is employing that we've been doing this year is recycling and our private activity bond cap to provide another tax-exempt resource above the 55 percent test to make the 4% deals possibly have better cash flow and lower debt service requirements debt requirements the other thing we do that chap has done a great job of and we've been doing for a number of years is recycling our single family private activity bonds and the reason that's important is the more we can recycle our single family bonds the less pressure that puts on the overall resources and it makes more bond cap available for multifamily deals and the other thing we're doing is just trying to get the word out to never let cap expire and one of the really great things that we had a chance to do along with Dola this year in April was host an annual luncheon for issuers and this was a really good success we had many issuers come to chafa we had a luncheon we talked about our pipeline kind of shared our pipelines with each other and talked about strategies for preserving volume cap and also talked about what's happening in everyone's respective markets so we will do that again in 2019 so next year sometime before April please look for an invitation to that lunch and again we hope you can attend and if we have it's a good success again next year we probably will make this an annual event shamon we have a question what is meant by recycling PAB and Fred feel free to jump in here but under the Hera legislation chafa when let's say Chapa issued bonds for project a and when the construction loan is when the project's built and the bonds are being paid down for what we'll call project a Chaka has a one-time ability to recycle that volume Kappa are recycled those tax exempt bonds and there are a lot of limitations to it once we recycle that bonding authority we have to deploy it within six months so what I'll do is along with our finance team will recycle that resource and then we'll look at our pipeline of deals and we'll look at when those projects are closing and we'll see if we can marry up if you will that recycled resource with that project that's going to close before the end of a six month period and what that does is from the developers perspective is it's pretty seamless because you'll have fifty five percent tax exempt bonds and then above that you have the opportunity to have more tax exempt bonds so it really looks like the same thing to you and to the developer and you can exceed that fifty five percent threshold which can make the lending terms more attractive and that the cash well better for a project idea of anything to add to that on the recycling bond opportunity no no it's good stewardship by Chapa to do that in terms of getting every possible dollar of employed and the tax code permits it and so it's a great tool and we do cap it does there is a cost for us to do this and we have to pay interest to the Federal Home Loan Bank to have a line of credit outstanding which is one of the requirements under the hare legislation and that we have to borrow so there is a cost associated with a developer using this however like this isn't our reality today but if tax-exempt bonds we're at 5% and taxable was at 7 and you could have more than 55% of tax exempt that makes for a much better deal so that's for for some projects it makes a lot of sense to use recycled bonds if you have more questions about that and or what our pipeline if you will recycled opportunities are please contact me and I can certainly talk with you about that why don't I answer the question on qualified opportunities Oh No thank you we can knock that one down great in theory those are intentionally available for a capital stack for a multifamily project if the multifamily project is located in a qualified opportunity zone which are basically very low income areas that are measured by census tracts that eat certain economic criteria in particular the purpose of the legislation when introduced by Senators Anna Cory Booker from New Jersey and Tim Scott from South Carolina was to provide another tool another tax benefit for areas that have been bypassed or were being bypassed by the recovery from the 2008 recession so it's a very rigid definition the funding comes through investors who are holding capital unrealized capital gains in stock this is a manner with which they can get their capital gains and a tax break by directing investments into qualified Opportunity Zones and the nature of these projects that can be funded qualified opportunities owned businesses is very very broad the only exception the same exception we have new market tax credits and tax exempt bonds as we can't finance any sin SI n businesses with the proceeds of a qualified opportunities own program investment so in March governor Hickenlooper designated the areas that met these criteria all the governor's across the country did it was sort of a very quick drill because this legislation that was adopted at the end of December it's the tax bill that was F got that at the end of December and it immediately directed the governor's to designate through executive order of these zones and so that's happened here in Colorado so in theory this is a mechanism and a tool available to a developer if they can thread the needle with all these requirements then the legislation created thank you thanks Fred that's a great answer any other questions I have no other questions okay Karen I believe you were up next yes okay you will have to advance my slides for me so if you couldn't advance to the next slide okay Shannon just talked about using private activity bonds for multifamily uses and you may recall that she showed a graph of Chavez any issuance for multifamily uses prior to 2015 some of that was due to the the softness in the bond market but it also had to do with the private activity bond 4% state tax credit model didn't exist so when chafa did issue bonds for housing it was for single-family uses since that other model that Chanin just talked about the PAB 4% and state tax credit model is now available this has put a lot of competition within chafa for the available PAB for single-family when we also for multifamily we do have some other means of financing multifamily or single-family loans so that has freed up quite a bit of private activity bonds for the multifamily use as Shannon also mentioned we do recycle our single family bond repayment so that also frees up private activity bonds for multifamily use but again we never quite have enough so let's talk about single-family housing there are three eligible single-family uses for private activity bonds you can use them to issue bonds use the proceeds of those bonds to purchase or make mortgage loans for the acquisition of a home for a first-time homebuyer qualified veteran which we'll talk about you can use them for mortgage credit certificates mortgage credit certificate so we'll also talk about uses a private activity bond cap very very quickly and you can use them for energy improvements which we're not going to really focus on because there hasn't been currently or in the past much utilization for this in Colorado next slide so so what does that mean any local issuer or authority can create a single-family program funded with tax exempt bonds but there are specific fundamental rules that the IRS requires borrowers that participate in these programs must be first-time homebuyers and that means anyone who has not owned their primary residence in the past three years they could sell their home and not own a home be a renter for three years and regain that first-time homebuyer status that that will come back to them they can also be qualified veterans meaning someone who has had an honorable or a general discharge from military service less an honorably discharged veterans are ineligible for any VA housing benefits or private activity bond related programs any program must have countywide income and purchase price limits and this is based on a Senate of the HUD area median income also referred to as AMI and these limits generally go up to 115 percent of ami adjusted for family size there is another there's a higher limit in targeted areas which we'll talk about in just a second purchase price limits are generally set by what an eligible borrower at the maximum income limit can afford to buy however an issuer or an authority can choose to have lower limits in specific areas or across the board from their whole program the IRS also requires that all programs have funds set aside for use in targeted areas which are census tracts are parts of census tracts that are economically distressed sometimes it can be in an entire county or an entire city or town or it can just be a small sliver of a larger area and within that targeted area you can have or you are required to make funds available for non first-time homebuyers and at higher income and purchase price limits any program that is funded with private activity bonds is subject to a recapture tax this is the IRS s way to recapture some of the subsidy that a borrower has received many Realtors or lenders or just individuals are nervous about recapture taxes partially because they don't understand it and it's really pretty easy to understand three things have to happen to trigger recapture tax which is essentially the perfect storm the borrower must sell their home within nine years and they must have made a gain on sale of their home adjusted for any improvements that they've made and the borrower's income must have increased more than five percent per year adjusted for family size so even in areas like Denver where housing appreciation is very very rapid borrowers may not hit those other they may not hit the income target they may not have had a 5% increase or more adjusted for family size to eliminate that scariness of recapture chafa has decided to reimburse borrowers who have to pay the recapture tax but quite honestly there are very very few people that are subject to it I don't have a slide in here about mortgage credit certificates but I do want to talk about them currently there are mortgage credit certificate program programs active with the city of Denver in El Paso County may also have a mortgage credit certificate program but generally these funds get used very quickly so I don't believe there's anything active right now so mortgage credit certificate we always called it the gift that keeps on giving generally a borrower can take 20% of the mortgage they paid the mortgage interest they paid in a year as a direct credit against their federal tax liability the remaining 80% of the mortgage interest is still a deduction the really cool thing about this is they repeat this credit deduction model for as long as they live in the house as their primary residence most mortgage credit certificate programs use the 20% credit amount but the local issuer of the authority who's ever managing the program can increase that credit amount to up to 50% per year but it uses a lot more private activity bond cap and it serves far fewer borrowers you cannot use a mortgage credit certificate with a private activity bond funded mortgage so again this is double dipping on the tax benefit the other neat thing about it MCC is that should a borrower continue to remain in their house in a falling interest rate environment they may choose to refinance their original acquisition mortgage they can do that and have the MCC reissued so they can contain you to have that credit deduction model available to them for up to 30 years from the original acquisition date of the house the other thing that's that's interesting is that mortgage credit certificates can be used for manufactured homes not affixed to a permanent foundation in considered chattel nextslide okay so let's talk about in dust we're going to switch gears and talk about Industrial Development bonds which are also called industrial revenue bonds industrial development bonds should be one of the first things an economic developer or a local elected official or any kind of local community leader thinks about when a small manufacturer wants to move to or expand within their community it's not necessarily applicable to every business but it should be top of mind for any type of manufacturing business we talk about it a lot here in Grand Junction and in Montrose County because we have two new light manufacturing parks available so it's it's a tool that that we keep top of mind for all of us it doesn't get used as much as private activity bonds for housing partially due to some restrictions in the tax code Shannon talked about the ability to carry forward private activity bonds for up to three years if they're being used for multifamily or single-family housing it's a little more challenging for using it for ID B's a local issuer can still carry forward pay B's for an ID B use but it must be a named project ready to grape break ground within one year as opposed to a general purpose single-family or multifamily you would use it for XYZ project and it's going to be out of the ground in a year a more efficient way to use private activity bonds for ID B's would we to assign the cap to an entity like chafa with no specific manufacturing purpose and when an ID bee project is ready in your community you've already created that relationship with chaff chaff ax and then chafa can use its current year or fresh cap to do those bonds that way as a Shannon spoke about we don't ever want any bonds to expire so having this relationship where we could issue those bonds for a project Aliyah eliminates that possibility that this cap would expire and not get used in that one year time because as you all are aware not every project follows an exact timeline whether it's manufacturing or housing there's always some some delay next slide there are specific uses and restrictions for IDPs for manufacturing project you can use it for acquiring land or a building construction or renovation of a building acquisition of machinery and equipment are usually the most frequent uses but there are elegant that can be used for bran proceeds and you have to pay a lot of attention to how this actually it's used because this could make a project ineligible since it's used for manufacturing you have to produce something one of the things we are hearing more and more about is using private activity bonds for value-added agriculture so somebody who's producing a product taking a particular product and adding something to it to create something something else that would be an eligible use so if you're acquiring land no more than 25% of the total bond proceeds can go to that land there has to be something done to the building if you're acquiring existing building most of what we see happen is its new construction of a building on land that they have purchased but it's very possible that they could buy an existing building and make modifications to that building and at least 15% of the building costs must be spent on those renovations if you are buying a building if a project wants to buy a manufacturing building that's already in existence and they're really doing nothing to it it's probably it's not likely going to be an eligible use for private activity bonds or IDPs here there also has to be care taken to how much of the total building is being used for non manufacturing space so such as office space or if they have a retail portion or in the case of such as like a a brewery we breweries are eligible for this if they have too much space that's their tasting room or their restaurant or their equipment it would make this project ineligible and then there's a limit on the amount of soft soft costs next slide so I think there's a local communities on here as well as some of them SBDC groups the economic development team should always be thinking about what businesses are in their community that perhaps are ready to grow on their own building or as they're out talking to new potential businesses keeping this particular product in mind for them in some of the rural areas we have color Auto real jumpstart for manufacturing this is great if this is already an established business and they are moving to Colorado or if they are creating a new business here although it might be a little more difficult to finance a brand new business because typically they start out smaller the the maximum amount of PAB okay next slide please the maximum amount of ID bees that can be issued are ten million dollars per company within a specific area if the project is greater than ten million dollars you can issue taxable bonds for up to twenty million dollars they can also refinance some additional debt that the existing debt that they may have in that taxable portion there is an aggregate amount that is a limit that's also part of the IRS tax code so if you've got a company that has multiple sites well in different jurisdictions there is an aggregate amount of forty million dollars in tax exempt bonds for one particular company in all of their locations so if they're located in Commerce City and Pueblo and Grand Junction all of those sites together could not have more than 40 million dollars in tax exempt bonds small projects are difficult to do so we typically see kind of the sweet spot between the five six million and ten million dollars chafa does have a mini bond program that we make available for projects that are smaller in you know two and a half some down as low as one and a half million but typically not that more like the two and a half to five million we use standardized documents from our bond Council and that will reduce the costs of the legal fees by approximately a third next slide similar to what we saw in the multifamily side using IDB proceeds can does does result in lower monthly debt payments because again let's say the same kind of thing as what Shannon talked about bonds are sold it could be privately placed they typically they are privately placed many banks will buy these these loans and then they will do or buy these bonds they will use the proceeds from the sale of the bonds to make a loan to a particular project because they're not paying interest on the they're not paying taxes on the interest on the bonds they can provide a loan to a project at a lower interest rate and that makes it more affordable to the project that will reduce the the costs to the project make the cash flows better again as Shannon talked about these are hard deals to do they can be expensive especially on some of the smaller transactions there are there are different fees and I and I think Fred's going to talk about some of this so I'm not going to really talk much about it but there are different fees for the different participants in the program whether it's the the attorneys the lenders the remarketing agents at cetera okay so just a quick look at some of the projects that we've done using ID B's for the past five years we have a couple that I couldn't put on here that we've done in 2017 and eighteen that are still in some phase of being closed and so I couldn't really disclose those but it kind of gives you an idea a little bit about the different types of projects that get done and also the size of them so definitely the one down on the bottom the jam properties that was an mini bond program loan but most of the rest of them were kind of in that sweet spot between the you know five and ten million maximum and that's it I'd be happy to answer any questions Paula do we have any questions for Karen we do not have any questions thank you Karen thank you thanks Karen and now turn things over to Fred Marin thathe partner with Khoo Teck who will give his presentation on issuing private activity bonds great good morning thank you glad to be here on the last presenter so the light at the end of the tunnel I've been with the law firm of cute a crack now for 35 and a half years participated in now over 900 financings twenty nine point six billion dollars so I've had the opportunity to work on all sorts of private activity bonds so that everything you've heard this morning I've had the opportunity to serve as bond counsel or underwriters counselor or lenders counsel on and these are very very difficult transactions there's lots of moving parts to make it all work and but they're fun and they can be very very beneficial the my first slide is just to give you a backdrop of the tax-exempt bond market in terms of volume this is a chart going back to 1999 and the numbers are in the billions so it's a very very large market in terms of annual issuance it's a trillion dollar market in terms of total outstanding tax-exempt bonds that are outstanding in terms of the activity in 2017 in November or December of 2017 Congress as part of the tax bill was talking about zeroing out and prohibiting the issuance of private activity bonds and so everything you heard this morning was on the chopping block as part of the first draft of the tax reform package that we saw and fortunately through the conference process we are able to still issue private activity bonds the only thing we cannot do is issue bonds to advance refund bonds and advanced refunding were not available for most private activity bonds the only type of private activity bonds and you could advance refund for Primal 1 C 3 nonprofits but that's the only thing that we lost as a result of the tax negotiation this would have been a very short seminar if if the House version had prevailed through the tax reform process there still continue to be discussions that you know from time to time about a new tax reform package or continued tax performances this year all of our trade associations that we belong to and participate in are keeping an eye on that to make sure that private activity bonds don't go back on the chopping block as well as our trade associations are pushing hard to try to get advanced refunding to come back it's a very good tool for governmental and as well as a 501 C 3 so 2017 was an interesting year because the fourth quarter was buoyed by a whole bunch of advanced refunding and late November early December there was weeks where there were 10 or 15 billion dollars of bonds coming into the market each week in order to meet that deadline this year is off to a slightly slower start than 2017 and 2016 can a lot of folks are projecting that will be somewhere between 300 and 350 billion for for the year here is an interest rate history going back to 1970 I always sometimes confuse this chart with my retirement funds in terms of my requirement for my earnings but the what you hi this is Alison I'm Kelly at the division of housing I just unmuted myself to see if anybody can hear me speaking since I'm not a chap as offices okay that was so much giving you I can hear you okay so Karen I think you people can obviously hear me thank you everyone I am Amy that you can hear me so we can hear Karen Fred or Paolo anybody on that end we still can't hear you guys how about now can you hear us oh there we go you're back okay oh we can hear you now oh that's very fine the audio guys knew that the lawyer was speaking so issues I was finishing this slide 20:18 slightly is slightly off other years looking at 300 to 350 billion dollars the next slide can okay China okay the next loop okay now we're having clicker problems there maybe on the next slide is a history of interest rates tax except interest rates measured by the 20 Bond Buyer index what this slide demonstrates is that rates are still very very low compared to historical returns the tax exempt investors have seen so that it makes a very compelling argument to continue trying to use extant bonds that the market provides a very nice financing tool and a lower cost and taxable convention barring might the next slide is showing historically what the spread has been between a B double-a security and a security and a double-a security many of our private activity bonds that we issue are going to be sub investment grade so they'll resemble something north of that blue line but it shows that the market has been fairly consistent and rational in terms of rewarding a higher credit with a lower rate than a lesser credit this is a chart that demonstrates all of the types of private activity bonds that are available to be issued what we've been discussing today are number two number nine and number 15 and the others are very very specific in a very very tax burden in terms of being eligible for utilization by different issuers for those purposes Congress has littered the landscape with all sorts of tax-exempt financing tools for different calamities so number 20 is a list of some of those where the golf opportunities zone DC Enterprise Bonds New York Liberty zone bonds are all Congress is reacting to various bad situations and trying to provide a low cost taxes and financing option to finance infrastructure to try to rebuild from those situations this is a chart that shows national private activity bond issuance from the CDFA that we talked about earlier it shows that it's currently been on the rise for multifamily and single-family transactions the gray line at the bottom are industrial development bonds those types of bonds are very very difficult as Karen described to issue its lots and lots of restrictions the $10,000,000 restrictions tough the the capital expenditure chest the 20 million capital expenditure test looking back three years forward three years is very very difficult to comply with as well so at the end of the day many manufacturing concerns we'll use conventional financing because either they can't qualify or they're not interested in signing up for the restrictions and ongoing compliance that the Industrial Development revenue bonds require the definition of manufacturing is also something that is the threshold item that oftentimes will prevent a company from being eligible to use tax exempt bonds so for example if you have a concern that is just racking and stacking things materials come in the door and all they're doing is racking and stacking them that may not be enough to qualify for manufacturing so that's in particular in the electronics area of an a threshold burden that's been hard to get over this is a national volume tap carry forward it shows the amount of path that's being carried forward by all governmental units and shows that there continues to be a great deal of tap on the Shelf and that means that folks are sitting on cap waiting to try to find projects during that three year carry for a period to be able to apply them to I wanted to go over some of the requirements for a multi-family transaction with respect to tax matters one of the first things that has to happen is the developer needs to make an election decide whether they're going to have twenty percent of the tenants at 50 percent ami or forty percent of the tenants at sixty percent any pie those are the minimums that are required by the tax code those are the requirements that many issuers including chafa and the state division of housing will increase and want to see a hundred percent affordability and maybe even some skewing in order to get folks in at 30 to 40 percent of ami in certain projects in order to issue bonds on a tax at that basis the issuer which has to be a political substitution and here in Colorado counties and municipalities are specifically authorized under the county and municipality development revenue bond act to issue bonds so one of the first things they have to do is if they decided to move forward with the transaction and so many issuers will either have an application and process and procedures to follow or the borrow application materials either from Dola or from Chavez in terms of if people apply for 4% credits as an issue where you can say send me or 4% credit application package and I'd like to see that for purposes of evaluating your project some issuers will have more tailored for their particular decision-makers what they want to see in an application and that's what the developer again in public hearing once you've decided to hold an issue the bonds and hold some Pat back for the project you have to have a public hearing before you issue the bonds it's called a tougher hearing which relates to some legislation back in 1982 when this was imposed and there has to be published in the newspaper of general circulation in the jurisdiction where the project is located a notice that describes the project project in the borrower and then also invite folks to come in for a public hearing and it has to be the notice has to occur at these 14 days prior to the hearing and many issuers will adopt that inducement resolution and developers will want an inducement resolution in order to be able to reimburse themselves for capital expenditures prior to the issuance of the bonds they need this document executed by the governmental entity which says hey we're going to issue the bonds for this project and that inducement resolution will be subject to conditions proceed so many issuers will say y'all agree to issued the bonds and I'll agree to commit cap to you but in this resolution I'm going to say I wanted to see a feasibility study I want environmental phase ones I want title insurance I'm going to see that you have controlled land I want to know that your you've got reasonable financing in place as well as I want to know that you've got final documents before I adopt the bond resolution which approves the final documents so we can draft the inducement resolution such that it satisfies the federal tax code but gives the issuer plenty of outs if the project doesn't materialize as the developer either promise are represented the other thing that has to be complied with with a tax-exempt bond issuance is ninety-five percent of the proceeds of the issue need to go to the project bricks and orders 2% of the proceeds of the bonds can be used for cost of issuance so paying the attorneys title insurance recording costs financing fees of the lender and then issuer fees are part of that two percent cost of issuance and then the remaining three percent because it all tested in less than five could go to non-qualifying costs related to the project so you have a tax regulatory agreement that will be put in place with respect to making sure all of the tax requirements for at least 15 years are complied with on the tax-exempt bond side of the equation and then if you're using tax credits you may have another land use restriction agreement as well as you may have other agreements that run with the land for certain flavors of subordinated debt that that comes into the transaction I want to briefly mentioned that senior housing can be financed with a 4% transaction the trick with a senior housing financing is going to be all of the units need to be complete living units on and there are certain types of senior housing when you get into the assisted and skilled nursing realm where the tenants are not living in complete units for safety reasons and so when you cross the line between a housing facility and a health care facility and there's tax code and regulations which help us with these definitions the closer you are to a healthcare facility it may be more difficult to qualify the transaction for taxes and financing under the fair housing law senior housing is a permissible manner with which if you want to have a 55 or older type project 55 years or older type project that's permissible under certain circumstances under the fair housing laws the steps for a typical bond issuance include what I've listed on this slide the first step is developer comes in sponsor comes in wants to do a transaction would like your help your cap so you're going to give them an application or want to see some background on the project you will adopt an inducement resolution if they get through the application phase you may be directing them if you've used up your cap with the inducement resolution to also apply for state volume cap allocation under their monthly cycle and that also can be a condition proceeding under your inducement resolution that say hey you can use our cap but you need to get the rest of the cap from the state white balance if you're not able to do that or if your turn down we get our cap back the other source for a developer or sponsor is to go to neighboring jurisdictions and see if they have cap available to the project that could be assigned over to the issuer so once the inducement resolution is drafted and approve approved by the issuer and the borrower is starting to put together its financing team and finds a lender or to size because they're in vest greater better to do a public offering we'll start putting documents in place that are appropriate either for a public offering or if it's a direct placement a set of documents that go directly to one lender once documents have come along pretty well will conduct a tougher hearing will have the issuer approve a bond resolution approving the structure and all the documents will make sure all the state volume camp allocations in place and then off we go into the market it's a public offering with a offering document or we're finalizing terms with the lender and the lender is committing firmly to purchase the bonds and then step seven and eight or where we party and spend the proceeds and construct or if you start getting constructed a project here's a diagram that lists all the players in a very simple bond financing so a bond underwriter or lender the issuer the borrower in the project in certain transactions we have a third party trustee holding the funds and paying the bondholders and so in the simple world that's when a simple fixed-rate transaction looks like in the different players here's what a low-income housing tax credit financing looks like similar to the slide you just saw to the right in terms of flow of funds the blue box to the left is how the investors in the tax credit partnership come to the table and organize and then their money flows over as part of the capital stack along with bond proceeds and whatever other sources of funds you you can get your hands on to the project in a light tech financing there's lots of math that are that has to be done precisely for the purposes of satisfying the tax code so these notions of applicable percentage qualified basis we generally will see sponsors and bar retain either counsel or accountants were very very qualified to help structure the transaction on the mechanical side with respect to qualifying for the tax credit that either having a situation where you've got some money into your project but then either through generally through audit if it's discovered something on the light side has not been done correctly you're going to end you hit there's the possibility of having some very angry high tech investors and you don't want that ongoing compliance is also a part of life that financing is just like the tax-exempt financing and then also oftentimes will be extended used periods again as I described on the tax exempt bonds and sometimes on the high tech side here are some other programs we see coming in as part of capital stack or to subsidize transactions section 8 projects have contracts vouchers and then a whole host of HUD programs FHA insurance and then what's nice about the FHA HUD programs is the ability to at the end of the day having very high rated securities through a securitization of the FHA insured Loudon to Ginnie Mae's which gives you a very good execution in the market that's the good news the bad news is these are the transactions that take a very very long time to clear through HUD and their approval process and so it's a layer of approvals and complexity that if you're going to use any of these products your lead time needs to be ample so broadly as we've heard sometimes the capital stack isn't going to get sold out filled out with tax and the bond proceeds we've heard a lot about all of these particular sources that either come from state government as well as the federal government and then opportunities own funds could be added to this as well now and then I would take any questions and I thank you for your time do we have any questions Paula please do not have any questions does anybody have any questions for Fred or Shannon frontier well thank you all for joining us today and we appreciate your time and attention give further questions our contact information is available and we'd be happy to field those do you have any housekeeping things Belinda this would be posted on our website so people's on the website I would say that will occur within a week or so you can find it there and then again if you have any questions you can also contact us through the chopper reach page on the chopper website at Thunder rental housing we also will be sending you an online evaluation to let us know what you thought of this webinar and other topics that you'd like to see so please do fill that out so that we can be responsive to your needs thanks everyone for your time thanks you

and everyone and thank you for joining us this is our annual presentation for local communities and really anyone else interested in the basics of private activity bond caps enhancing today&#39;s speakers are scheduled to be wayne fret wayne McCleary housing development specialists from the division of housing state Dola office had a family emergency so i will cover his portion we do have allison O&#39;Kelly available on the call from the state division of housing in the event and you have questions that i&#39;m unable to answer my name is shannon Friedel and i&#39;m a tax credit officer with chavez community development team we also have Karen Harkin who is our community relations manager at chafa and Karen is located in our Grand Junction office lastly we have Fred Marin Thal who&#39;s an attorney and partner with COO tech rock and he will wrap up the presentations today with his legal perspective of financing projects using private activity bonds again I&#39;ll be covering for Wayne so we won&#39;t have the benefit of this good looking guy today so let&#39;s jump in what our private activity bonds they&#39;re a special set of bonds with special requirements and limitations and it&#39;s important to note that it&#39;s not money it&#39;s not cash there&#39;s not a cheque issued unfortunately to municipalities tax-exempt bonds are issued for privately developed projects you&#39;re likely everybody&#39;s probably familiar with municipal bonds and those are issued by municipalities for public purposes and our focus today is going to be tax-exempt bonds that are issued for privately developed projects you&#39;ll also hear today reference to the words cap or capacity or volume cap and all of that refers to the IRS cap or limit on the amount of private activity bonds that are available to a state municipalities and often authorities issue the bonds but they have no obligation of repay the investors and that the general structure in a typical deal is that investors buy the bonds and underwriters use the bond proceeds or the money that comes in from the investors to make a loan to the project the project will pay back the loan there&#39;s no obligation for the city or county directly to pay back the loan and the investors get repaid of course plus interest importantly to do a 4% tax credit or what you&#39;ll hear referred to as lytec low-income housing tax credit project these rental developments require 4% as part of the financing stack so this is a very valuable resource for affordable housing and we&#39;ll talk a little bit more about light check later so every year on a calendar basis Colorado receives an allocation of volume tab and how this volume capacity is calculated is they take the population and multiply it by 105 per capita per person so for 2018 that resulted in a little over 588 million in bond cap tax-exempt on cap so the state the Colorado State statue calls for 50% of the allocation to go to statewide authorities that includes chafa as well as the AG Development Authority and that the AG Development Authority does not use a lot of volume cap and they&#39;re there a program designed to help beginning farmers the other 50% on the right-hand of the slide is allocated to local government and the statute says and that the local government must receive a minimum of a million and cap so effectively any local municipality needs to have about 20,000 persons or more the remaining portion which is which is a small portion stays with the state and is referred to as the statewide balance so at the beginning of this year in January 2018 this this is a pie chart representing where the CAF went so chafa received 48 percent local issuers received 47 percent you&#39;ll see that tiny gray sliver of the AG Authority and then 3 percent went to the state Dola statewide balance and you&#39;ll see a web link there at the bottom and this is kind of a this will direct you to a sheet a one-page sheet put together by the division of housing that lists all the municipalities the 53 local issuers and what amount of bond cap our volume tap each municipality receives so that&#39;s a helpful link for developers and issuers local issuers and statewide authorities will receive their allocation by January 15th and it&#39;s the job of the local issuers the local governmental agencies to decide what they want to do with the cap and there are a couple of options available and you need to pick the issuers need to pick one of these options act on it by September 15th that&#39;s an important deadline for today&#39;s discussion so firstly you can issue the bond and closed on an eligible project by December 23rd or if you don&#39;t have a project closed in that period on that first year you can carry forward the bond cap for another eligible purpose and close within a three-year period this will require filing some paperwork with the IRS you&#39;ll also need to notify in watts or Wayne McCleary at Dola of your intent if you don&#39;t do anything the allocation your direct allocation will automatically be relinquished to the state white balance another thing you can do is assign it to another issuer for an eligible purpose so in summary the options available to issuers your choices when you receive an assignment is that you can issue it and close on the bond you can carry it forward or it will automatically relinquish by September 15 and forgive me you can also assign it to another issuer for analytical purpose this next pie chart is after September 15 of last year and this will show you how things looked as you can see things moved around a bit Kappa ended up with 56% so we had a number of local governments assign their volume cap to chafa 22% was with local issuers and the remaining 21 percent of seventy million went to the statewide balance SMI on how to assemble the required bond cap for your project so firstly identify your issuer and and this is going to be where your project is to be built you&#39;ll want to talk with local governments and the city and the county you&#39;ll want to understand if your issuer has current year cap available and also understand that they have to make an election by September 15th you&#39;ll also want to know if there&#39;s any delegated cap that the issuer has carried forward and for what purpose they&#39;ve carried forward that cap and likely you&#39;re going to want to talk to Chapa and please feel free to give me a call directly especially if you want chafa to be the issuer you can also talk with division of housing and you can apply to the statewide balance this this last note here is an important one so please note that that Dola actually as well as chafa does limit the cap to a specific project to 55 percent of the aggregate basis this isn&#39;t an IRS rule this is just a practice that both agencies employ and the reason that we do this is so that we&#39;re effectively deploying cap throughout this state and and be really efficient about it so Wayne asked that I emphasize this slide so all participants on the call today on our webinar are aware of the states deadlines so dole it receives an allocation by January 15th and relinquished bond cap deadline is September 15 so keep in mind that March through November Dola will accept applications to the statewide balance or the $750 fee associated with that and also keep in mind that the applicant is not a developer the applicant is going to be the agency that will issue the bonds and that any agency or issuer that&#39;s going to issue the bonds needs to be sure that they&#39;ve already used all their direct allocation before applying to the statewide balance it&#39;s about an eight week process and the issuer will receive an award letter at the end in November after the round and and I imagine that this round for the state has become more competitive so thinking about that the state cannot directly issue and they can&#39;t carry forward that&#39;s why we have the statewide balanced application process and it&#39;s the state&#39;s job to really deploy all the cap annually all the deals need to close by December 23rd and the next two bullet points just to subscribe the issuance fee is associated with statewide balance Awards as well as direct allocations and I&#39;d like to make a note here an important one that if you&#39;re a local issuer and you still have 2015 cap that you&#39;ve carried forward it does expire at the end of this year it will be eliminated it&#39;s gone so it may make sense to touch base with the state other issuers and definitely Chapa so we can be sure that we don&#39;t have any loss of cap statewide so what is the state looking for on a statewide balanced application it&#39;s it&#39;s probably often the same as what the local issuer wants to see if the developers knocking on the issuers door asking for cap so the state wants to see a demonstrated local need and support in the form of an inducement resolution from the local issuer another thing that&#39;s a foundation of how Dola looks at applications to the statewide balance is to see if there&#39;s local financial subsidies being pledged for the benefit of the project all projects need to show a demand in the market there needs to be a viable demand for the project and Aneta seing that since it is becoming more competitive in doulas statewide balance process is the level of housing affordability so Dola prefers to see projects that have deeper affordability that go beyond the IRS requirements and Fred Marin saw from Khoo Teck we&#39;ll spend some time explaining these minimum requirements in his presentation and other things to include in your application to Dola it needs to be a viable deal it needs to have reasonable costs for the development in its operations there&#39;s a test for readiness to proceed you need to have site control zoning planning approved if you&#39;re going to have some sort of credit enhancement like FHA insurance that needs to be secured and the tax credits need to be reserved obviously it needs to be financially sound reasonable income and expenses appropriate underwriting ratios and you wouldn&#39;t believe it but on occasion we do see projects whereby the sources and uses do not balance so the state would like to see the sources and use is balanced and that there are no gaps also chafa and the state want to see development team experience so we want to we want to see experienced developers that have done tax credit deels and also we look at capacity just that the developer is isn&#39;t overtaxed with the number of deals that they have going on and has the capacity for the successful completion of the project they&#39;re proposing the next bullet point talks about typical bond issuance sizes and number of units and I would say here we have 50 to 210 units and I would probably say the cost of issuance would preclude you from a 50 unit project and your 4% bond deal very likely needs to be at least a minimum of a hundred units to make sense this gives you a sense of previous award winners again it&#39;s stolid job to get everything allocated out by your end the folded items are specific projects and the unfolded items such as denver housing programs Loveland Housing Authority etc are municipalities that came in had issued all of their allocation and asked for they had a list a pipeline of deals and they received an allocation for their pipeline I imagine based on demand that Dola may see less of just an overall pipeline list and more specific project yield so I&#39;ll conclude here with the Dola presentation and this is Wayne&#39;s contact information and you&#39;re also welcome to contact and what whom I&#39;m sure you&#39;re all familiar with because she sends your issuer letters to you and please feel free to contact and watch as well and please send in any questions on this portion of the present in your chat box I believe we&#39;ll also have an opportunity for Q&amp;A at the end of this webinar do we have any questions at this point you know we don&#39;t have any questions okay then I will move right along and again if you if you think of something from the first presentation and the state&#39;s presentation please feel free to send those in and we&#39;ll capture those at the end of our webinar today so this next section is my presentation and my presentation focuses exclusively on using private activity bonds for multifamily rental housing which is a qualified use of private activity bonds so I&#39;m at Chava I&#39;m responsible for pairing private activity bond cap with 4% non-competitive projects as well as our 4% state competitive projects if you&#39;re a local issuer and want to support a project or developer who needs private activity bonds for future project please feel free to give me a call directly so we can chat about it and I&#39;ll talk a little bit about 4% tax credits or what we call lytec as they are required to use private activity bonds as a source of financing for those new to chafa we are different from the state from division of housing we are a quasi governmental agency chafa was created in 1973 and by the General Assembly specifically to address the need for affordable housing in the state of Colorado in later years our Authority was expanded to include economic development and although we&#39;re not a state agency our board is appointed by the governor of Colorado mission is to strengthen Colorado by investing and affordable housing as well as Community Development and today approximately 17 billion has been raised and invested in Colorado by chafa and that and that 17 billion is a really awesome number to see and this is one of those things that&#39;s really great about the work that we all do because when we&#39;re issuing bonds we&#39;re investing in affordable and economic develop we&#39;re investing in affordable housing as well as economic development in Colorado and furthermore these activities have a really a powerful ripple effect by creating and supporting jobs as well as creating housing and spurring economic development I do have a question Shannon can we use this with opportunity&#39;s own funds or an opportunities own project Fred do you know that I don&#39;t know the answer to that okay we will look into that and have that as well have an answer to that question as part of what we send out after the after the webinar good question thank you so again private activity bonds are used to finance affordable privately owned multifamily rental housing we there are a couple of eligible project types new construction acquisition and ACT rehab we also have seen a few adaptive reuse projects in the last few years the Inc for more it&#39;s free to the investor so that that&#39;s the big benefit and the investors for that benefit are willing to take a lower yield because the tax rate interest earned on the bonds and that the tax-free nature of the bonds creates a benefit not only for the bond investors but ultimately for the underlying project the bond support so in really simple terms these are the financing dilemmas that developers and municipalities are faced with when developing affordable housing so as we all know the lower the rents there are results and lower revenue lower revenue means lower cash flow and lower cash flow results and lower debt capacity therefore really to build affordable housing you need to subsidize the revenue often in the form of vouchers or subsidize the asset by using tax credits and private activity bonds although this is not a tax credit webinar I want to give a little background on lytec for the private activity bond financing to make sense so traditionally there are two types of federal light tech there is a nine percent tax credit which yields a 70 percent or 70 percent present value credit it is a very competitive award process its population-based and it provides a deep subsidy to the capital stack the next one is a 4% light tech to 30% present value credit essentially the non-competitive award process this is a year-round allocation process it&#39;s not subject to around with the exception of the month of July and December when Chapa does not accept or a process for % applications and has a shower shallower subsidy and there are requirements for the 50% test with private activity bonds so let me be a little more specific about this 50% test because it&#39;s an important feature at least 50% of the project&#39;s aggregate basis which is typically land plus depreciable assets must be financed by volume cap tax exempt private activity bonds so and even if your project meets the test and is at forty nine point nine nine nine repeating percent if they don&#39;t meet the fifty percent test they forfeit the four percent credits so developers and investors are always watching this percentage closely to create a cushion and for cost overruns kapha as well as jolla will allow the project to go up to fifty five percent of the aggregate basis also in colorado we&#39;ve paired our state credit with four percent tax credits and bonds and this is a competitive round a little more about the what we call a chaff of a state round and four percent state round so is renewed again in 2018 it extends and the state light tech program for five more years which is terrific there&#39;s five million in annual state light tech available and chaff is using the state light tech to help finance the gaps in four percent bond transactions and both new construction and rehab deals are eligible for the state credit so it really pairs three financing sources and you have four percent federal credit state credit and private activity vodka this is a typical system of the affordable housing financing tools that are available you can have standard bank financing credit enhancements such as an FHA loan there Austin will cease soft funds in the capital stack home funds Community Development Block Grant funds there&#39;s also lytec and tax credits we have 4% non-competitive 9% competitive which cannot use private activity bonds and then the 4% and state competitive though not on this slide and there are limited soft funds available from Chapa and I&#39;ll mention those briefly we have the capital magnet fund the Housing Opportunity Fund and a healthy housing fund we also have a new 4% loan present non-competitive bond transaction so if you&#39;d like more details on this please call me and I can put you in touch with Terry Bernard who is in charge of our lending team and he also manages these limited soft funds that might be available for a 4% project with Chavez 4% loan product so this next diagram illustrates what we just talked about about parrying the PAB financing with the 4% non-competitive and state credit state credits we&#39;re looking at capital stacks three different capital stacks for typical deal types in the left hand conventional column the debt in this example would likely come from a bank or private lender their owner would contribute about 25% of their own cash to the project and they would likely charge market rents and you&#39;ll see the the rent line sweeping across this slide and the higher rents are on the conventional project in the far right column the 9% light tech model this really is the ideal model for most affordable housing projects because in this model the sale of this tax credits provides more than 60% of the total project cost as equity so there&#39;s a lot of equity that flows into a 9% deal don&#39;t very likely also be soft funds from Grants you know in a limited amount of debt which would make up the rest of the capital stack because this model uses the lowest amount of repayable debt the rents can be the lowest and please note that the 9% is a very competitive product and perhaps one of the reasons that Chapa is experiencing higher demand for the 4% credits the blend of these financing options is our middle column here where the 4% non-competitive credits are used with more soft funds and state tax credits the debt comes from the proceeds from the sale of the private activity bonds which results generally in lower loan rates depending depending on the interest rate environment and the lower loan rates are because of the tax-exempt nature of the bonds okay so these are the bond transactions and structures that we typically see and construction construction perm perm only the bond structures that Chapa typically sees is conduit financing we&#39;re kind of it financing in Chapa terms just means that we are issuing the bonds but we are not a lender in those situations there may be a public offering or there might be a private placement with a traditional bank the other scenario might be that Chapa is the issuer as well as the lender as well as the tax credit provider and that does provide some efficiencies and cost reduction for the developer I&#39;d like to point out a few challenges of doing a 4% lytec bond deal first and foremost it&#39;s the limited availability of private activity bonds this is new in the last four years and we&#39;re definitely feeling the crunch at chafa and you may be feeling the crunch or demand as a local issuer on your private activity bond resources and these are complex transactions a lot of technical expertise is required and you need to have well-versed jurisdictional staff there are a lot of development partners involved in the deal there will be a lender or lenders more definitely lots of lawyers and bond counsel and other professionals which makes can make for an expensive transact an expensive transactional cost so really be thoughtful about the cost of the bond issuance when you&#39;re comparing that to the property size of a proposed project because it may high transaction costs may preclude smaller projects from making sense so for example a 50% our fifty unit project probably is not going to make sense as a bond deal but a hundred and fifty unit project likely will this graph I&#39;m including because I wanted to show you Chavez issuance levels so you can see for a number of years through 2014 we had low levels of issuance however in 2015 things really started to spike up year-over-year and we continue we continue to see real study demand for the 4% on program the last column is our year-to-date for this year 2018 so starting at the bottom on the far right the blue section are the bonds we have issues so these are closed deals and if you if you can cannot read that that represents 103 million that we&#39;ve issued and closed the orange section are active closings that we&#39;re working on that will need PA B so these are deals that have already received a text credit award and the bond cap needs in this category equal about 165 million the top section the gray section is our pipeline and it&#39;s what we call our PA be asked so these are deals that have submitted an LOI to chafa or an application that have not received an award of tax credits as of yet and that represents and about a hundred and sixty-six million one other thing that I&#39;d like to point out is that due to the demand on our tap one thing Chapa changed in 2018 and more effectively managed the cap is that we no longer issue an inducement resolution which can also sometimes be referred to as a reimbursement resolution so what we do instead is we go straight from a tax credit award to then seek an authorizing resolution from our board of directors so once you receive a tax credit award you&#39;ll need to start working with fund council and your financing team to start your fancy calls work through the tephra process and once we have substantially complete documents we have the ability to take the request the project&#39;s request for an authorizing resolution to chaffetz board of directors I do want to say though we always want to be flexible here at chafa and do what makes sense so if there&#39;s a very special circumstance whereby the project does need an inducement resolution before the final resolution please give me a give me a call and we can we can talk about it and again if there&#39;s a compelling reason to do that we can we can certainly do that and want to be flexible this next slide you may already be from here with this national organization it&#39;s the Council of development and finance agencies and this is their annual report on volume cap which is published in September of every year and the reason that that I point this out is that as you can see on on the top section chafa was in the top ten of the largest amounts of private activity bonds in 2016 issue for multifamily housing so we were a big player in 2016 I imagine when they published the report in September of this year with 2017 data we may well be on that top 10 list as well of course California New York came in as one and two but Colorado made it to number ten and I think that demonstrates how much demand and real estate development growth we have happening in the affordable housing field in Colorado one important thing that this report also discloses is which states let cap expire so everyone on the call and all of our issuers can be congratulated along with Dola because in 2017 Dola reported that no cap expired so that that was great for the state of Colorado it makes us look good not only are we using our tab and effectively efficiently managing it we are also one of the biggest issuers so that&#39;s that&#39;s everybody&#39;s to be congratulated there one of the things that I&#39;ve been Chaves been tasked with this year is preserving our precious resource we have a private activity on volume cap so the theme for the today really is that Colorado is experiencing tremendous demand for this resource we although not required I&#39;d like to really encourage issuers when it makes sense to limit the bond cap to 55 percent of the aggregate basis one of the strategy strategies that chaff is employing that we&#39;ve been doing this year is recycling and our private activity bond cap to provide another tax-exempt resource above the 55 percent test to make the 4% deals possibly have better cash flow and lower debt service requirements debt requirements the other thing we do that chap has done a great job of and we&#39;ve been doing for a number of years is recycling our single family private activity bonds and the reason that&#39;s important is the more we can recycle our single family bonds the less pressure that puts on the overall resources and it makes more bond cap available for multifamily deals and the other thing we&#39;re doing is just trying to get the word out to never let cap expire and one of the really great things that we had a chance to do along with Dola this year in April was host an annual luncheon for issuers and this was a really good success we had many issuers come to chafa we had a luncheon we talked about our pipeline kind of shared our pipelines with each other and talked about strategies for preserving volume cap and also talked about what&#39;s happening in everyone&#39;s respective markets so we will do that again in 2019 so next year sometime before April please look for an invitation to that lunch and again we hope you can attend and if we have it&#39;s a good success again next year we probably will make this an annual event shamon we have a question what is meant by recycling PAB and Fred feel free to jump in here but under the Hera legislation chafa when let&#39;s say Chapa issued bonds for project a and when the construction loan is when the project&#39;s built and the bonds are being paid down for what we&#39;ll call project a Chaka has a one-time ability to recycle that volume Kappa are recycled those tax exempt bonds and there are a lot of limitations to it once we recycle that bonding authority we have to deploy it within six months so what I&#39;ll do is along with our finance team will recycle that resource and then we&#39;ll look at our pipeline of deals and we&#39;ll look at when those projects are closing and we&#39;ll see if we can marry up if you will that recycled resource with that project that&#39;s going to close before the end of a six month period and what that does is from the developers perspective is it&#39;s pretty seamless because you&#39;ll have fifty five percent tax exempt bonds and then above that you have the opportunity to have more tax exempt bonds so it really looks like the same thing to you and to the developer and you can exceed that fifty five percent threshold which can make the lending terms more attractive and that the cash well better for a project idea of anything to add to that on the recycling bond opportunity no no it&#39;s good stewardship by Chapa to do that in terms of getting every possible dollar of employed and the tax code permits it and so it&#39;s a great tool and we do cap it does there is a cost for us to do this and we have to pay interest to the Federal Home Loan Bank to have a line of credit outstanding which is one of the requirements under the hare legislation and that we have to borrow so there is a cost associated with a developer using this however like this isn&#39;t our reality today but if tax-exempt bonds we&#39;re at 5% and taxable was at 7 and you could have more than 55% of tax exempt that makes for a much better deal so that&#39;s for for some projects it makes a lot of sense to use recycled bonds if you have more questions about that and or what our pipeline if you will recycled opportunities are please contact me and I can certainly talk with you about that why don&#39;t I answer the question on qualified opportunities Oh No thank you we can knock that one down great in theory those are intentionally available for a capital stack for a multifamily project if the multifamily project is located in a qualified opportunity zone which are basically very low income areas that are measured by census tracts that eat certain economic criteria in particular the purpose of the legislation when introduced by Senators Anna Cory Booker from New Jersey and Tim Scott from South Carolina was to provide another tool another tax benefit for areas that have been bypassed or were being bypassed by the recovery from the 2008 recession so it&#39;s a very rigid definition the funding comes through investors who are holding capital unrealized capital gains in stock this is a manner with which they can get their capital gains and a tax break by directing investments into qualified Opportunity Zones and the nature of these projects that can be funded qualified opportunities owned businesses is very very broad the only exception the same exception we have new market tax credits and tax exempt bonds as we can&#39;t finance any sin SI n businesses with the proceeds of a qualified opportunities own program investment so in March governor Hickenlooper designated the areas that met these criteria all the governor&#39;s across the country did it was sort of a very quick drill because this legislation that was adopted at the end of December it&#39;s the tax bill that was F got that at the end of December and it immediately directed the governor&#39;s to designate through executive order of these zones and so that&#39;s happened here in Colorado so in theory this is a mechanism and a tool available to a developer if they can thread the needle with all these requirements then the legislation created thank you thanks Fred that&#39;s a great answer any other questions I have no other questions okay Karen I believe you were up next yes okay you will have to advance my slides for me so if you couldn&#39;t advance to the next slide okay Shannon just talked about using private activity bonds for multifamily uses and you may recall that she showed a graph of Chavez any issuance for multifamily uses prior to 2015 some of that was due to the the softness in the bond market but it also had to do with the private activity bond 4% state tax credit model didn&#39;t exist so when chafa did issue bonds for housing it was for single-family uses since that other model that Chanin just talked about the PAB 4% and state tax credit model is now available this has put a lot of competition within chafa for the available PAB for single-family when we also for multifamily we do have some other means of financing multifamily or single-family loans so that has freed up quite a bit of private activity bonds for the multifamily use as Shannon also mentioned we do recycle our single family bond repayment so that also frees up private activity bonds for multifamily use but again we never quite have enough so let&#39;s talk about single-family housing there are three eligible single-family uses for private activity bonds you can use them to issue bonds use the proceeds of those bonds to purchase or make mortgage loans for the acquisition of a home for a first-time homebuyer qualified veteran which we&#39;ll talk about you can use them for mortgage credit certificates mortgage credit certificate so we&#39;ll also talk about uses a private activity bond cap very very quickly and you can use them for energy improvements which we&#39;re not going to really focus on because there hasn&#39;t been currently or in the past much utilization for this in Colorado next slide so so what does that mean any local issuer or authority can create a single-family program funded with tax exempt bonds but there are specific fundamental rules that the IRS requires borrowers that participate in these programs must be first-time homebuyers and that means anyone who has not owned their primary residence in the past three years they could sell their home and not own a home be a renter for three years and regain that first-time homebuyer status that that will come back to them they can also be qualified veterans meaning someone who has had an honorable or a general discharge from military service less an honorably discharged veterans are ineligible for any VA housing benefits or private activity bond related programs any program must have countywide income and purchase price limits and this is based on a Senate of the HUD area median income also referred to as AMI and these limits generally go up to 115 percent of ami adjusted for family size there is another there&#39;s a higher limit in targeted areas which we&#39;ll talk about in just a second purchase price limits are generally set by what an eligible borrower at the maximum income limit can afford to buy however an issuer or an authority can choose to have lower limits in specific areas or across the board from their whole program the IRS also requires that all programs have funds set aside for use in targeted areas which are census tracts are parts of census tracts that are economically distressed sometimes it can be in an entire county or an entire city or town or it can just be a small sliver of a larger area and within that targeted area you can have or you are required to make funds available for non first-time homebuyers and at higher income and purchase price limits any program that is funded with private activity bonds is subject to a recapture tax this is the IRS s way to recapture some of the subsidy that a borrower has received many Realtors or lenders or just individuals are nervous about recapture taxes partially because they don&#39;t understand it and it&#39;s really pretty easy to understand three things have to happen to trigger recapture tax which is essentially the perfect storm the borrower must sell their home within nine years and they must have made a gain on sale of their home adjusted for any improvements that they&#39;ve made and the borrower&#39;s income must have increased more than five percent per year adjusted for family size so even in areas like Denver where housing appreciation is very very rapid borrowers may not hit those other they may not hit the income target they may not have had a 5% increase or more adjusted for family size to eliminate that scariness of recapture chafa has decided to reimburse borrowers who have to pay the recapture tax but quite honestly there are very very few people that are subject to it I don&#39;t have a slide in here about mortgage credit certificates but I do want to talk about them currently there are mortgage credit certificate program programs active with the city of Denver in El Paso County may also have a mortgage credit certificate program but generally these funds get used very quickly so I don&#39;t believe there&#39;s anything active right now so mortgage credit certificate we always called it the gift that keeps on giving generally a borrower can take 20% of the mortgage they paid the mortgage interest they paid in a year as a direct credit against their federal tax liability the remaining 80% of the mortgage interest is still a deduction the really cool thing about this is they repeat this credit deduction model for as long as they live in the house as their primary residence most mortgage credit certificate programs use the 20% credit amount but the local issuer of the authority who&#39;s ever managing the program can increase that credit amount to up to 50% per year but it uses a lot more private activity bond cap and it serves far fewer borrowers you cannot use a mortgage credit certificate with a private activity bond funded mortgage so again this is double dipping on the tax benefit the other neat thing about it MCC is that should a borrower continue to remain in their house in a falling interest rate environment they may choose to refinance their original acquisition mortgage they can do that and have the MCC reissued so they can contain you to have that credit deduction model available to them for up to 30 years from the original acquisition date of the house the other thing that&#39;s that&#39;s interesting is that mortgage credit certificates can be used for manufactured homes not affixed to a permanent foundation in considered chattel nextslide okay so let&#39;s talk about in dust we&#39;re going to switch gears and talk about Industrial Development bonds which are also called industrial revenue bonds industrial development bonds should be one of the first things an economic developer or a local elected official or any kind of local community leader thinks about when a small manufacturer wants to move to or expand within their community it&#39;s not necessarily applicable to every business but it should be top of mind for any type of manufacturing business we talk about it a lot here in Grand Junction and in Montrose County because we have two new light manufacturing parks available so it&#39;s it&#39;s a tool that that we keep top of mind for all of us it doesn&#39;t get used as much as private activity bonds for housing partially due to some restrictions in the tax code Shannon talked about the ability to carry forward private activity bonds for up to three years if they&#39;re being used for multifamily or single-family housing it&#39;s a little more challenging for using it for ID B&#39;s a local issuer can still carry forward pay B&#39;s for an ID B use but it must be a named project ready to grape break ground within one year as opposed to a general purpose single-family or multifamily you would use it for XYZ project and it&#39;s going to be out of the ground in a year a more efficient way to use private activity bonds for ID B&#39;s would we to assign the cap to an entity like chafa with no specific manufacturing purpose and when an ID bee project is ready in your community you&#39;ve already created that relationship with chaff chaff ax and then chafa can use its current year or fresh cap to do those bonds that way as a Shannon spoke about we don&#39;t ever want any bonds to expire so having this relationship where we could issue those bonds for a project Aliyah eliminates that possibility that this cap would expire and not get used in that one year time because as you all are aware not every project follows an exact timeline whether it&#39;s manufacturing or housing there&#39;s always some some delay next slide there are specific uses and restrictions for IDPs for manufacturing project you can use it for acquiring land or a building construction or renovation of a building acquisition of machinery and equipment are usually the most frequent uses but there are elegant that can be used for bran proceeds and you have to pay a lot of attention to how this actually it&#39;s used because this could make a project ineligible since it&#39;s used for manufacturing you have to produce something one of the things we are hearing more and more about is using private activity bonds for value-added agriculture so somebody who&#39;s producing a product taking a particular product and adding something to it to create something something else that would be an eligible use so if you&#39;re acquiring land no more than 25% of the total bond proceeds can go to that land there has to be something done to the building if you&#39;re acquiring existing building most of what we see happen is its new construction of a building on land that they have purchased but it&#39;s very possible that they could buy an existing building and make modifications to that building and at least 15% of the building costs must be spent on those renovations if you are buying a building if a project wants to buy a manufacturing building that&#39;s already in existence and they&#39;re really doing nothing to it it&#39;s probably it&#39;s not likely going to be an eligible use for private activity bonds or IDPs here there also has to be care taken to how much of the total building is being used for non manufacturing space so such as office space or if they have a retail portion or in the case of such as like a a brewery we breweries are eligible for this if they have too much space that&#39;s their tasting room or their restaurant or their equipment it would make this project ineligible and then there&#39;s a limit on the amount of soft soft costs next slide so I think there&#39;s a local communities on here as well as some of them SBDC groups the economic development team should always be thinking about what businesses are in their community that perhaps are ready to grow on their own building or as they&#39;re out talking to new potential businesses keeping this particular product in mind for them in some of the rural areas we have color Auto real jumpstart for manufacturing this is great if this is already an established business and they are moving to Colorado or if they are creating a new business here although it might be a little more difficult to finance a brand new business because typically they start out smaller the the maximum amount of PAB okay next slide please the maximum amount of ID bees that can be issued are ten million dollars per company within a specific area if the project is greater than ten million dollars you can issue taxable bonds for up to twenty million dollars they can also refinance some additional debt that the existing debt that they may have in that taxable portion there is an aggregate amount that is a limit that&#39;s also part of the IRS tax code so if you&#39;ve got a company that has multiple sites well in different jurisdictions there is an aggregate amount of forty million dollars in tax exempt bonds for one particular company in all of their locations so if they&#39;re located in Commerce City and Pueblo and Grand Junction all of those sites together could not have more than 40 million dollars in tax exempt bonds small projects are difficult to do so we typically see kind of the sweet spot between the five six million and ten million dollars chafa does have a mini bond program that we make available for projects that are smaller in you know two and a half some down as low as one and a half million but typically not that more like the two and a half to five million we use standardized documents from our bond Council and that will reduce the costs of the legal fees by approximately a third next slide similar to what we saw in the multifamily side using IDB proceeds can does does result in lower monthly debt payments because again let&#39;s say the same kind of thing as what Shannon talked about bonds are sold it could be privately placed they typically they are privately placed many banks will buy these these loans and then they will do or buy these bonds they will use the proceeds from the sale of the bonds to make a loan to a particular project because they&#39;re not paying interest on the they&#39;re not paying taxes on the interest on the bonds they can provide a loan to a project at a lower interest rate and that makes it more affordable to the project that will reduce the the costs to the project make the cash flows better again as Shannon talked about these are hard deals to do they can be expensive especially on some of the smaller transactions there are there are different fees and I and I think Fred&#39;s going to talk about some of this so I&#39;m not going to really talk much about it but there are different fees for the different participants in the program whether it&#39;s the the attorneys the lenders the remarketing agents at cetera okay so just a quick look at some of the projects that we&#39;ve done using ID B&#39;s for the past five years we have a couple that I couldn&#39;t put on here that we&#39;ve done in 2017 and eighteen that are still in some phase of being closed and so I couldn&#39;t really disclose those but it kind of gives you an idea a little bit about the different types of projects that get done and also the size of them so definitely the one down on the bottom the jam properties that was an mini bond program loan but most of the rest of them were kind of in that sweet spot between the you know five and ten million maximum and that&#39;s it I&#39;d be happy to answer any questions Paula do we have any questions for Karen we do not have any questions thank you Karen thank you thanks Karen and now turn things over to Fred Marin thathe partner with Khoo Teck who will give his presentation on issuing private activity bonds great good morning thank you glad to be here on the last presenter so the light at the end of the tunnel I&#39;ve been with the law firm of cute a crack now for 35 and a half years participated in now over 900 financings twenty nine point six billion dollars so I&#39;ve had the opportunity to work on all sorts of private activity bonds so that everything you&#39;ve heard this morning I&#39;ve had the opportunity to serve as bond counsel or underwriters counselor or lenders counsel on and these are very very difficult transactions there&#39;s lots of moving parts to make it all work and but they&#39;re fun and they can be very very beneficial the my first slide is just to give you a backdrop of the tax-exempt bond market in terms of volume this is a chart going back to 1999 and the numbers are in the billions so it&#39;s a very very large market in terms of annual issuance it&#39;s a trillion dollar market in terms of total outstanding tax-exempt bonds that are outstanding in terms of the activity in 2017 in November or December of 2017 Congress as part of the tax bill was talking about zeroing out and prohibiting the issuance of private activity bonds and so everything you heard this morning was on the chopping block as part of the first draft of the tax reform package that we saw and fortunately through the conference process we are able to still issue private activity bonds the only thing we cannot do is issue bonds to advance refund bonds and advanced refunding were not available for most private activity bonds the only type of private activity bonds and you could advance refund for Primal 1 C 3 nonprofits but that&#39;s the only thing that we lost as a result of the tax negotiation this would have been a very short seminar if if the House version had prevailed through the tax reform process there still continue to be discussions that you know from time to time about a new tax reform package or continued tax performances this year all of our trade associations that we belong to and participate in are keeping an eye on that to make sure that private activity bonds don&#39;t go back on the chopping block as well as our trade associations are pushing hard to try to get advanced refunding to come back it&#39;s a very good tool for governmental and as well as a 501 C 3 so 2017 was an interesting year because the fourth quarter was buoyed by a whole bunch of advanced refunding and late November early December there was weeks where there were 10 or 15 billion dollars of bonds coming into the market each week in order to meet that deadline this year is off to a slightly slower start than 2017 and 2016 can a lot of folks are projecting that will be somewhere between 300 and 350 billion for for the year here is an interest rate history going back to 1970 I always sometimes confuse this chart with my retirement funds in terms of my requirement for my earnings but the what you hi this is Alison I&#39;m Kelly at the division of housing I just unmuted myself to see if anybody can hear me speaking since I&#39;m not a chap as offices okay that was so much giving you I can hear you okay so Karen I think you people can obviously hear me thank you everyone I am Amy that you can hear me so we can hear Karen Fred or Paolo anybody on that end we still can&#39;t hear you guys how about now can you hear us oh there we go you&#39;re back okay oh we can hear you now oh that&#39;s very fine the audio guys knew that the lawyer was speaking so issues I was finishing this slide 20:18 slightly is slightly off other years looking at 300 to 350 billion dollars the next slide can okay China okay the next loop okay now we&#39;re having clicker problems there maybe on the next slide is a history of interest rates tax except interest rates measured by the 20 Bond Buyer index what this slide demonstrates is that rates are still very very low compared to historical returns the tax exempt investors have seen so that it makes a very compelling argument to continue trying to use extant bonds that the market provides a very nice financing tool and a lower cost and taxable convention barring might the next slide is showing historically what the spread has been between a B double-a security and a security and a double-a security many of our private activity bonds that we issue are going to be sub investment grade so they&#39;ll resemble something north of that blue line but it shows that the market has been fairly consistent and rational in terms of rewarding a higher credit with a lower rate than a lesser credit this is a chart that demonstrates all of the types of private activity bonds that are available to be issued what we&#39;ve been discussing today are number two number nine and number 15 and the others are very very specific in a very very tax burden in terms of being eligible for utilization by different issuers for those purposes Congress has littered the landscape with all sorts of tax-exempt financing tools for different calamities so number 20 is a list of some of those where the golf opportunities zone DC Enterprise Bonds New York Liberty zone bonds are all Congress is reacting to various bad situations and trying to provide a low cost taxes and financing option to finance infrastructure to try to rebuild from those situations this is a chart that shows national private activity bond issuance from the CDFA that we talked about earlier it shows that it&#39;s currently been on the rise for multifamily and single-family transactions the gray line at the bottom are industrial development bonds those types of bonds are very very difficult as Karen described to issue its lots and lots of restrictions the $10,000,000 restrictions tough the the capital expenditure chest the 20 million capital expenditure test looking back three years forward three years is very very difficult to comply with as well so at the end of the day many manufacturing concerns we&#39;ll use conventional financing because either they can&#39;t qualify or they&#39;re not interested in signing up for the restrictions and ongoing compliance that the Industrial Development revenue bonds require the definition of manufacturing is also something that is the threshold item that oftentimes will prevent a company from being eligible to use tax exempt bonds so for example if you have a concern that is just racking and stacking things materials come in the door and all they&#39;re doing is racking and stacking them that may not be enough to qualify for manufacturing so that&#39;s in particular in the electronics area of an a threshold burden that&#39;s been hard to get over this is a national volume tap carry forward it shows the amount of path that&#39;s being carried forward by all governmental units and shows that there continues to be a great deal of tap on the Shelf and that means that folks are sitting on cap waiting to try to find projects during that three year carry for a period to be able to apply them to I wanted to go over some of the requirements for a multi-family transaction with respect to tax matters one of the first things that has to happen is the developer needs to make an election decide whether they&#39;re going to have twenty percent of the tenants at 50 percent ami or forty percent of the tenants at sixty percent any pie those are the minimums that are required by the tax code those are the requirements that many issuers including chafa and the state division of housing will increase and want to see a hundred percent affordability and maybe even some skewing in order to get folks in at 30 to 40 percent of ami in certain projects in order to issue bonds on a tax at that basis the issuer which has to be a political substitution and here in Colorado counties and municipalities are specifically authorized under the county and municipality development revenue bond act to issue bonds so one of the first things they have to do is if they decided to move forward with the transaction and so many issuers will either have an application and process and procedures to follow or the borrow application materials either from Dola or from Chavez in terms of if people apply for 4% credits as an issue where you can say send me or 4% credit application package and I&#39;d like to see that for purposes of evaluating your project some issuers will have more tailored for their particular decision-makers what they want to see in an application and that&#39;s what the developer again in public hearing once you&#39;ve decided to hold an issue the bonds and hold some Pat back for the project you have to have a public hearing before you issue the bonds it&#39;s called a tougher hearing which relates to some legislation back in 1982 when this was imposed and there has to be published in the newspaper of general circulation in the jurisdiction where the project is located a notice that describes the project project in the borrower and then also invite folks to come in for a public hearing and it has to be the notice has to occur at these 14 days prior to the hearing and many issuers will adopt that inducement resolution and developers will want an inducement resolution in order to be able to reimburse themselves for capital expenditures prior to the issuance of the bonds they need this document executed by the governmental entity which says hey we&#39;re going to issue the bonds for this project and that inducement resolution will be subject to conditions proceed so many issuers will say y&#39;all agree to issued the bonds and I&#39;ll agree to commit cap to you but in this resolution I&#39;m going to say I wanted to see a feasibility study I want environmental phase ones I want title insurance I&#39;m going to see that you have controlled land I want to know that your you&#39;ve got reasonable financing in place as well as I want to know that you&#39;ve got final documents before I adopt the bond resolution which approves the final documents so we can draft the inducement resolution such that it satisfies the federal tax code but gives the issuer plenty of outs if the project doesn&#39;t materialize as the developer either promise are represented the other thing that has to be complied with with a tax-exempt bond issuance is ninety-five percent of the proceeds of the issue need to go to the project bricks and orders 2% of the proceeds of the bonds can be used for cost of issuance so paying the attorneys title insurance recording costs financing fees of the lender and then issuer fees are part of that two percent cost of issuance and then the remaining three percent because it all tested in less than five could go to non-qualifying costs related to the project so you have a tax regulatory agreement that will be put in place with respect to making sure all of the tax requirements for at least 15 years are complied with on the tax-exempt bond side of the equation and then if you&#39;re using tax credits you may have another land use restriction agreement as well as you may have other agreements that run with the land for certain flavors of subordinated debt that that comes into the transaction I want to briefly mentioned that senior housing can be financed with a 4% transaction the trick with a senior housing financing is going to be all of the units need to be complete living units on and there are certain types of senior housing when you get into the assisted and skilled nursing realm where the tenants are not living in complete units for safety reasons and so when you cross the line between a housing facility and a health care facility and there&#39;s tax code and regulations which help us with these definitions the closer you are to a healthcare facility it may be more difficult to qualify the transaction for taxes and financing under the fair housing law senior housing is a permissible manner with which if you want to have a 55 or older type project 55 years or older type project that&#39;s permissible under certain circumstances under the fair housing laws the steps for a typical bond issuance include what I&#39;ve listed on this slide the first step is developer comes in sponsor comes in wants to do a transaction would like your help your cap so you&#39;re going to give them an application or want to see some background on the project you will adopt an inducement resolution if they get through the application phase you may be directing them if you&#39;ve used up your cap with the inducement resolution to also apply for state volume cap allocation under their monthly cycle and that also can be a condition proceeding under your inducement resolution that say hey you can use our cap but you need to get the rest of the cap from the state white balance if you&#39;re not able to do that or if your turn down we get our cap back the other source for a developer or sponsor is to go to neighboring jurisdictions and see if they have cap available to the project that could be assigned over to the issuer so once the inducement resolution is drafted and approve approved by the issuer and the borrower is starting to put together its financing team and finds a lender or to size because they&#39;re in vest greater better to do a public offering we&#39;ll start putting documents in place that are appropriate either for a public offering or if it&#39;s a direct placement a set of documents that go directly to one lender once documents have come along pretty well will conduct a tougher hearing will have the issuer approve a bond resolution approving the structure and all the documents will make sure all the state volume camp allocations in place and then off we go into the market it&#39;s a public offering with a offering document or we&#39;re finalizing terms with the lender and the lender is committing firmly to purchase the bonds and then step seven and eight or where we party and spend the proceeds and construct or if you start getting constructed a project here&#39;s a diagram that lists all the players in a very simple bond financing so a bond underwriter or lender the issuer the borrower in the project in certain transactions we have a third party trustee holding the funds and paying the bondholders and so in the simple world that&#39;s when a simple fixed-rate transaction looks like in the different players here&#39;s what a low-income housing tax credit financing looks like similar to the slide you just saw to the right in terms of flow of funds the blue box to the left is how the investors in the tax credit partnership come to the table and organize and then their money flows over as part of the capital stack along with bond proceeds and whatever other sources of funds you you can get your hands on to the project in a light tech financing there&#39;s lots of math that are that has to be done precisely for the purposes of satisfying the tax code so these notions of applicable percentage qualified basis we generally will see sponsors and bar retain either counsel or accountants were very very qualified to help structure the transaction on the mechanical side with respect to qualifying for the tax credit that either having a situation where you&#39;ve got some money into your project but then either through generally through audit if it&#39;s discovered something on the light side has not been done correctly you&#39;re going to end you hit there&#39;s the possibility of having some very angry high tech investors and you don&#39;t want that ongoing compliance is also a part of life that financing is just like the tax-exempt financing and then also oftentimes will be extended used periods again as I described on the tax exempt bonds and sometimes on the high tech side here are some other programs we see coming in as part of capital stack or to subsidize transactions section 8 projects have contracts vouchers and then a whole host of HUD programs FHA insurance and then what&#39;s nice about the FHA HUD programs is the ability to at the end of the day having very high rated securities through a securitization of the FHA insured Loudon to Ginnie Mae&#39;s which gives you a very good execution in the market that&#39;s the good news the bad news is these are the transactions that take a very very long time to clear through HUD and their approval process and so it&#39;s a layer of approvals and complexity that if you&#39;re going to use any of these products your lead time needs to be ample so broadly as we&#39;ve heard sometimes the capital stack isn&#39;t going to get sold out filled out with tax and the bond proceeds we&#39;ve heard a lot about all of these particular sources that either come from state government as well as the federal government and then opportunities own funds could be added to this as well now and then I would take any questions and I thank you for your time do we have any questions Paula please do not have any questions does anybody have any questions for Fred or Shannon frontier well thank you all for joining us today and we appreciate your time and attention give further questions our contact information is available and we&#39;d be happy to field those do you have any housekeeping things Belinda this would be posted on our website so people&#39;s on the website I would say that will occur within a week or so you can find it there and then again if you have any questions you can also contact us through the chopper reach page on the chopper website at Thunder rental housing we also will be sending you an online evaluation to let us know what you thought of this webinar and other topics that you&#39;d like to see so please do fill that out so that we can be responsive to your needs thanks everyone for your time thanks you

Transcript for:Enhancing Private Activity Bonds for Housing

Transcript for:
Enhancing Private Activity Bonds for Housing