TAX-EXEMPT BOND REQUIREMENTS. Hawkins Delafield & Wood LLP

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1 TAX-EXEMPT BOND REQUIREMENTS Hawkins Delafield & Wood LLP

2 Internal Revenue Code it s the framework for US Treasury to raise $$ tension between raising $$ and steering social policy ex. of social policy: encourage home ownership categories of tax-exemption (public good is worth loss of Federal tax revenue) single-family housing is such a category Code imposes many rules to assure public purposes are met 1

of social policy: encourage home ownership categories of tax-exemption (public good is

3 Must use MRB proceeds for SF loans or to refund bonds that were used for SF loans Only 2 other uses permitted costs of bond issuance (not more than 2%) reserve funds (not more than 10%) down payment/closing cost assistance ok 2

costs of bond issuance (not more than 2%) reserve funds

4 public hearing and elected official approval newspaper, radio or TV public notice 14 days in advance of hearing is safe harbor hearing conducted to get public comments proposed regs may permit internet publication highest elected official of issuer s jurisdiction (or person named by law) gives approval after hearing 3

public comments proposed regs may permit internet publication highest elected

5 There is limit on interest rate and points charged on loans Limit is 1-1/8% (1.125%) over bond yield Loan yield in excess of bond yield is called spread Spread Limit is aggregate of all loans allocated to bond issue 4

6 payments of certain excess earnings to IRS every 5 years called rebate ; pay IRS net excess of earnings over bond yield is only paid on non-loan investments, eg, Revenue fund Reserve fund 5

7 set-aside of 20% of proceeds for loans in targeted areas targeted areas are qualified census tracts or areas of chronic economic distress (ACEDs) one year set-aside can have higher purchase price and income limits for these loans; no 1 st -time homeowner req ment 6

distress (ACEDs) one year set-aside can have higher purchase price

8 borrower may be required to pay certain gain on sale of home to feds (Recapture) never more than 6.25% of loan amount limited to ½ gain on sale won t owe if income hasn t increased won t owe if sale is more than 9 years after purchase many issuers indemnify borrowers 7

25% of loan amount limited to ½ gain on sale won t owe if income

9 Issuer must declare official intent if it expends money before bonds are issued needed if Issuer warehouses loans before bonds are issued reimbursement must occur within 18 months of loan funding intent is declared by resolution or similar official documentation 8

are issued reimbursement must occur within 18 months of loan

10 certain tax returns must be filed at time of bond issue and annually within specified time after bonds are issued every August 15 th, an annual mortgagor report 9

11 loan repayments must be used to redeem bonds and not to used to re-lend ( 10-year rule ) generally, won t apply for first 10 years applies sooner for refunding bonds 10

12 bond proceeds not used to make loans within 42 months must be used to redeem bonds only applies to new money proceeds only applies to lendable proceeds 11

13 each State has limit of private activity bonds that can be issued annually based on State population (w/ small state minimum) 2013: $95 x population or $291,875,000 not just housing (12+ categories of bonds use cap) unused cap may be carried forward for 3 years 12

$95 x population or $291,875,000 not just housing (12+ categories

14 A refunding is using bond proceeds to pay off outstanding bonds used to lower debt costs of issuer used to recycle at current lending rates trust indentures dictate when/if old bonds can be redeemed early certain maturity limits on refunding bonds 13

current lending rates trust indentures dictate when/if old

bonds subject to the alternative minimum tax this is an extra tax, meant to apply to the very wealthy (< 100 taxpayers when enacted in the 1960 s) began applying to housing bonds in 1986 eliminated

15 bonds subject to the alternative minimum tax this is an extra tax, meant to apply to the very wealthy (< 100 taxpayers when enacted in the 1960 s) began applying to housing bonds in 1986 eliminated for new money housing bonds issued after July 30, 2008 corporate bondholders won t include bond interest in adjusted current earnings for AMT calculations still applies to refundings of AMT bonds 14

eliminated for new money housing bonds issued after July 30, 2008 corporate bondholders won t

16 1st-time homebuyer requirement really 3-year rule exception for targeted-area lending exception for certain veterans rule applies to each borrower 5% exception (planned or oops ) 15

17 principal residence requirement based on expectations 60-day safe harbor only land that provides basic livability limited business use permitted 2, 3 or 4-family building is ok with certain restrictions 16

18 family income limits HUD 8 rules control limits for 1-2 person families (100% AMGI) and 3+ families (115% AMGI) higher for targeted areas (120%-140%) high housing cost area adjustment (up to 140%) 17

19 purchase price limits based on acquisition cost based on FHA insurable limits/ % of such, except 110% in targeted areas higher limits possible if more accurate data issuer study requires separate data for new and existing 18

975 90% of such, except 110% in targeted areas higher

20 mortgage loans must be new, not refi s MRB proceeds may not be used to pay off borrower s existing indebtedness exception for bridge, construction or temporary loans 19

21 Code permits assumptions if new owner qualifies Some issuers permit, many do not 20

22 non-purchase loans home improvement loans $15,000 limit, with higher limits for certain disaster areas must improve basic livability or energy efficiency qualified rehab loans generally in connection with acquisition; cost is added to acquisition cost residence must be >20 years old must add 25% or more to basis of home specific rules about retention of interior and exterior walls 21

23 safe harbor compliance obtain affidavits of borrower, seller 3 years of tax returns have comprehensive program guide remove any non-complying loan when discovered 22

24 New in 2011 Not a requirement (yet) but affects IRS treatment of bond issue IRS Form filed with Bond Issue has 2 boxes to check: Issuer has PIWPs as to Arbitrage Matters Issuer has PIWPs as to Non-compliance 23

25 24

Lesson 8 Section 143 Qualified Mortgage Bonds

Lesson 8 Section 143 Qualified Mortgage Bonds Lesson 8 Overview Introduction In Phase I, Lesson 4, you learned about the private activity bond tests, including the consumer loan test. Lesson 4 of Phase II discussed the various types of exempt facility