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Affordable housing developments today involve a variety of financing sources which often includes tax-exempt bonds.
What are tax-exempt housing bonds?
A bond is like a Promissory Note. It is evidence that money was borrowed by the issuing authority. By signing the bond, the issuing authority promises to pay the bondholder principal and interest during the term of the bond. Almost all states have various laws which authorize housing authorities, redevelopment agencies, states, cities, counties, and state and local housing finance agencies such as the Urban Residential Finance Authority (URFA) to issue bonds. The proceeds of these bonds are used to provide financing for single family and multifamily rental apartment projects.
Section 103 of the Internal Revenue Code provides that interest paid to bond holders on certain types of bonds for single family and multifamily housing will be excluded from gross income for federal income tax purposes if they meet requirements of the Code.
Why do developers use tax exempt housing bonds?
Tax-exempt bonds provide low interest rates on borrowing. Tax-exempt rates can be below 6% for long term “AAA” rated fixed-rate housing bonds. Variable rate (floating rate) bonds currently have rates around 2%. Using tax-exempt bonds can often reduce the borrowing rate by 1% or more as opposed to taxable financing rates or conventional financing. This lower borrowing cost can often increase available loan proceeds by 10% to 15% or more.
How is the Bond Allocation Calculated?
The State of Georgia along with all other states receives $75 per capita ($75 per person) on an annual basis which can be issued in tax exempt bonds for various purposes. This calculates to $706,350,000 for the year 2005 for the State of Georgia. For more information on the allocation breakdown, visit the DCA website.
URFA’s allocation has to be requested of the State of Georgia Department of Community Affairs (DCA) on a project by project basis. It can be used for either multifamily or single family housing. Once an allocation request is submitted to DCA with all the accompanying documents, URFA receives a Notice of Allocation. URFA has 75 days to close the bond issue after the Notice of Allocation is issued, after which the allocation is recaptured by DCA and is no longer available to URFA.
On September 30 of each year, DCA recaptures all unallocated dollars into a common pool. Any authority can then apply for a portion of this pool of funds. DCA decides who gets how much and will either give the authority 75 days to close (until December 15 of that year) or allow the authority to request a carryforward allocation. Carryforward allocations must be used within three (3) years from the date of issuance.
What is the Bond application process?
Applications may be submitted to URFA by developers January 1 – September 1 of each year. Upon receipt, Invest Atlanta Housing Finance staff reviews each application in accordance with the criteria set forth in the application. Consideration is given to the following information submitted:
- Type of project - acquisition and new construction/ acquisition and rehabilitation, adaptive reuse, etc.
- Location of project; physical description; site amenities
- Allocation $$$ requested/cost per unit
- Tenant population to be served
- Project readiness to proceed
- Development Team experience; financial strength
- Firmness of credit enhancement
- Impact on neighborhood
- Firmness of Site control
- Project Financial Feasibility
- Level of Minority Participation
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After review of the above criteria, Housing Finance review team makes recommendations for projects to be presented to the URFA Board of Directors for inducement. Each project goes through a two-step approval process with the Board:
- Approval of Inducement Resolution giving staff the authority to move forward with the preparation of bond documents; and
- Approval of Bond Resolution to authorize the issuance of bonds and to approve the final transaction.
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Atlanta is a brain gainer town, with 35% of its over-25 population holding a bachelors degree or higher. The US average is 24%.
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