UNDERSTANDING THE TAX-EXEMPT FINANCING PROCESS by ToaKohe-Love

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									UNDERSTANDING
THE TAX-EXEMPT
FINANCING
PROCESS    Presented by:
           John Whiting
       Quarles & Brady LLP
     One South Pinckney Street
     Madison, Wisconsin 53703
          (608) 251-5000
          March 20, 2006
General Outline

    Understanding some basic concepts
    Parties to a typical taxable financing
    Parties to a typical tax-exempt
     financing
General Outline

    Who are potential issuers of tax-
     exempt debt?
    For what purposes may tax-exempt
     debt be issued?
    Who are potential purchasers of tax-
     exempt debt?
General Outline

    Who are potential borrowers of the
     proceeds of tax-exempt debt?
    What restrictions do Federal tax law
     impose on tax-exempt debt?
UNDERSTANDING
SOME BASIC CONCEPTS
Understanding Some Basic
Concepts
    Tax-exempt
     – An organization which is exempt from
       paying state or federal income taxes
     – Property which is exempt from paying
       real estate taxes
     – Interest on a debt which is exempt from
       federal or state income taxes
Understanding Some Basic
Concepts
    “Revenue” bonds
     – Revenue bonds are payable only from
       specified revenues
     – Revenue bonds may bear interest at
       fixed rates or variable rates
APPLICABLE SOURCES
OF LAW
Federal Tax Law

    Federal tax law determines whether
     the interest on obligations validly
     issued under State law is exempt
     from federal income tax.
Wisconsin Law

  State law determines the validity of
   obligations.
  In limited cases, State law also determines
   whether the interest on obligations validly
   issued under State law is exempt from
   State income tax.
  Legislative proposals have been made to
   give a state tax exemption for interest on
   certain WHEFA bonds.
PARTIES TO A TYPICAL
TAXABLE FINANCING
Parties to a Typical Taxable
Financing
    Borrower
    Lender
                        Borrowing
                        Purposes


         Promise to
           repay

Lender                Borrower


          Cash
PARTIES TO A TYPICAL
TAX-EXEMPT FINANCING
Parties to a Typical
Tax-Exempt Financing
    Issuer
    Borrower
    Purchaser (lender)
    Trustee as representative of
     purchasers
    Credit enhancer
          Cash                          Cash




 Lender                 Issuer
                                               Borrower
Purchaser              (Conduit)




    Promise to repay               Promise to repay
    (Revenue Bond)                     (Note)
WHO ARE THE
POTENTIAL ISSUERS OF
TAX-EXEMPT DEBT?
Potential Issuers

    Must be a governmental or quasi-
     governmental unit
    Wisconsin Health and Educational Facilities
     Authority (WHEFA)
    Cities, towns and villages
    Redevelopment authorities
    Housing authorities
    Community development authorities
Why Would One Issuer Be
Chosen Over Another?
    Type of projects for which it can
     issue bonds
    Issuer’s expertise
    Local politics
    Bank eligibility
    Double tax exemption
For What Purposes May Tax-
Exempt Debt Be Issued?
    The purposes for which tax-exempt
     debt may be issued varies depending
     on the Issuer involved.
Wisconsin Health and
Educational Facilities
Authority (WHEFA)
WHEFA
   Hospitals
   Nursing homes
   Continuing care facilities
   Community-based residential facilities
   Private colleges and universities
   Federally qualified health center
   K-12 schools
   Legislation under consideration may
    permit WHEFA to issue bonds for cultural
    facilities
Cities, Towns and Villages

    Hospitals
    Clinics
    Nursing homes
    Public utilities
Redevelopment Authorities

    Redevelopment Authorities can be
     created by cities, towns and villages
    “Blight” finding required but
     definition is very broad
Housing Authorities

    May be created by cities, towns and
     villages
    Elderly housing projects (generally
     for persons 62 years or older)
    Low income housing projects
Community Development
Authorities
    Have all the powers of a
     Redevelopment Authority and a
     Housing Authority
          Cash                         Cash




 Lender                Issuer
                                           Borrower
Purchaser             (Conduit)




   Promise to repay               Promise to repay
   (Revenue Bond)                     (Note)
WHO ARE POTENTIAL
BORROWERS OF THE
PROCEEDS OF
TAX-EXEMPT DEBT?
Potential Borrowers

    Not-for-profit Section 501(c)(3)
     Organizations
    For-profit entities
Potential Borrowers

    What form does a Borrower’s
     repayment obligation usually take?
     – Loan Agreement
     – Master Trust Indenture – facilitates the
        pooling of collateral
        pooling of credit
        issuance of multiple series of parity debt
     – Obligation may be secured or unsecured
          Cash                         Cash




 Lender                Issuer
                                              Borrower
Purchaser             (Conduit)




   Promise to repay               Promise to repay
   (Revenue Bond)                     (Note)
WHO ARE THE
POTENTIAL
PURCHASERS OF
TAX-EXEMPT DEBT
(LENDERS)?
Potential Purchasers

  Financial institutions
  Institutional investors
  Public markets
     –   unrated
     –   rated on the Borrower’s credit
     –   rated based on a Credit Enhancer’s credit
     –   credit enhancements could be
           guaranties
           bond insurance
           bank letters of credit
FEDERAL TAX LAW
REQUIREMENTS
Federal Tax Law Requirements

    100% of the proceeds of the debt
     must produce property owned by
     Section 501(c)(3) corporations
    95% of the proceeds of the debt must
     produce property used by Section
     501(c)(3) corporations
Federal Tax Law Requirements

    Tax-exempt debt cannot have an
     average maturity greater than 120%
     of the reasonably-expected economic
     life of the property financed
    Not more than 2% of the proceeds of
     the debt may be used to pay costs of
     issuance
    Reimbursements

								
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