LIHTC Bonds: A Project Manager’s Cheat Sheet

Bond Counsel Basics

What does Bond Counsel do?

Bond Counsel issues a legal opinion (a “bond opinion” or “final opinion”) confirming:

1. Interest on the bonds is tax-exempt, and
2. The bonds are valid under state law

That opinion informs Bond Counsel’s analysis throughout the transaction.

How is Bond Counsel hired?

It depends. Some issuers appoint Bond Counsel directly. Other issuers allow the affordable housing developer to appoint an experienced firm to serve as Bond Counsel to the issuer.

Who is Bond Counsel’s client?

Bond Counsel’s client is typically the bond issuer. Bond Counsel also works closely with developers, capital providers, and counsel to help structure the financing and support a smooth closing.

What does the bond opinion have to do with LIHTC?

For 4% LIHTC transactions, a project must meet the applicable bond financing threshold (often referred to as the “50% test” or “25% test,” depending on when the bonds were issued and the project is placed in service). Bond Counsel’s work helps confirm that the bond financing is properly structured and proceeds are used in a way that supports the project’s eligibility for 4% credits.

• PM Takeaway: Bond Counsel’s tax analysis and closing documentation are closely tied to the bond financing required for the project to qualify for 4% credits.

What’s the “95% test,” and how is it different from the “25% test”?

The 25% test is the LIHTC threshold tied to how much of the project is financed with tax-exempt bonds (subject to rules and exceptions). The 95% test is a separate tax-exempt bond rule that focuses on how bond proceeds are spent (i.e., that most proceeds go toward qualified project costs).

• PM Takeaway: 25% test = LIHTC eligibility. 95% test = bond proceeds compliance.

Can You Use Income Averaging for Both LIHTC and Bonds?

Income averaging (a/k/a income smoothing or blending) is permitted for 4% LIHTC, allowing units to be designated at different AMI levels (e.g., 20%, 40%, 60%, 80%) so long as the average across LIHTC units does not exceed 60% AMI; however, this flexibility does not apply to tax-exempt bond compliance, where each bond-restricted unit must independently meet the applicable set-aside (typically 20% at 50% AMI or 40% at 60% AMI), with no averaging across units.

• PM Takeaway: A project can satisfy LIHTC income averaging but still fail bond compliance—always track and underwrite bond and LIHTC restrictions separately.

Quick Reference: Key Terms

Bond-Related Approvals:

Inducement Resolution
Issuer declaration of intent to issue tax-exempt bonds that helps preserve reimbursement and timing flexibility.

TEFRA Approval
Public approval process (hearing + approval) required for certain tax-exempt bonds.

Authorizing Resolution
Issuer action approving the bond financing and authorizing related steps toward issuance.

Key Deal Documents:

Bond Regulatory Agreement
Agreement that sets the federal tax and state law affordability and program compliance requirements for the project for the applicable compliance period (including income/rent restrictions and related covenants).

Indenture
Agreement between the issuer and the bond trustee that governs the bonds and key mechanics (including flow of funds, investments, and bondholder protections). In some private placements, a “Funding Loan Agreement” is used instead.

Loan Agreement (or Financing Agreement)
Agreement between the issuer and borrower describing the loan of bond proceeds and the borrower’s repayment and project-related obligations. In some private placements, a “Borrower Loan Agreement” or “Project Loan Agreement” is used instead.

Tax Certificate and Agreement
Closing document in which the issuer and borrower certify facts and make covenants supporting the tax-exempt status of the bonds (including how proceeds will be used and invested).

Bond Purchase Agreement (or Bond Purchase Contract)
Agreement among the issuer, the underwriter, and the borrower that sets pricing and key terms for the bond sale. Typically used in publicly offered transactions; direct bank placements usually do not include a bond purchase agreement, with terms instead documented in the bond documents and related financing agreements.

Official Statement
Disclosure document provided to investors in a public offering that describes the bonds, the project/financing, key risks, and other information relevant to the bonds.

Continuing Disclosure
Ongoing disclosure obligations (typically annual reports and event notices) required for public offerings under federal securities law standards.

Structuring Concepts:

Volume Cap
Federal limit on certain tax-exempt private activity bonds issued in a state each year; typically awarded on a project basis. Example: If a LIHTC project needs $50M of tax-exempt bonds, it generally needs a $50M volume cap allocation.

Recycled Volume Cap
Permits certain previously used volume cap to be reused for another project. Bonds issued using recycled volume cap (“recycled bonds”) generally do not count toward the LIHTC 25% test.

Arbitrage
Extra investment earnings on bond proceeds (or related) above the bond yield. Tax rules limit how much can be kept, and excess earnings may need to be rebated.

Reissuance (Tax-Exempt Bonds)
A “reissuance” occurs when a significant modification to the terms of a tax-exempt bond or the related loan (such as changes to interest rate, maturity, payment schedule, obligor, or collateral) is treated as the issuance of a new bond for federal tax purposes, potentially requiring the bonds to comply with current law requirements (including TEFRA approval and other rules) rather than those in effect at original issuance.

• PM Takeaway: Before modifying key loan or bond terms, consult Bond Counsel to assess reissuance risk.