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~~ ~, ild <br />~ i j+ ~ . <br /> <br />cover letter includes the response due date <br />for the Form. We strongly encourage you to <br />.promptly complete and return the Compliance <br />.Check Questionnaire. It is likely that you <br />will have questions about the appropriate <br />responses to Form 14127. Do not hesitate to <br />contact your bond counsel or financial advisor <br />with your questions. <br />Points to Remember <br />While simple in concept, the use of BABs is <br />subject to some requirements not part of your <br />typical tax-exempt bond issues. <br />• Bond proceeds may not pay for costs of <br />issuance exceeding 2% of the bonds. <br />• The issue cannot include capitalized <br />interest beyond the date the improvements <br />are placed in service. <br />• In addition, only 65%ofneeded capitalized <br />interest can be included in the issue since <br />federal reimbursement will cover the <br />other 35%. <br />The terms of sale must include specific <br />restrictions on the ability to reoffer the <br />bonds at a premium. <br />• Issues should contain an "extraordinary <br />call" provision that allows the issuer <br />to immediately call and prepay all <br />outstanding principal in the event that, for <br />any reason, the issue becomes ineligible <br />as a BAB or the federal government no <br />longer provides the subsidy. Taxable BABs <br />may be refunded with tax-exempt bonds. <br />Market Conditions <br />The economics of BABs varies over time with <br />changes in taxable and tax-exempt interest <br />rates. The chart on this page shows sample <br />general obligation interest rates for the week <br />of March 5. Issuers should make some form <br />of market check a part of the sale process. For <br />competitive sales, bidders should be able to <br />submit taxable BABs and tax-exempt bids. For <br />negotiated sales, apre-pricing comparison of <br />BABs and tax-exempt should be performed. <br />These steps help the issuer to be assured <br />that the sale will achieve the lowest effective <br />interest expense. <br />Looking Ahead <br />The current authorization for the issuance <br />of BABs ends on December 31, 2010. There <br />appears to be growing support for extending <br />the BAB program. <br />Extension does not mean that the program <br />will be the same. One area of discussion is <br />the amount of the subsidy rate for future <br />BABs. The Administration's FY 2011 budget <br />proposed dropping the rate to 28%. There <br />does not appear to be congressional support <br />for a drastic change in the subsidy rate. At <br />some point, a reduction in interest subsidy <br />eliminates the economic advantage of BABs <br />over tax-exempt bonds. <br />Extension of the BABs may also come with new <br />procedures on the issuance and management <br />ofthesebonds. The contentsoftheCompliance <br />Average Rates (March 5, 2010) <br />6.00% <br />s.oo°ra <br />4.00% <br />3.ao°i° <br />2.oo°i° <br />i.oo°ra <br />o.oo°i° <br /> <br />Data compiled by Northland Securities <br />Check Questionnaire suggest some potential <br />areas of interest to the IRS. <br />Interest subsidy and direct payment options <br />are being explored as alternatives to tax credit <br />programs. Few issuers have used the option to <br />issue the current version of BABs as tax credit <br />bonds. <br />Fasi 1 prav end Ares Pram P <br />ductian and Consensus. The key to <br />success is the time spent on the front end to <br />understand needs, explore alternatives and <br />build support for a plan of action. The petition <br />and veto provisions require a collaborative <br />approach to finding solutions. <br />Limited Prepayment. Give careful thought <br />to granting the ability of property owners to <br />prepay the fee. The ability to prepay makes <br />the fee function like a special assessment. <br />Banks may require prepayment upon sale of <br />the unit. If the fees are pledged to bonds, <br />the city may face negative arbitrage from <br />the inability to invest the prepayments at a <br />rate equal to the bonds. Finally, prepayment <br />creates administrative headaches because the <br />implementing entity must keep amortization <br />schedules for every housing unit. A good <br />compromise is to allow a one-time prepayment <br />period immediately after the fee is approved. <br />Lasting alution. Use of a HIA should be <br />a one-time fix and not an ongoing capital <br />funding plan. Associations must create long- <br />term capital improvement plans including the <br />dues, assessments and other monies needed <br />to pay for the improvements. Cities should <br />have an ongoing program for monitoring <br />these plans and the financial condition of the <br />association. <br />wild a eserue. The traditional way of <br />building a debt service reserve is to borrow <br />money in the bond issue. Another approach <br />is to delay payment of principal for one year <br />(or longer). Paying interest only allows for <br />an accumulation of fee revenues to provide <br />protection against future delinquencies. <br />Conclusion <br />With the growing number of aging common <br />ownership neighborhoods in every community, <br />the chances are good that some will experience <br />physical and financial distress. Cities should <br />understand the basic elements of the housing <br />improvement area as a tool for meeting <br />community housing needs. <br />The information in this newsletter is based on <br />sources believed to he reliable, but does not <br />purport to be complete and is not warranted <br />by Northland Securities, Inc. <br />March ?010%ASL `_043 <br />t. ~ ~ . .f;tv~ t. ~ <br />~°titi 'v°tia ~°ti~ ~°,y° ~°ti~ ~°,y° ~°~~ <br />