Private Activity Bonds

The Tax Reform Act of 1986 limits the amount of private activity bonds that can be issued each year by each state. The limitation covers multi-family, single family and industrial development and solid waste bonds. The state of Nevada reserves 50% of the total allocation to finance their single-family loan program. The remaining 50% is allocated to the cities and counties to finance the new construction or rehabilitation of multifamily units where low-income households will occupy a certain percentage of the units. Each year, in approximately March or April, the city receives the amount of Private Activity Bond Cap Allocation from the state that is available for distribution.

The following are highlights of potential benefits and disadvantages of financing for multi-family projects using tax exempt Private Activity Bonds.

• The most attractive feature of the Private Activity Bond is the lower than conventional financing cost of capital.
• Historically, on a fixed-rate 25 or 30-year loan, a tax exempt bond financed loan will result in an average savings of 125-175 basis points (1.25-1.75%) relative to a conventional loan.
• Typically, a multi-family project is entitled to a 4% non-competitive tax credit if 50% or more of the project is financed with tax-exempt bond proceeds.
• All tax exempt bond financed projects have set aside requirements dictated by federal tax rules. Typically, 20% of the units must have an AMI of 50% or below, or 40% of the units must have an AMI of 60% or below.
• The state of Nevada has three years, from the date of issuance to sell the bonds. The city does not give the applicants money or bond proceeds, it simply grants to the State Housing Division bonding authority to issue private activity bonds for an applicant.