Housing Services:
501(c)(3) Bond Program

501(c)(3) Bonds

Purpose

Through the City of Portland's authority to issue tax-exempt debt, PDC is responsible for the review and processing of applications for 501(c)(3) bonds to assist in the financing of development projects that provide public benefits within the Portland city limits. While these bonds are not backed or guaranteed by the City in any way, the availability of this form of tax-exempt financing can significantly enhance the feasibility of eligible projects. The bonds are secured by, and paid from, revenues of the project for which the bonds are sold.

501(c)(3) bonds are tax-exempt bonds issued on behalf of non-profits for the construction or rehabilitation of housing. The main advantage of financing housing projects with 501(c)(3) bonds is the lower interest cost generally realized as compared to that obtainable through private commercial financing. This is a result of the tax-exempt status of 501(c)(3) bonds. Interest paid to bond purchasers is not subject to federal income taxes or Oregon personal income tax. Since bond purchasers receive tax-free interest income, they can accept a lower interest rate from the applicant when lending their capital. The interest rate advantage of tax-exempt bonds over conventional debt can only be achieved if the bonds receive an investment grade rating from a nationally recognized rating agency. An investment grade rating typically requires external credit enhancement such as a bank letter of credit, Fannie Mae credit support, or FHA insurance. Another advantage of 501(c)(3) bonds is that they do not require private activity bond volume cap.

Product Description

The City of Portland is a conduit issuer of 501(c)(3) bonds which may be privately placed with a commercial bank or other financial institution, or publicly offered for sale through an underwriter. The funds obtained through the sale of bonds are available to the nonprofit applicant to finance project costs. Use of the bonds is restricted to projects that are solely owned by a non-profit or by an LLC in which a non-profit is the only member, therefore, these bonds may not be used in conjunction with Low Income Housing Tax Credits. The proceeds of the borrowing must be exclusively used for the exempt purpose of the organization.

The disbursement of bond proceeds for construction expenses as well as the collection and disbursement of funds for the payment of principal and interest is typically handled by a trustee. Bond funds are typically provided in the form of a mortgage with accompanying security interests to bond holders. Payments made by the borrower must be sufficient to pay all principal and interest payments and all costs of servicing the bonds. The borrower is also responsible for payment of all of the expenses of the operation and maintenance of the project and all taxes and special assessments levied with respect to the project and payable during the term of the loan.

Conditions for Issuance: The terms and conditions of issuance and purchase of 501(c)(3) bonds are to be agreed upon by the applicant and bond purchaser with the concurrence of PDC and are governed by ORS Chapter 280 and Chapter 5.72 of the City Code.. The following guidelines and special provisions apply to all 501(c)(3) bonds issued by the City:

Eligible project costs may include:

The cost of construction and reconstruction subject to the credit enhancer's, if any, requirements.
The cost of acquisition of property, including rights in land and other property, both real and personal and improved and unimproved and the cost of site improvements.
The cost of demolishing, removing, rehabilitating or relocating any building or structures on lands so acquired, including the cost of acquiring any lands to which the buildings or structures may be moved or relocated.
The cost of machinery and equipment and related financing charges.
The cost of engineering and architectural surveys, plans and specifications.
The cost of financing charges and interest prior to and during construction, and for a reasonable period after completion of construction.
The cost of consultant and legal services, other expenses necessary or incident to determining the feasibility or practicability of constructing a project, administrative and other expenses necessary to or incident to the construction of the project, including, but not limited to, costs of relocation and moving expenses according to a project plan developed by the City, and the financing of the construction of the project thereof, including reimbursement to any state or other governmental agency or any lessee of such project for the expenditures made with the approval of the City that would be costs of the project under this Chapter had they been made directly by the City, and any costs incurred after bond issuance by the City for audits or monitoring.

If the project is to be managed by an independent party, the management contract must comply with federal tax guidelines.
Eligible projects costs do not include any profit element of amounts paid to related contractors, developers or other professionals and for a reasonable period after completion of construction.
Bonds may be sold at public or private sale, and, in most cases, mature at any time or times up to forty years from their date of issue. Bonds which are to be sold publicly, however, must be rated by either Moody's or Standard and Poor's, and have an "A" rating or better.
The applicant will be required to keep PDC advised of the schedule for document preparation and approval, and to provide drafts of documents to PDC upon request.
The applicant will be required to submit design development and final site and construction plans for review and approval by PDC prior to construction.
The applicant will be required to meet PDC's Minority Business Enterprise/ Women Business Enterprise/ Emerging Small Business requirements (see Chapter 3.4.H of this manual) and incorporate the City's Green Building Criteria.
Upon issuance of the bonds, the applicant will pay PDC a one-time issuance fee equal to $7 per $1,000 of the face amount of the bonds. In addition, the applicant will pay the City a one-time fee of not less than $10,000 for debt management costs. The applicant must also pay any bond counsel expenses and any other direct cost incurred by the City.
The applicant is required to comply with all applicable arbitrage rebate requirements for as long as the bonds are outstanding. As a condition of closing the bond issue, the City will require the applicant to have a signed contract with a firm with recognized professional expertise in performing arbitrage rebate calculations.

The following general conditions prevail regarding the preparation of all bond documents:

Bond Counsel will be designated by the City. The applicant may submit their recommendation of Bond Counsel.
The trustee chosen by the applicant, and approved by PDC, must be a bank or trust company doing business in the state of Oregon with trust powers.
A bond purchase agreement will be submitted to PDC for approval if the applicant chooses to place the bonds in a private sale or private placement, or if the applicant chooses an underwriter for private or public sale.
Bond documents must be received in final form by PDC fourteen days prior to a scheduled Commission meeting at which it will be acted upon.

Application Process

Because of the extensive documentation necessary to issue 501(c)(3) bonds, the time before funds are available is usually longer than that of conventional financing. To complete the transaction, from application to closing, takes approximately six months and depends on how quickly the applicant completes the required procedures.

A non-profit corporation, company or individual desiring the issuance of 501(c)(3) bonds must submit a formal application to PDC. PDC may request additional information from the applicant, as well as any and all data deemed relevant. Any information retained by PDC is available to the public in accordance with state law.

The primary steps toward issuing 501(c)(3) bonds are:

PDC Commission preliminary review and recommendation to City Council for approval of an application or approval with conditions. The Commission, which meets monthly, must receive an application one month prior to its meeting date.
City Council approval or preliminary conditional approval by ordinance and authorization to execute a letter of intent and Indemnification and Compensation Agreement of the application and authorization for the Commission to proceed with further application processing. The City Council's consideration of a request typically follows PDC Commission approval by two weeks.
PDC recommendation to City Council for issuance of bonds in accordance with all requested and required final documents. This takes place after the project is fully defined and underwritten.
City Council adoption of ordinance authorizing issuance of the bonds in accordance with those documents.

In order for an application to be considered complete for processing by PDC, the applicant must:

Demonstrate the project is consistent with City-adopted plans and policies.
Demonstrate the project is consistent with applicable Internal Revenue Service Regulations, Oregon Revised Statutes and the Portland City Code.
Demonstrate knowledge of the full extent of the financial transaction and financial feasibility of the project.
Demonstrate that the project supports the City of Portland economic development, housing or historical preservation policies, as appropriate.
Describe the land use, transit, and transportation facilities in the vicinity of the proposed project.
Include information on the density of use and potential impact in the area affected by the proposed project.
Incorporate PDC design guidelines.
Submit three years of financial statements, or a guarantor with adequate financial strength to guarantee the bonds, or other evidence of sufficient resources to demonstrate a probability the bonds will be marketable to a buyer- bank, underwriter or insurance company.
Agree to pay all applicable City and PDC expenses associated with the application whether or not the bonds are issued.
Agree to indemnify and hold harmless the City, PDC, their staff and officers from any action arising out of its review, processing and action on the applicant's application.
Submit a relocation plan for any households, individuals, or businesses which may be displaced by the propose project.
Submit a copy of the Service Agreement.

The applicant must pay a fee of $500 at the time of filing the formal application with PDC. In addition, PDC will be reimbursed in full for all direct and indirect costs incurred in the project. The fees will be paid as follows:

$500 at the time of filing a formal application with PDC.
The balance at the time of closing of the bond issue. In the event the financing is not completed, costs incurred to date by PDC will be subject to immediate reimbursement.

PDC will, within 60 days after a complete application is filed with PDC, prepare a written recommendation of approval, disapproval with conditions or denial of the application. If an application is denied, the applicant may appeal the decision by filing written notice of their appeal with PDC within fourteen days of receiving the notice of denial in writing.

Minimum Qualifications

The applicant must be a nonprofit organization with 501(c)(3) designation from the IRS. It is the policy of PDC to recommend issuance of 501(c)(3) bonds for projects which promote the economic development and housing goals established and adopted by the City of Portland.

501(c)(3) bonds will be considered for the following types of residential development projects:

Multiple unit residential housing created through new construction.
Multiple unit residential housing created through rehabilitation of non-residential buildings, or rehabilitation of vacant residential buildings.

No project will be approved which would result in the conversion of existing occupied residential rental units to condominium or cooperative projects. In addition, construction must begin within nine months from the date of the bond issuance.

Project Specific Guidelines

If the organization's exempt purpose is to provide low income housing the following applies (if the organization's purpose is to address elderly or other special needs groups the following does not apply except in the case of certain acquisition/rehab situations). Seventy-five percent of the units must be occupied by households with an annual income less than 80% of the area median income. A minimum of 40% of the project must be occupied by households at 60% or less of area median income or a minimum of 20% of the units in the project must be affordable to households at 50% or less of area median income. The remaining 25% of the project may be at market rate rents.

No more than five percent of working capital (this includes operating or replacement reserves) may be financed with the bonds. Commercial space uses may not exceed 5% of the principal amount of the bonds less the amount of bond proceeds spent on costs of issuance. Debt service reserves may be financed with tax-exempt debt. There is no minimum rehab requirement.

Project size: The fixed cost of bond issuance is higher than that of conventional debt financing and, therefore, the size of the project should be large enough to cover these cost. Typically projects requiring less than $2 million in debt financing are inappropriate for 501(c)(3) bond use given the fixed costs of issuance.

Eligible Developers: Non-profit developers are eligible to apply for the program.

Eligible Projects: In addition to the list of items required as part of the application listed in the Application Section above, PDC will consider the following when reviewing a project for bond financing:

The economic feasibility of the project with and without the use of 501(c)(3) bonds.
The need for housing and community facilities resulting from the project.
The general benefits to the City of the proposed project.
The City's ability to supply other needed services required by the project.
Employment and property tax income from the project.
Suitability of the proposed project in the specific proposed location.
The incorporation, to the extent feasible, of the City's Green Building criteria in the project.

How to Access the Program

Contact PDC for further information about the investment under your consideration and its eligibility for 501(c)(3) bond financing through the City of Portland. PDC will work with you to further define your assistance needs, determine your project's eligibility for 501(c)(3) bond financing, or other programs currently available through PDC, and review the schedule and time required for the necessary approvals.

PDC also advises the involvement of a qualified bond counsel as early as possible in the planning of your project. The bond counsel plays a critical role throughout the 501(c)(3) bonding process. No 501(c)(3) bond issue will be purchased or underwritten without the written legal opinion of a nationally recognized bond counsel, attesting to a complete review of the transaction, to the legality of the issue, and to the bond's tax-exempt status. Because the essence of the entire transaction is tax-exemption, the bond counsel should normally be involved throughout the application, negotiation and issuance of the 501(c)(3) bonds.