Housing Services:
Private Activity Bond Program

Private Activity 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 private activity bonds to assist in the financing of multifamily 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.

The main advantage of financing housing projects with private activity 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 certain private activity 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 City is one of several issuers of private activity bonds for Portland housing projects. Other issuers include the Oregon Housing and Community Services Department; the Health, Housing, Educational and Cultural Facility Authority (HHECFA); and the Housing Authority of Portland. 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.

PDC may also issue taxable bonds in conjunction with tax-exempt bonds under certain circumstances. Private Activity Bonds may be used in conjunction with federal low-income housing 4% Tax Credits, PDC direct loan assistance, applicable property tax abatement programs and other private and public housing financing programs. Private Activity Bonds are a limited resource and the process to obtain the bonds is typically competitive. Therefore, issuance of the bonds for a project depends on the priority the City of Portland gives a project.

Product Description

The City of Portland is a conduit issuer of private activity 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 finance project costs and up to 2% of the proceeds may be used for costs of issuance.

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 of Issuance: The terms and conditions of issuance and purchase of private activity 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 private activity 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.
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.

Eligible projects costs do not include any profit element of amounts paid to related contractors, developers or other professionals.
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 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 or private placement agreement will be submitted to PDC for approval if the applicant chooses to place the bonds in a private sale, 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 private activity 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 corporation, company or individual desiring the issuance of private activity 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 five primary steps toward issuing private activity bonds are:

PDC Commission preliminary review and recommendation by resolution 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 with the applicant 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.
Volume cap allocation from the state Private Activity Bond Committee (obtained by applicant) which meet quarterly. Information on the Committee and their process can be found on the Oregon State Treasury's Debt Management website or contact Committee staff at 503-378-4930.
PDC final recommendation by resolution to City Council for issuance of bonds in accordance with all requested and required final documents.
City Council adoption of final 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, if receiving permanent financing, at least 85% of the housing units are affordable to households with incomes up to 150% of the area median income. If the applicant receives construction or permanent and construction financing, 100% of the units must be affordable to households with incomes up to 150% of the area median income. In addition, the applicant must covenant that, as required by IRS regulations, a minimum of 40% of the units will be rented to households at 60% or less of the area median income or a minimum of 20% of the will be rented to households at 50% or less of the area median income.
Certify by letter that the issuance of private activity bonds is an inducement to locate, retain or expand the project in the City of Portland.
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.
Follow 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.
Agree not to discriminate against any purchaser or tenant who is a parent or legal guardian with whom a child resides or is expected to reside, except in projects designated exclusively for senior households (over 62 years of age).
Agree construction will begin within 9 months of bond closing.

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 conjunction with 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, the City and Bond Counsel will be subject to immediate reimbursement.

An applicant planning to apply to the Oregon Housing and Community Services Department (OHCS) for 4% tax credits to be used with the private activity bonds must apply to OHCS before requesting private activity bond volume cap from the Private Activity Bond Committee. For more information on and an application for 4% tax credits contact OHCS at (503) 986-2108 or visit their website at the link above.

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

It is the policy of PDC to recommend issuance of private activity bonds for projects which promote the economic development and/or housing goals established and adopted by the City of Portland.

Private activity 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.
The provision of mortgage funds to low and moderate income purchasers of cooperative or condominium units within multiple unit residential projects.

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

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 private activity bond use given the fixed costs of issuance.

Eligible Developers: For profit and 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 private activity bonds.
The need for housing 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.
Projects in the downtown, particularly the RX zone, designated urban renewal or redevelopment areas will receive the highest priority.
The incorporation 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 private activity bond financing through the City of Portland. PDC will work with you to further define your assistance needs, determine your project's eligibility for private activity 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 the City's bond counsel and an underwriter or placement agent as early as possible in the planning of your project. The bond counsel plays a critical role throughout the private activity bonding process. No private activity 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 private activity bonds. An underwriter or placement agent will assist in the financial analysis of the marketability of the bonds and can suggest structures and forms of credit enhancement.