Exploring private placement trends and benefits, statutory change implications and the rate environment.

1. Tax-Exempt
Financing:
What 501(c) (3) Organizations Need To Know
Presented by UMB, BKD & Baird Holm
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2. PARKER SCHENKEN
Executive Committee Member and Public Finance Chair, Baird Holm
Parker Schenken is in his twentieth year with Baird Holm LLP. He currently serves on the
firm’s Executive Committee and is the Chair of its Public Finance section. His practice
principally includes municipal law and public finance, including qualified 501(c)(3) conduit
financings. Parker also provides counsel in the areas of corporate finance, commercial
law, corporate law and real estate. Parker is a member of the National Association
of Bond Lawyers and is admitted to practice law in the states of Nebraska, Colorado
and Iowa. He has been included in the The Best Lawyers in America®; since 2007.
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3. Fundamental Principles
IRC Section 103 – interest on a “state or local bond” is exempt from gross income for
federal income tax purposes. Corresponding provisions of applicable state law may also
provide for exemption from state income taxes.
Traditional Governmental Bonds – issued by cities, school districts, other public agencies
for public projects.
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4. Bond Transaction Structure
4
Simple Governmental Bond Structure
ISSUER BONDHOLDER

5. Fundamental Principles
Congress has extended benefits of tax-exemption “subsidy” to other sectors that involve
non-governmental use – so-called “qualified private activity bonds”. IRC Section 141 and
related sections.
One category of qualified private activity bond is a “qualified 501(c)(3) bond” described in
IRC Section 145.
Qualified private activity bonds are often structured as “conduit” bond issues – in which
the governmental issuer issues the bonds and then immediately loans the proceeds to
the conduit user.
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6. Bond Transaction Structure
Credit Enhanced Conduit Bond Structure
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ISSUER UNDERWRITER DTC
BOND-
HOLDERS
CONDUIT 501(c)(3)
BORROWER
LETTER OF CREDIT
BANK
TRUSTEE
LEASE/LOAN
AGREEMENT
REIMBURSEMENT
AGREEMENT
BOND
PAYMENT

7. Fundamental Principles
In order to have tax-exempt debt for the benefit of a non-governmental 501(c)(3)
organization, you must utilize a qualified governmental conduit issuer, which may, for
example, include:
A municipality under Neb. Rev. Stat. Sections 13-1101 et seq. or Iowa
Code Chapter 419;
A specialized authority, such as NIFA, NEFA, IFA, a Hospital Authority,
etc.
A direct loan from a bank or other lender to a 501(c)(3) organization is
NOT tax-exempt.
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8. Areas of Legal Analysis
State Law – issuer must have the authority to issue the obligations for the identified
purpose; other generally applicable state law requirements such as open meeting laws,
laws relating to contracting and public bidding, laws relating to investment of public funds,
etc., may be in play depending on the transaction.
Federal Tax Law – bonds must fall in a category of exempt obligations under federal tax
laws (and, in the context of a qualified 501(c)(3) financing under Section 145, the
organization must maintain its 501(c)(3) status).
Securities Law – tax-exempt financing likely results in the issuance of a security for
purposes of federal and state securities law, applicable exemptions from registration must
be identified, and other applicable securities law requirements must be satisfied.
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9. Economic Analysis
Since the bondholder is not paying tax on its interest income, it will charge interest which
is lower than a traditional taxable borrowing – this translates into a lower interest rate
charged to the 501(c)(3) borrower.
BUT – transaction costs (issuer fees, underwriting or bank fees, legal fees, etc.) are
generally higher in a conduit tax-exempt transaction, and these upfront costs may
counteract the interest savings – important to run a “true interest cost” type analysis.
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10. Limitations on Private Use
All financed property must be owned by the 501(c)(3) organization. Limitations on
“private use” – 5% - which can result from:
“Management contracts” – including traditional management contracts but also
very broadly defined to include things such as physician group contracts. See
Rev. Proc. 97-13.
Research contracts. See Rev. Proc. 97-14.
Requirements/take-or-pay contracts.
Leases for ancillary services (beauty shop, food service, etc.)
Naming rights.
Joint ventures.
Any other arrangement resulting in a “special legal entitlement” to use of the
financed property.
2% limitation on financing costs of issuance (NOTE: counts against 5% private use).
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11. Arbitrage/Rebate Requirements
As a general rule an issuer (or conduit borrower) cannot “profit” by earning a yield on
proceeds of a tax-exempt issue which is higher than the yield on the bonds.
Can you earn it? (“Yield Restriction”)
Can you keep it? (“Rebate” and applicable exemptions)
Specific rules govern calculations of yields, allocations, etc.
A bond issue needs to comply at the time of issuance (i.e., reasonable expectations) and
during the life of the issue (actual facts and deliberate actions).
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12. Post-Issuance Compliance Policies
IRS Form 8038
IRS Form 990, Schedule K
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13. Role of Bond Counsel
Unqualified Legal Opinion – but lawyers are not engineers, financial advisors,
accountants or experts in health care operations. So the assistance of qualified
professionals is critical, for example, in addressing:
501(c)(3) status (now including 501(r) as applicable).
Covenant compliance.
Satisfaction of “additional bonds” tests.
“Agreed upon procedures” for financial disclosure.
Allocation and accounting of private use.
Determination of useful lives of assets (IRC Section 147)
Arbitrage/rebate recordkeeping, analysis, reporting and returns
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14. Other Relevant Code Sections/Concepts
Public offering vs. private placement
Section 265 “Bank Qualification”
“TEFRA” public hearing and approvals
Information filings and returns (8038 Series)
Residential rental housing rules
Limitations on working capital financings
Fundraising and arbitrage/rebate implications
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15. SCOTT CRIST
Vice President, Public Finance, UMB
Scott Crist leads the UMB Healthcare Investment Banking Group. Over the course
of his tenure with UMB, Scott has worked with numerous colleges, hospitals and
other non-profit entities throughout the Midwest, with a specific emphasis on
publicly owned and not-for-profit community hospitals. Scott assists his clients in the
financing of large scale capital projects, ranging in scope from significant expansions
or renovations to new facility construction, utilizing tax exempt bond issues.
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16. 16
This communication is provided for informational purposes only. UMB Bank, n.a. and UMB Financial Corporation
are not liable for any errors, omissions, or misstatements. This is not an offer or solicitation for the purchase or
sale of any financial instrument, nor a solicitation to participate in any trading strategy, nor an official
confirmation of any transaction. The information is believed to be reliable, but we do not warrant its
completeness or accuracy. Past performance is no indication of future results. The numbers cited are for
illustrative purposes only. UMB Financial Corporation, its affiliates, and its employees are not in the business of
providing tax or legal advice. Any materials or tax‐related statements are not intended or written to be used,
and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Any such
taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
The opinions expressed in this email are those of the author and do not necessarily represent the opinions of
UMB or UMB Financial Corporation. Future results may vary. Products offered through Investment Banking are:
Not FDIC Insured, May Lose Value, Not Bank Guaranteed.
UMB Bank, n.a.
Investment Banking Division
1010 Grand Blvd
Kansas City, MO 64106
866.651.9262
Disclosure

17. Interest Rate Environment
Although tax exempt interest rates have increased from the historic lows we experienced
over the past few years, they are still very attractive from a historical perspective.
17
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
Interest rates from 1994 - Present
"A" Rated Revenue Bonds
10-year Maturity
Last 3.43%
High (11/21/94) 6.63%
Low (12/05/12) 2.48%
Average 4.40%
Source: Bloomberg

18. Bond Issuance
Many municipalities and 501(c)(3) organizations have taken advantage of these
historically low interest rates to finance much needed capital projects, and refinance
existing debt.
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Over the last ten years, we
have seen a heightened level
of tax exempt bond issuance
that corresponds to this period
of low interest rates.
Included in this data is the
increasing use of private
placements as a method of
issuing tax exempt bonds 0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
$inMillions
Tax Exempt Bond Issuance
2005 - 2013
New Money Refunding
Source: Bond Buyer

19. Private Placement
What is a Private Placement
A private placement involves the sale of tax exempt bonds directly to one or a few
institutional investors (typically banks), rather than offering the bonds to the public
through a public sale.
Because there is no public disclosure on the part of the Issuer during the private
placement process, the buyer of the bonds is required to represent that they are an
“accredited investor”, have conducted their own due diligence with regard to the
borrower, and intend to purchase the bonds for their own account and not for re-sale to
the public. The buyer must also represent that they understand they may not sell,
transfer, or otherwise dispose of the Bond without receiving similar representations from
a subsequent purchaser.
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20. Private Placement Trends
Over the past several years, there has been a growing trend among municipal and 501(c)(3)
organizations to issue tax exempt bonds on a private placement basis, rather than through the
public sale process.
Due to the private nature of these transactions, public data on the number of private placement
bond issues is difficult to obtain. However, industry estimates have put the volume of tax
exempt private placements for 2013 at $21.4 billion, which is up 690% from 2010*.
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0
5,000
10,000
15,000
20,000
25,000
2005 2006 2007 2008 2009 2010 2011 2012 2013
$inMillions
Tax Exempt Private Placements
* Source: Bond Buyer

21. Private Placement Trends
Two Reasons for Increased Private Placement Issuance
1.) Since 2009, as Letters of Credit have become more expensive for Issuers of variable-rate
debt - primarily due to bank downgrades and increased capital requirements for contingent
liabilities, many banks and Issuers have moved towards direct lending as an attractive
alternative.
2.) With commercial loan demand at an extended low point during the last several years, and
with investment yields near zero, many Banks are considering tax exempt loans with municipal
and 501(c)(3) organizations as an attractive way to generate income.
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0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
$inBillions
Commercial Loans Outstanding
2004 to present
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
3 Month Treasury Yields
1994 - present
Source: BloombergSource: Federal Reserve Bank of St. Louis

22. Private Placements
Advantages for Issuers
 Less expensive and time consuming than a public sale
 No disclosure required other than what the Lender requests
 No Official Statement prepared
 No bond rating required
 Lower underwriting and legal fees
 Greater flexibility with regard to structure and covenants to fit the needs of the individual
borrower
 Ability to lock in interest rates quickly and well in advance of when funds are needed
 Ability to utilize a draw note during construction to save interest expense for the
borrower
 Flexibility with regard to interest rate structure - including fixed, variable and re-setting
structures
 Greater flexibility with regard to prepayment provisions, financial covenants and
required reserves
 Monthly, quarterly, or semi-annual payment structures
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23. Private Placements
Example Transactions
Bond Refunding for a Large 501(c)(3) Organization in Omaha
 Outstanding tax exempt bonds with a call date in September 2015
 Client wanted to lock in an interest rate today to refund these bonds on their call date in
2015 without having to do an advance refunding
 UMB was able to lock in an attractive rate for the client along with savings of $1.3MM
Parking Garage Project for a Large City in Iowa
 City had a “AAA” rating with considerable experience issuing bonds in the public sale market
 As part of a larger development project, the City agreed to purchase a parking garage from
the Developer upon completion of construction.
 The Developer wanted the City’s financing commitment in place prior to beginning
construction
 Through a private placement, we were able to finalize the financing structure with the City,
along with the method to be used to determine the interest rate 18 months into the future
when the parking garage construction was completed.
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24. Private Placement
Typical Private Placement Terms
Types of Projects: New project financing, or refinancing of existing debt
Financing Size: $100K - $50MM
Financing Term: 1 – 15 years
Interest Rate: Fixed, Variable or Re-setting
Types of Security: Tax proceeds, Revenues, Mortgage, Guarantee Agreements or
Lease Purchase financing
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25. Private Placement
Issuance Process
Issuer: For 501(c)(3) organizations, the issuance of tax exempt bonds involves a
“conduit issuer” which is typically a political subdivision or municipal authority with the
authorization under state statutes and the Internal Revenue Code to issue tax exempt
bonds on behalf of 501(c)(3) organizations. As a conduit issuer, they have no liability for
the repayment of the bonds, and typically assign over any rights or obligations they may
have to a Trustee or the Lender.
Bond Counsel: A bond attorney will typically be engaged to draft the documents for the
transaction, and give their opinion that the bonds have been validly issued under state
statutes, and are tax exempt under the Internal Revenue Code.
Timetable: Depending upon the complexity of the transaction, the financing can usually
be completed within 6 – 10 weeks
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26. JASON W. BOMBECK, CPA
Partner, BKD
Jason, a member of the BKD National Not-for-Profit Group, has more
than 17 years of public accounting experience, specializing in the trust and
estate and exempt organization areas. He oversees the Nebraska practice’s
tax services provided to foundations, membership and social service
organizations, as well as higher education institutions. Jason is also involved
with tax preparation and review, request for tax-exempt status, consultation
regarding sales and use tax issues, unrelated business income, excess benefit
transaction and use of charitable planning techniques in fundraising.
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27. Tax Exempt Bonds
•Increased enforcement by IRS starting in 2012
•Targeted examinations based on information reported in Schedule K
•Increased correspondence audits
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28. Tax Exempt Bonds
Written post-issuance policies & procedures must be adopted prior to violation
Specify responsible official
Description of training provided to such responsible official
Frequency of compliance checks (at least annually)
Nature of compliance activities
Procedures used to identify & elevate violations
Procedures for record retention
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29. Tax Exempt Bonds
Post-issuance compliance
Cost of issuance limitation
Reallocation
Determining amounts of private business use
Disposals of bond-financed property
Arbitrage
Yield restriction requirements
Rebate requirements
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30. Definition of Private Business Use
Use of property by any person other than governmental unit
Excludes use of financed property as member of general public
Excludes use by other 501(c)(3) organizations that is not unrelated trade
or business use
Includes costs of issuance paid from proceeds
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31. Private Business Use Arrangements
Ownership
Leases
Management contracts (Safe Harbors Rev. Proc. 97-13)
Research agreements
Unrelated business income activities
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32. Tax Exempt Bonds
Post-issuance compliance
Have you adopted post-issuance policies?
Who do you include on your tax-exempt bond team?
Private business use calculations
Internal or external
Software utilization
Leases, management contracts
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33. IRS Form 990, Schedule K
IRS Form 990, Schedule K
Significant Sections on Schedule K
•Use of Proceeds
•Private Business Use
•Arbitrage
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34. Other Considerations
Forecast needed?
•Internal or external?
Debt service coverage
Covenants & definition
The information in BKD seminars is presented by BKD professionals, but applying specific information
to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor
before acting on any matters covered in these seminars.
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35. THANK YOU
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