NEW MARKETS TAX CREDITS - Jones Walker
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NEW MARKETS TAX CREDITS Introduction to NMTCs Presented By: Aileen S. Thomas – Jones Walker ABC’s of NMTCs Presented By: Jonathan R. Katz – Jones Walker © Copyright 2013—Jones Walker. All Rights Reserved. Further use of this work should be made with permission of the authors.
Transcript of NEW MARKETS TAX CREDITS - Jones Walker
UntitledABC’s of NMTCs
Presented By: Jonathan R. Katz – Jones Walker
© Copyright 2013—Jones Walker. All Rights Reserved. Further use of this work should be made with permission of the authors.
INTRODUCTION TO NEW MARKETS TAX
CREDITS
qualified projects or real estate businesses.
Investor
CDE
QALICB
qualified equity investments (QEI) in Community
Development Entities (CDE) that have received
NMTC allocation authority from either the CDFI
Fund or the Alabama Department of Commerce.
The CDE uses the proceeds of the QEI to provide a
qualified low income community investment –
usually in the form of a loan (QLICI) to qualified
active low income community businesses (QALICB).
At the end of the 7 year compliance period, the
QLICI is forgiven – thus creating a subsidy for the
QALICB.
QEI
QLICI
CREDITS
No CAP
$240 million of allocation authority
Administered by the Alabama Dept. of Commerce
$10 million CAP
50% tax credit
CREDITS
NMTC ALLOCATION PROCESS
Organizations apply to the CDFI Fund for certification as a “Community
Development Entity” (CDE)
CDEs apply for Federal NMTC allocation authority (this is a very
competitive process!)
Qualified CDEs may apply to Alabama Department of Commerce for
Alabama NMTC allocation authority
CREDITS
HOW CAN A PROJECT OBTAIN NMTCS?
Once a project sponsor has determined that the proposed project qualifies for
NMTCs, inquiry should be made to CDEs that have allocation authority.
Keep in mind that Allocatees look for projects with significant social impacts:
revitalization
environmentally sustainable projects
CREDITS
CHALLENGES
Leverage Lender Challenges
Post Closing Compliance Requirements
May limit use of other public sources of funds and financing programs
BENEFITS
12 18% project subsidy (after closing costs)
Can be used with other public sources of funds and financing programs
RESINALL PROJECT
Investor: Trustmark National Bank
Project: Construction of a new Hydrogenated Hydrocarbon Resin Unit at Resinall
Corp’s existing manufacturing facility to supply the increasing demand for
hydrogenated tackifier resins
Community Impact: Preserved 125 manufacturing jobs and created 10 20 new jobs
Closing: November 2011
Credits Used: $18M Federal NMTCs and $10M MS State NMTCs
This project was named the overall winner in the
Operating Business Category by The Novogradac
Community Development Foundation on October
18, 2012 at the New Markets Tax Credit Investors
Conference in New Orleans, LA
BTH QUITMAN TORREFACTION PLANT
CDEs: Enhanced Capital and MuniStrategies
Federal NMTC Investor: U.S. Bank
Project: Construction of Phase III of a torrefaction plant which convert
forest, sawmill and urban wood residuals and waste into
compacted, torrefied wood pellets to be co fired with coal in
electric power plants. Torrefied wood is recognized
internationally as a source of clean, green energy with long
term carbon neutrality.
Community Impact: Creation of jobs in rural low income community; creation of a
viable source of green energy.
Closing: June 2011
Credits Used: $16.25M Federal NMTCs and $10M MS State NMTCs
NEW ORLEANS MILITARY OF MARITIME
ACADEMY
Investor: Valley National Bank
Project: Renovation of historic buildings on a shuttered former military base for
a not for profit, co educational, college preparatory charter school.
Community Impact: Create an educational opportunity for local “at risk” students. Students
benefit from a superior education and receive specialized maritime job
training and character accountability.
CAPITAL AREA FOOD BANK PROJECT
CDE: Enhanced Capital
Investor: JPChase Morgan
Project: Construction of a new food distribution center.
Community Impact: The new food distribution center helps address the challenges of
reducing hunger and malnutrition in the Washington Metropolitan
Area and helps to drastically decrease food waste and inefficient
food distribution.
IRON HORSE PROJECT
Restaurant and the MS
Music Hall of Fame
located in a blighted
1906 and has been
created
$6M MS NMTCs and
Federal Historic Tax Credits
Federal NMTC Investor: Wells Fargo Bank
Project: Construction of an expansion to the rural hospital’s facilities
Community Impact: The expansion will benefit the health and welfare of the residents of
Neshoba County, MS, where 50.3% of all patients served are low
income persons. The expansion will also create 42 new high quality
permanent jobs and retain 354 positions.
Closing: October 2012
Credits Used: $22.8M Federal NMTCs and $10M MS State NMTCs
ABC’S OF NEW MARKETS TAX CREDITS
IT’S SIMPLE!
QEI = Qualified Equity Investment
This is the equity investment made to the CDE, the proceeds of which are used to fund the loan to or equity investment in the project
CDE = Community Development Entity
This is the entity that applies for (and may receive) NMTC allocation authority and often suballocates that allocation to a Sub CDE
Sub CDE = Subsidiary Community Development Entity
This is a subsidiary of the CDE that typically receives a QEI and makes a loan to or investment in the QALICB
QLICI = Qualified Low Income Community Investment
This is the loan to (or equity investment in) the project entity
QALICB = Qualified Active Low Income Community Business
This is the qualified project entity
Investor
CDE
QALICB
QEI
QLICI
QALICB REQUIREMENTS
Generally, the project entity (or division thereof) must satisfy a number of tests, including:
Partnership or Corporation
Gross Income Test 50% of entity’s gross income must be derived from active conduct of qualified business in a LIC.
Satisfied if TPP Test or Employee Services Test is satisfied by 50% instead of 40%.
Tangible Personal Property (TPP) Test 40% of the use of the tangible property of the entity (whether owned or leased) is within a LIC.
Employee Services Test 40% of the services performed for such entity by its employees are performed in a LIC.
If entity has no employees, entity must satisfy the TPP Test by 85%.
ABC’S OF NEW MARKETS TAX CREDITS
QALICB REQUIREMENTS
Poverty rate for such tract is at least 20%, or
If tract is located within metropolitan area, the median family income
(MFI) does not exceed 80% of the MFI of the State or metro area, or
If tract is not located within metropolitan area, the MFI of tract must not
exceed 80% of state MFI.
Rely on CDFI Fund’s Information and Mapping System at www.cdfi.gov (CDE log on
required).
If you do not have access to the CDFI Fund’s mapping system, generally accurate
information may be obtained from Novogradac’s web based mapping system at:
www.novoco.com/new_markets/resources/ct/
IF PROJECT IS NOT LOCATED IN A LIC, ELIGIBILITY IS DIFFICULT BUT NOT
IMPOSSIBLE. MAY BE ABLE TO USE THE LOW INCOME TARGETED
POPULATION TEST.
QALICB REQUIREMENTS
Additional Requirements:
Nonqualified Property Test Less than 5% of the property of the entity is attributable to property like debt, stock, partnership interests, options, futures…
Reasonable amounts of working capital are allowed, including loan proceeds expended for construction of real property within 12 months of the loan.
Collectibles Test Less than 5% of the property of the entity is attributable to collectibles such as antiques, rugs, art, metals, gems, stamps or coins (unless primarily held for sale to customers in the ordinary course of business).
Nonqualified Businesses Liquor Store, Massage Parlor, Golf Course, Country Club, Hot Tub Facility, Tanning Salon, Race Track or other Gambling Facility, Residential Real Property or Farming.
Alabama – Landfill or Dump
QALICB REQUIREMENTS
What is Residential Real Estate?
Any building or structure in which 80% or more of the gross rental income is from dwelling units.
Gross rental income from dwelling units includes other amounts received with respect to associated facilities. (i.e., a parking lot, pool or other recreational areas)
For sale housing generally allowed.
Real Estate, even if commercial, must have “substantial improvements”.
WHAT IF BUSINESS FAILS QALICB TEST? ISOLATE PROJECT, OR
MEET QALICB REQUIREMENTS USING A “PORTION OF THE BUSINESS” THAT WOULD QUALIFY IF IT WAS A SEPARATELY INCORPORATED BUSINESS.
Investment
Debt Service
Sub CDE
Debt Service
Sub CDE
$5.4M – Total
$620k – State CDE Fees (5% of QEI + $15/yr)
$350k – Closing Costs
ILLUSTRATION
Price of Federal and State Tax Credits
CDE Fees (Upfront vs. Deferred)
Separate State and Federal Investors
CDE/Investor Relationship
Source of Leverage Relationship between leverage sources and investor
Multiple CDEs Annual audit and tax fees increase ($15k/yr per CDE)
Closing costs may increase
Tax Cancellation of Debt
GETTING STARTED
Identify Available Sources NMTC Compliance/Benefits
Regulatory Requirements (LIC, Qualified Business, Etc.)
Community Benefits (Highly Distressed, Jobs, Renewable, Rural, Fresh Foods...)
Determine Preferred Structure Timing
External Items: Identify CDE Identify Investor Identify Bridge/Leverage Lender
ABC’S OF NEW MARKETS TAX CREDITS
QUESTIONS
What types of deals are CDEs and Investors looking for?
When should I start organizing the NMTC players?
What professionals do I need?
What are the post closing compliance requirements?
What issues arise with commercial leverage lenders?
What incentives can I “twin” with NMTCs?
Presented By: Jonathan R. Katz – Jones Walker
© Copyright 2013—Jones Walker. All Rights Reserved. Further use of this work should be made with permission of the authors.
INTRODUCTION TO NEW MARKETS TAX
CREDITS
qualified projects or real estate businesses.
Investor
CDE
QALICB
qualified equity investments (QEI) in Community
Development Entities (CDE) that have received
NMTC allocation authority from either the CDFI
Fund or the Alabama Department of Commerce.
The CDE uses the proceeds of the QEI to provide a
qualified low income community investment –
usually in the form of a loan (QLICI) to qualified
active low income community businesses (QALICB).
At the end of the 7 year compliance period, the
QLICI is forgiven – thus creating a subsidy for the
QALICB.
QEI
QLICI
CREDITS
No CAP
$240 million of allocation authority
Administered by the Alabama Dept. of Commerce
$10 million CAP
50% tax credit
CREDITS
NMTC ALLOCATION PROCESS
Organizations apply to the CDFI Fund for certification as a “Community
Development Entity” (CDE)
CDEs apply for Federal NMTC allocation authority (this is a very
competitive process!)
Qualified CDEs may apply to Alabama Department of Commerce for
Alabama NMTC allocation authority
CREDITS
HOW CAN A PROJECT OBTAIN NMTCS?
Once a project sponsor has determined that the proposed project qualifies for
NMTCs, inquiry should be made to CDEs that have allocation authority.
Keep in mind that Allocatees look for projects with significant social impacts:
revitalization
environmentally sustainable projects
CREDITS
CHALLENGES
Leverage Lender Challenges
Post Closing Compliance Requirements
May limit use of other public sources of funds and financing programs
BENEFITS
12 18% project subsidy (after closing costs)
Can be used with other public sources of funds and financing programs
RESINALL PROJECT
Investor: Trustmark National Bank
Project: Construction of a new Hydrogenated Hydrocarbon Resin Unit at Resinall
Corp’s existing manufacturing facility to supply the increasing demand for
hydrogenated tackifier resins
Community Impact: Preserved 125 manufacturing jobs and created 10 20 new jobs
Closing: November 2011
Credits Used: $18M Federal NMTCs and $10M MS State NMTCs
This project was named the overall winner in the
Operating Business Category by The Novogradac
Community Development Foundation on October
18, 2012 at the New Markets Tax Credit Investors
Conference in New Orleans, LA
BTH QUITMAN TORREFACTION PLANT
CDEs: Enhanced Capital and MuniStrategies
Federal NMTC Investor: U.S. Bank
Project: Construction of Phase III of a torrefaction plant which convert
forest, sawmill and urban wood residuals and waste into
compacted, torrefied wood pellets to be co fired with coal in
electric power plants. Torrefied wood is recognized
internationally as a source of clean, green energy with long
term carbon neutrality.
Community Impact: Creation of jobs in rural low income community; creation of a
viable source of green energy.
Closing: June 2011
Credits Used: $16.25M Federal NMTCs and $10M MS State NMTCs
NEW ORLEANS MILITARY OF MARITIME
ACADEMY
Investor: Valley National Bank
Project: Renovation of historic buildings on a shuttered former military base for
a not for profit, co educational, college preparatory charter school.
Community Impact: Create an educational opportunity for local “at risk” students. Students
benefit from a superior education and receive specialized maritime job
training and character accountability.
CAPITAL AREA FOOD BANK PROJECT
CDE: Enhanced Capital
Investor: JPChase Morgan
Project: Construction of a new food distribution center.
Community Impact: The new food distribution center helps address the challenges of
reducing hunger and malnutrition in the Washington Metropolitan
Area and helps to drastically decrease food waste and inefficient
food distribution.
IRON HORSE PROJECT
Restaurant and the MS
Music Hall of Fame
located in a blighted
1906 and has been
created
$6M MS NMTCs and
Federal Historic Tax Credits
Federal NMTC Investor: Wells Fargo Bank
Project: Construction of an expansion to the rural hospital’s facilities
Community Impact: The expansion will benefit the health and welfare of the residents of
Neshoba County, MS, where 50.3% of all patients served are low
income persons. The expansion will also create 42 new high quality
permanent jobs and retain 354 positions.
Closing: October 2012
Credits Used: $22.8M Federal NMTCs and $10M MS State NMTCs
ABC’S OF NEW MARKETS TAX CREDITS
IT’S SIMPLE!
QEI = Qualified Equity Investment
This is the equity investment made to the CDE, the proceeds of which are used to fund the loan to or equity investment in the project
CDE = Community Development Entity
This is the entity that applies for (and may receive) NMTC allocation authority and often suballocates that allocation to a Sub CDE
Sub CDE = Subsidiary Community Development Entity
This is a subsidiary of the CDE that typically receives a QEI and makes a loan to or investment in the QALICB
QLICI = Qualified Low Income Community Investment
This is the loan to (or equity investment in) the project entity
QALICB = Qualified Active Low Income Community Business
This is the qualified project entity
Investor
CDE
QALICB
QEI
QLICI
QALICB REQUIREMENTS
Generally, the project entity (or division thereof) must satisfy a number of tests, including:
Partnership or Corporation
Gross Income Test 50% of entity’s gross income must be derived from active conduct of qualified business in a LIC.
Satisfied if TPP Test or Employee Services Test is satisfied by 50% instead of 40%.
Tangible Personal Property (TPP) Test 40% of the use of the tangible property of the entity (whether owned or leased) is within a LIC.
Employee Services Test 40% of the services performed for such entity by its employees are performed in a LIC.
If entity has no employees, entity must satisfy the TPP Test by 85%.
ABC’S OF NEW MARKETS TAX CREDITS
QALICB REQUIREMENTS
Poverty rate for such tract is at least 20%, or
If tract is located within metropolitan area, the median family income
(MFI) does not exceed 80% of the MFI of the State or metro area, or
If tract is not located within metropolitan area, the MFI of tract must not
exceed 80% of state MFI.
Rely on CDFI Fund’s Information and Mapping System at www.cdfi.gov (CDE log on
required).
If you do not have access to the CDFI Fund’s mapping system, generally accurate
information may be obtained from Novogradac’s web based mapping system at:
www.novoco.com/new_markets/resources/ct/
IF PROJECT IS NOT LOCATED IN A LIC, ELIGIBILITY IS DIFFICULT BUT NOT
IMPOSSIBLE. MAY BE ABLE TO USE THE LOW INCOME TARGETED
POPULATION TEST.
QALICB REQUIREMENTS
Additional Requirements:
Nonqualified Property Test Less than 5% of the property of the entity is attributable to property like debt, stock, partnership interests, options, futures…
Reasonable amounts of working capital are allowed, including loan proceeds expended for construction of real property within 12 months of the loan.
Collectibles Test Less than 5% of the property of the entity is attributable to collectibles such as antiques, rugs, art, metals, gems, stamps or coins (unless primarily held for sale to customers in the ordinary course of business).
Nonqualified Businesses Liquor Store, Massage Parlor, Golf Course, Country Club, Hot Tub Facility, Tanning Salon, Race Track or other Gambling Facility, Residential Real Property or Farming.
Alabama – Landfill or Dump
QALICB REQUIREMENTS
What is Residential Real Estate?
Any building or structure in which 80% or more of the gross rental income is from dwelling units.
Gross rental income from dwelling units includes other amounts received with respect to associated facilities. (i.e., a parking lot, pool or other recreational areas)
For sale housing generally allowed.
Real Estate, even if commercial, must have “substantial improvements”.
WHAT IF BUSINESS FAILS QALICB TEST? ISOLATE PROJECT, OR
MEET QALICB REQUIREMENTS USING A “PORTION OF THE BUSINESS” THAT WOULD QUALIFY IF IT WAS A SEPARATELY INCORPORATED BUSINESS.
Investment
Debt Service
Sub CDE
Debt Service
Sub CDE
$5.4M – Total
$620k – State CDE Fees (5% of QEI + $15/yr)
$350k – Closing Costs
ILLUSTRATION
Price of Federal and State Tax Credits
CDE Fees (Upfront vs. Deferred)
Separate State and Federal Investors
CDE/Investor Relationship
Source of Leverage Relationship between leverage sources and investor
Multiple CDEs Annual audit and tax fees increase ($15k/yr per CDE)
Closing costs may increase
Tax Cancellation of Debt
GETTING STARTED
Identify Available Sources NMTC Compliance/Benefits
Regulatory Requirements (LIC, Qualified Business, Etc.)
Community Benefits (Highly Distressed, Jobs, Renewable, Rural, Fresh Foods...)
Determine Preferred Structure Timing
External Items: Identify CDE Identify Investor Identify Bridge/Leverage Lender
ABC’S OF NEW MARKETS TAX CREDITS
QUESTIONS
What types of deals are CDEs and Investors looking for?
When should I start organizing the NMTC players?
What professionals do I need?
What are the post closing compliance requirements?
What issues arise with commercial leverage lenders?
What incentives can I “twin” with NMTCs?
