Using Historic Tax Credits in New York Combining HTCs and NMTCs Wednesday, June 24, 2009.

Using Historic Tax Credits in New York

Combining HTCs and NMTCs

Wednesday, June 24, 2009

New Markets Tax Credit Fundamentals

NMTC Synopsis

A federal tax credit available to those that provide equity (QEIs) to certain certified community development entities (CDEs) that in turn lend or invest (QLICIs) in qualified businesses (QALICBs) located in low-income communities (LICs).

New Markets Tax Credits

What is a Qualified Business?

• Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business; must meet requirements regarding gross income, tangible property, services performed, collectibles, and nonqualified financial property

• No financing of residential rental property

– Mixed use okay

• Restrictions on certain types of business operations and tenants

– E.g. massage parlor, hot tub facility, liquor store, gambling facility


What is a Low-Income Community?

• Generally, a census tract where

– The poverty rate is at least 20%, or

– The median family income is 80% or less of either statewide median family income, or the greater of statewide or metropolitan median family incomes.

• Special rules for “Targeted Populations,” low population areas, and high migration rural counties

•Go to: www.cdfifund.gov and click on “NMTC” tab


What is a CDE?

• A partnership or corporation who:

– Has a primary mission of community development;

– Maintains accountability to residents of low-income communities through their representation on any governing board or advisory board; and

– Is certified by the CDFI Fund division of the Treasury

• CDEs participate in national competition for allocations of NMTC authority

• Confirm your project qualifies

– Low-income community

– Additional “distress” criteria

• Reach out to CDEs who

– Specialize in financing historic rehabilitation

– Target allocation to your geographical area (city/state or urban/rural)

– Prefer your tenant mix (retail, community facilities, etc.)


Finding an Allocation


How They Work

Tax Credit Investor

CDE (Subsidiary)

QEI ($100)

Tax Credits over 7 years ($39) and Cash Return

Property Owner (QALICB)

Suballocation of Tax Credit Authority

Loan/Equity QLICI (85%+ of QEI)

CDE (Allocatee)

Typical HTC Structure (Single Entity)

TenantsTenants

RentalPayments

Tax Credit Investor LLC


Construction/Perm Lender


Managing Member(Developer Affiliate)


HistoricTax Credit

Equity

99.99% Credits, Profits & Losses and Cash Flow

LoanProceeds

DebtService

Payments

Tax Credit, LLC(Property Owner)

Tax Credit, LLC(Property Owner)

Tax Credit InvestorTax Credit Investor

.01% Credits, Profits & Losses, Fees and

Cash Flow

DeveloperEquity

DeveloperDeveloperDev.Fee

Sample Transaction

Calculating the HTC Equity

Qualifying Rehab Expenditures 24,060,799

Credit Rate 20.00%

Total Calculated Credit 4,812,160

Tax Credit Investor Allocation 99.99%

Total Credit to Investors 4,811,679

Credit Price Per Each $1 of Credit 0.98

Equity Contributions by Investors 4,727,474

Sample Transaction

Calculating the NMTC Equity

Gross HTC Equity 5,252,800

Credit Rate 39.00%

Total Calculated NMTC Credit 2,048,592

Iterative Effect 124.21%

Total Credit to Investors 2,544,556

Price Per Each $1 of NMTC Credit 0.65

Add’l Equity Contributions by Investors 1,653,961

Key Business Issues

• Pricing (e.g. $.9825 vs. $1.24+)

• Equity Pay-In Schedule (same or faster)

• Exit Strategy (unwind may be delayed 2-3 years)

– Put Option

– Call Option

Key Business Issues cont’d

• Guarantees (expanded – negotiable; adjuster gross up)

• Reserves (no change)

• Cash Flow Participation (3% industry standard)

• Operational limitations (subtenant mix)

Master Tenant/NMTC Structure

Sub-Tenants/End Users

Sub-Tenants/End Users

RentalPayments







100% Credits, Profits & Losses, and Cash Flow

LoanProceeds

DebtService

Payments

.01% Credits, Profits & Losses,

Fees andCash Flow

DeveloperEquity

HistoricTax Credit

Equity

Master Tenant, LLC(Master Tenant)

Master Tenant, LLC(Master Tenant)

Landlord, LLC(Property Owner/Lessor)

Landlord, LLC(Property Owner/Lessor)

99.99% Credits, Profits & Losses, Fees and Cash Flow

Pass-through of Historic Tax Credits & Share of Residual

Lease Payment &Equity Investment

Tax Credit Investor

Tax Credit InvestorCDECDE

QLICI

Single Member LLC(Disregarded Entity)

Single Member LLC(Disregarded Entity)

Non-Member Manager

QALICBQALICB

QLICI

Tax Credit Investor

Tax Credit Investor

QEI

Thank you

Merrill Hoopengardner, Esq.

401 9th Street, NWSuite 900Washington, DC 20004

202.585.8169202.585.8080 (Fax)

[email protected]

Using Historic Tax Credits in New York Combining HTCs and NMTCs Wednesday, June 24, 2009.

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