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Springfield HTC WorkshopMay 6, 2011

Jackie R. WinchesterVice President – Community Development Advisor

PNC Community Development Banking(614) 463-8109

jackie.winchester@pnc.com

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Banking Perspective of Historic Tax Credits

Commitment to Fostering Community and Economic Development

Help the Bank meet its Community Reinvestment Act Requirements

Profit Motive

“It just Makes Sense”- Leverage other private dollars - enhances property

values- Creates affordable and market rate housing- Augments revenues for federal, state and local

government

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Project Structure/What the Developer Needs

GAP Financing

Part II certificate showing readiness to start construction

Additional equity equaling 5% - 10% of project costs

Complete development budget for the project

A forward commitment on the permanent mortgage is not required but is preferred

Developer must show experience in rehabilitation construction and have acceptable credit history

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Evaluation Process/Determining Feasibility

Size of Allocation: The PNCCDC will consider both small investments and large investments, $500,000 - $20,000,000.

Debt Coverage*: Minimum of 1.20. * Depending on type of project

Deferred Development Fee paid out of cash flow prior to the ending of the 5-year compliance period is evaluated.

Environmental Assessment: Required

Term of Outstanding Debt: If a portion of the funding is raised through debt, the term of the loan must not be less than 5 years (tax credit compliance period).

Reporting: Annual tax returns (1065 & K-1) and annual financial statements.

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Evaluation Process/Determining Feasibility (Cont.)

Project must meet the community development definition: Community development is defined as activities which primarily support affordable housing, and community services which are targeted at low-to-moderate income individuals or which promote economic development through financing of small businesses and farms or which revitalize or stabilize low-to-moderate income geographies.

CRA Requirements: Investments consistent with the requirement under the Community Reinvestment Act;- The innovativeness of the project- Responsiveness to credit and community development needs- Other economic and community development spin off and

market impact

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Calculating the Historic Preservation Tax Credit

Federal Credit 20% of a project’s qualifying rehabilitation expenditures (QRE’s)

State of Ohio Credit 25% of QRE and is a refundable tax credit. New legislation allows for the special allocation of the credit.

10% Federal Credit For restoring older buildings that predate 1936. This is a non-contributing structure by the department of interior.

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Calculating the Historic Preservation Tax Credit

Acceptable- Hard construction Cost for

Rehabilitation- Architect’s Fees- Construction Period

Interest Allocated to the Rehabilitation

- Development Fees Allocated to the Rehabilitation

- Environmental Testing & Remediation

- Properly Allocable Legal Expense

- Historic Consultants- Insurance & Taxes During

Construction

Unacceptable- Land- Acquisition Costs- Site Improvements- Syndication Expenses- Personal Property, e.g.,

Furniture & Equipment- Financing Fees (non-

construction)- Marketing Costs

General Examples of Acceptable and Unacceptable Cost for

Historic Basis Purposes

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Pricing of Historic Tax Credits

Depends on the following factors:- Developer strength- Investment size- Capital contribution pay-in schedule- Structure of return components- Local market dynamics

Example: $1 million in Qualified Rehabilitation Expenditures X 20% = Your Credit or $200,000. NCCDC with a 99% partnership interest as a limited partner will receive$198,000 in credits. The market is approximately 85 - 95 cents of the dollar. At 90 cents the GP will receive $178,200 for the credits.

State Credit Calculation: $250,000 x 99% = $247,500 x $.60 = $148,500.

Total investment for Federal and State: $326,700.

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Syndication Structuring

Limited Partnership/Limited Liability Company

Placed in Service: The appropriate work has been completed which allows for occupancy of either the entire building, or some identified portion of the building.

Project Completion Date Timing of Pay-ins and Investment Horizon

- Capital ContributionsCan begin as early as construction startCan come in as late as near placement

Investment Horizon- Can begin as early as construction start- Can come in as late as near placement

Developerowns 1%

Investorowns 99%

Pass-throughEntity

owns

Land and Buildings

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Guarantee Requirements

Historic Tax Credit guarantee

Construction completion guarantee

Operating deficit guarantee equaling six months of operating expenses and debt service coverage

Development Fee

Reserve Requirements- Minimum building reserves set by the first mortgage

requirements- Operating reserves equal to six months of operating

expenses and debt service

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New Markets Tax Credits

Fundamentals

NMTC SynopsisA federal tax credit available to those that provide equity to certain certified entities that in turn lend or invest in businesses (including non-profits) located in low-income communities.

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How They Work

QALICB* CDE

CDFI

Investor

Allocation

Qualified Equity

InvestmentRepayments

* Qualified Low Income Community Businesses** Qualified Low income Community Investments

QLICIs **Tax

Credits & Return

New Markets Tax Credits

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New Markets Tax Credits

When is Rehabilitating Real Estate Qualified?

Developing or renting non-residential real estate is qualified.

Financing the developing of residential real estate (including multi-family) is not qualified.

Lending or investing in developers of residential real estate may be qualified.

Note: Residential real estate is defined as “any building or structure if 80% or more of the gross rental income from

such building or structure is rental income from dwelling units.”

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New Markets Tax Credits

Recapture

Potential recapture for 7-year period from the date of investment in a CDE.

Occurs if:

- The entity ceases to be a CDE; or- At least 85% of the proceeds of the

investment cease to be invested in QLICIs (drops to 75% in year seven); or

- The investment is redeemed.

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Tax Issues

Profit Motive- Economic Profit Independent of Tax Benefits- Cash Flow Distribution- CRA Supporting Economic Participation

Exit Strategies/Investor Buyout Strategy- Fair Market Value Calculations- Put and Call Provisions

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Due Diligence Items/Checklist

Existing Operating Agreement Certified Copy of Articles of

Organization and all amendments

Survey Plans and Specifications Building Permit Availability of Utilities Letters Deed Owner’s Title Policy Notice of Commencement General Contractor Architect Corporate Resolutions Certificate of Good Standing Loan Documents UCC, tax lien search Litigation search Environmental Report

Insurance Certificates Appraisal Initial Construction Budget Zoning Letter Financial Projections Financial Statement(s) of

Principals/Guarantors Federal HTC Part I & II

application Local Approval State Part I Approval Federal and State Part III Commitment Letter Local Counsel Opinion Tax Opinion Development Agreement Unconditional Guaranty Estoppel Letter from Lender(s)

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Common Pitfalls for First-Time Users of the Federal Historic Tax Credits

Having inadequate contingency in the development budget

Presenting final drawings and commencing construction prior to receiving Part II

Allowing the general contractor to value engineer without regard to NPS standards

Using third-party consultants inefficiently

Delaying contact with potential investors

Coordinating equity with debt