Combining Historic Tax Credits and New Markets Tax

Combining Historic Tax Credits and New Markets Tax Credits National Historic Tax Credit Conference - 2007 10: 15 -11: 15 am Thursday, November 8, 2007

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 lowincome 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

New Markets Tax Credits How They Work Tax Credit Investor CDE (Allocatee) Suballocation of Tax Credit Authority QEI ($100) Tax Credits over 7 years ($39) and Cash Return CDE (Subsidiary) Loan/Equity QLICI (85%+ of QEI) Property Owner (QALICB)

Typical HTC Structure (Single Entity) Tax Credit Investor LLC Managing Member (Developer Affiliate). 01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Historic Tax Credit Equity 99. 99% Credits, Profits & Losses and Cash Flow Tax Credit, LLC (Property Owner) Loan Proceeds Debt Service Payments Construction/ Perm Lender Tax Credit Investor Dev. Fee Rental Payments Tenants Developer

Legal Considerations Pros • $$$$ • High percentage of historic buildings in Low-Income Communities • Similarity of basic structure • $$$$

Legal Considerations Cons • “Related Party” requirements limit equity • Operational limitations – Subtenant mix – Mixed-use • Additional guaranties • Different compliance periods • Lack of guidance on making equity QLICIs – CDFI Fund – IRS • Increased complexity

Master Tenant/NMTC Structure Managing Member (Developer Affiliate) Developer Equity 99. 99% Credits, Profits & Losses, Fees and Cash Flow Landlord, LLC QALICB (Property Owner/Lessor) Loan Proceeds Debt Service Payments Construction/ Perm Lender Non-Member Manager . 01% Credits, Profits & Losses, Fees and Cash Flow Pass-through of Historic Tax Credits & Share of Residual QLICI Lease Payment & Equity Investment Tax. CDE Credit Investor LLC QEI Tax Credit Investor Historic QLICI 100% Credits, Tax Credit Profits & Losses, Equity and Cash Flow Single Master. Member Tenant, LLC (Disregarded (Master Tenant) Entity) Rental Payments Sub-Tenants/ End Users

Dia: Beacon, New York

Thank you Merrill Hoopengardner, Esq. 401 9 th Street, NW Suite 900 Washington, DC 20004 202. 585. 8169 202. 585. 8080 (Fax) mhoopengardner@nixonpeabody. com