New Markets Tax Credits Revisited Origins and Current

New Markets Tax Credits Revisited: Origins and Current Developments May 6, 2008 Herbert F. Stevens, Esq. Gregory N. Doran, Esq. 1

Investors NMTC CDE NMTC Qualified Equity Investment Qualified Low. Income Community Investment You’re a CDE Certification CDE Allocation Application Community Development Entity NMTC CDFI Fund (Treasury Dept. ) (“Substantially ALL”) Qualified Active Low-Income Community Qualified Active Low. Income Community Business 2

Program Overview • Enacted on December 21, 2000 • Part of the Community Renewal Tax Relief Act of 2000 • Creates a tax credit for qualified equity investments (“QEIs”) in Community Development Entities (“CDEs”) 3

Process Overview Step 1: Step 2: Step 3: Step 4: Step 5: Entities apply to the Fund for CDE certification Entities apply to the Fund for an NMTC allocation The Fund competitively selects CDEs to receive NMTC allocations CDEs use allocations to offer NMTCs to investors for cash CDEs use proceeds to make Qualified Low. Income Community Investments (“QLICIs”) 4

Amount of NMTC Investment Authority Available 2001 2002 2003 2004 2005 2006 2007 2008 $ $ $ $ 1. 0 billion 1. 5 billion 2. 0 billion 3. 5 billion Total $ 18. 5 billion (not including $1 billion GO Zone) Unallocated investment authority may be carried over from year to year until 2014. 5

Credit Amount • • Equals 39% of amount of original investment Invest $100 and Receive $39 Tax Credit taken over a 7 -year period Credit rate: – 5% in each of the first 3 years – 6% in each of the final 4 years 6

CDEs • Definition – Community Development Entities (CDEs) must: • • Have a primary mission of community development; Maintain accountability to residents of low-income communities through their representation on any governing board or advisory board; Be certified by the CDFI Fund Be a domestic corporation or partnership (including LLCs) 7

Substantially All & QEIs • Qualified Equity Investment (QEI) – Requirements: • Investment in a CDE; • Either stock or a capital interest; • Acquired at original issue solely in exchange for cash; • Substantially all of such cash must be used to make Qualified Low-Income Community Investments (QLICIs); and • CDE must designate the investment as a QEI and report it to the CDFI Fund. 8

Substantially All & QEIs • Timing of Investment – Investment must be made in the CDE within 5 years of allocation of NMTCs. – Once the CDE receives cash from an equity investment, it has 12 months to make a qualified low-income community investment (QLICI) with the equity. 9

Substantially All & QEIs • Substantially All Test – 85% of Qualified Equity Investments (QEIs), received by the CDE, must be invested in Qualified Active Low. Income Businesses (QALICBs) to be considered Qualified Low-Income Community Investments (QLICIs). – Continuously invested 10

QLICIs • Qualified Low-Income Community Investment – Any capital or equity investment in, or loan to, any QALICB in a Low-Income Community; – The purchase by a CDE (the NMTC CDE) from another CDE of any loan that is a QLICI; – Financial counseling and other services to (e. g. , advice regarding organization and operation) to businesses located in, and residents of, low-income communities; and – Any equity investment in, or loan to, any CDE (second CDE) by a CDE (primary CDE), to the extent the second CDE uses the proceeds in a certain manner. 11

QALICBs • Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business that meets all 5 requirements: – – – Gross Income Tangible Property Services Performed Collectibles Nonqualified Financial Property 12

QALICBs • Qualified Businesses – Rental real estate • • • Cannot be IRC § 168(e)(2)(A) “residential rental property” (building which derives 80% or more of gross rental income from dwelling units) Substantial Improvements must be located on property No lessee can be a country club, golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility or liquor store 13

QALICBs • Qualified Businesses – Excluded businesses: • • • A business which develops or holds intangibles for sale or license A business which operates: a country club, golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility or liquor store Certain farming businesses 14

Low-Income Communities • Low Income Communities are census tracts where: – Poverty rate exceeds 20% or – Median income is below 80% of the greater of: Statewide median income or • Metropolitan area median income – “Targeted populations” – Census tracts with less than 2, 000 people that is contiguous to a low-income community and within an empowerment zone – High migration rural counties (use 85% instead of 80%) • 15

NMTC Structures 16

ABC Community Development Fund Non-Leveraged - Closing NMTC Investor QEI $10, 000 ABC Sponsor Managing Member 0. 01% Investor Member 99. 99% Sponsor Fees ABC CDE, LLC $500, 000 Loan Loss Reserve $500, 000 $9, 000 Loan QALICB Interest 5. 5% 7 years 17

ABC Community Development Fund Non-Leveraged - Compliance Period NMTC Investor $3, 900, 000 Tax Credits $3, 325, 000 Cash Distributions Operating Expenses ABC CDE, LLC $140, 000, or 20, 000 per year Interest Payments QALICB $3, 465, 000, or $495, 000 per year 18

ABC Community Development Fund Non Leveraged - Termination NMTC Investor $9, 500, 000 Cash Distributions ABC CDE, LLC Release of Loan Loss Reserves $500, 000 $9, 000 Principal Payment QALICB 19

ABC Community Development Fund Leveraged - Closing NMTC Investor Economic Lender $3, 000 Equity Contribution $7, 000 Loan Leverage Fund Investor Member 99. 99% QEI $10, 000 Interest 6. 5% Investor Member 7 years 99. 99% ABC Sponsor Managing Member 0. 01% $2, 000 Loan (B Loan) ABC CDE, LLC $500, 000 Loan Loss Reserve $500, 000 $7, 000 Loan (A Loan) Interest 6. 5% Interest 1% 40 years Sponsor Fees QALICB 7 years 20

ABC Community Development Fund Leveraged - Compliance Period NMTC Investor $3, 900, 000 Tax Credits Economic Lender Leverage Fund $3, 185, 000 Cash Distributions $3, 185, 000 Interest Payments Operating Expenses ABC CDE, LLC $140, 000, or 20, 000 per year Loan A Interest Payments $140, 000 Interest Payments (B Loan) QALICB $3, 185, 000, or 455, 000 per year 21

ABC Community Development Fund Leveraged - Termination NMTC Investor $300, 000 Cash Distribution ABC Sponsor $2, 000 B Loan $200, 000 Cash Distribution Economic Lender Leverage Fund $7, 300, 000 Cash Distributions ABC CDE, LLC $7, 000 Payoff of Loan Release of Loan Loss Reserves $500, 000 $7, 000 Payoff of A Loan QALICB 22

Recapture • Time period for recapture – Subject to recapture for 7 years after equity investment is made in CDE • Amount of recapture is equal to the sum of: – NMTCs allowed for all prior taxable years; and – Interest at the IRS underpayment rate. – This amount is referred to as the “credit recapture amount. ” 23

Recapture • Recapture is triggered if: – CDE ceases to be a qualified CDE; or – Equity investment proceeds no longer satisfy the Substantially All requirement (i. e. , less than 85% are used for QLICIs); or – Equity investment is redeemed or cashed out by CDE. • These events are referred to as “recapture events. ” 24

Require Additional Information? Herbert F. Stevens Gregory N. Doran Nixon Peabody LLP 202 -585 -8266 gdoran@nixonpeabody. com To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 25