US Bancorp Community Development Corporation Historic and New
US Bancorp Community Development Corporation Historic and New Markets Tax Credits for the Armory: Investor Reflections (or lack thereof) Robert Wasserman Western, Southern and GO Zone Region Manager New Markets Tax Credit and Historic Tax Credit Investments (213) 615 -6647 robert. wasserman@usbank. com 1
USB CDC • Created in mid 1990 s • Subsidiary of US Bancorp • Primarily equity investors whose return is a stream of tax credits. Yields are computed in after-tax returns. • Headquartered in St. Louis with offices in Los Angeles, KC and Denver • Two divisions – LIHTC (Low-Income Housing Tax Credits) – New Markets Tax Credits (NMTC) and Historic Tax Credits (HTC) • Mission-oriented – All credit memos include a community impact section • VOLUME: – Received $135 mm in NMTC allocation in June 2006. All earmarked for or deployed in projects – Over 140 NMTC transactions; Average investment is $6 -20 million – National investor outside of footprint – Ability to do leveraged and non-leveraged transactions – Over $2 billion in total development costs; Deal size: $5 -60 mm – HTC: Active, national investor with over 30 investments in the past 2 years. – LIHTC: Footprint investor. Both a fund investor and direct investor Approximately $400 million in equity invested per annum. 2
Historic-NMTC Real Estate Transaction Investments • Office • Retail • Mixed-use with Housing – 20%/80% Requirement • Entertainment/Theater • Hotel • Community Facilities 3
Why would US Bank invest in the Armory? • Mission Oriented – Community Involvement and Commitment to Arts and Culture – Invested in three historic theaters • • Portland Armory Atlas Theater, Washington DC Fox Theater, Spokane, Washington Currently evaluating two more historic theaters • Broaden our involvement in the markets we serve – Ability to serve our core banking business • Profit – All investors have return requirements and this was no different than any other deal – However, our goal is to invest in projects that sink the subsidy into the project – View our return in the form of tax credits, tax losses, cash return (priority return) and put • Here we isolated each one of the benefits and analyzed the risk and the determined an amount of equity 4
NMTC requirements imposed on the Armory and the CDE • Recapture – Redemption Test • CDE cannot distribute investment capital to the Investment Fund or the Investor – We pre-funded QEIs and if there was a construction bust, our money would have to be deployed into another project • Receive reports from the CDE and annual testing by the accountants – Substantially-all Test • Up to 85% of the investment must deployed at all times after the first 12 months of the investment (and not including any re-investment situations) – We pre-funded QEIs so we were needed to ensure that the money would be deployed within 12 months – Risk: Construction bust or delay – Solution: Find another project or sink the money into the project prematurely so long as the leveraged debt is in place • Receive reports from the CDE and annual testing by the accountants – CDE Status • CDE is ultimately responsible for its status 5
Primary concerns for the Armory • Structure and Risk – Armory required flexibility • Armory 1 – HTC investment passed through the structure – HTC bridged by USBCDC • Armory 2 – HTC Investment was outside of the structure – Uncertain costs • Mitigated by experienced developer, GC, guarantees – Uncertain operations • Mitigated by the team, reserves, guarantees – Uncertain exit • Don’t account for the exit in our underwriting 6
Financial Analysis of the Armory • NMTC Investment – Minimal underwriting as the leveraged fund was guaranteed – Hold out for 7 years in order to protect NMTC investment • HTC Investment – Significant economic risk – Underwriting • NOI analysis – Evaluate theater market on high level – Is there a captive sub-tenant? Theater, symphony, ballet, etc – Protected leap of faith • Staged pay-in – Sizing of the debt • Pledges, capital contributions, fundraising to buy down the debt over its term • Guarantees – Inability to underwrite brought about need for a strong guarantor – Reserves established • Tax opinion concerns 7
How the NMTC Works: Funding the Project LEVERAGE LENDER (USB CL): Provides loan NMTC INVESTOR (USBCDC): Provides equity for TCs $3 mm Equity = 30% of QEI 39% of $10 mm * $. 77/credit $7 mm Loan= 70% of QEI @ Market interest rate INVESTMENT FUND: To fund $10 mm QEI CDFI FUND (Dept of Treasury) $10 mm QEI CDE ALLOCATEE: Receives NMTC Allocation 8% CDE Fee: $800, 000 (varies) Sub-allocates SUB-CDE: $10 mm Allocation (need to fund QEI) QLICI Loan A: $7 mm @ Market interest DEVELOPER: Manager * Not all structures are the same Transaction Costs: $200, 000 (varies) Legal and Accounting QLICI Loan B / QLICI Equity: $2 mm low interest rate loan or invested as equity (some loans are forgivable) QALICB: Project Entity 8
How the NMTC Works: Servicing the Loan(s) NMTC INVESTOR: Receives tax credits LEVERAGE LENDER $3. 9 mm Tax Credits: Received over 7 yrs plus 5% exit fee of equity Leverage Loan/ Loan A Interest INVESTMENT FUND Leverage Loan/ Loan A “Interest” CDE ALLOCATEE Loan B Interest: Pays annual management fees and CDE/IF costs Leverage Loan/ Loan A Principal SUB-CDE P+I - QLICI Loan A: Matches leverage loan debt service Sinking Fund (USB Account) I/O - QLICI LOAN B / Equity: *Low interest rate loan or *Equity treated similarly with possible small annual return QALICB: Project Entity * Not all structures are the same 9
How the NMTC Works: Exit at end of 7 year compliance period LEVERAGE LENDER NMTC INVESTOR TC Investor Put = ~5% of TC equity paid 100% of leverage loan principal balance INVESTMENT FUND Sinking fund plus LOAN A principal CDE ALLOCATEE LOAN B principal CDE exit fee Principal - QLICI Loan A: (Less sinking fund balance) Remaining LOAN B principal or reserves Balance of sinking fund SUB-CDE Sinking Fund (USB Account) Principal - QLICI Loan B / Equity: * Either equity remains in the project or Loan B is 1) forgiven or 2) repaid QALICB: Project Entity * Not all structures are the same 10
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