Using Historic Tax Credits in New York Combining

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 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 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

New Markets Tax Credits 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

New Markets Tax Credits Finding an Allocation • 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. )

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

Sample Transaction Calculating the HTC Equity Qualifying Rehab Expenditures Credit Rate Total Calculated Credit Tax Credit Investor Allocation Total Credit to Investors Credit Price Per Each $1 of Credit Equity Contributions by Investors 24, 060, 799 20. 00% 4, 812, 160 99. 99% 4, 811, 679 0. 98 4, 727, 474

Sample Transaction Calculating the NMTC Equity Gross HTC Equity Credit Rate Total Calculated NMTC Credit Iterative Effect Total Credit to Investors Price Per Each $1 of NMTC Credit Add’l Equity Contributions by Investors 5, 252, 800 39. 00% 2, 048, 592 124. 21% 2, 544, 556 0. 65 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 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

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