The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no
longer permitted.
Leveraging New Markets Tax Credits to Finance
Community Development: Latest Regs,
Guidance and Legal Developments Twinning With Historic Tax Credits, Allocating COD Income to Partners, Using EB-5 Funds and More
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, OCTOBER 17, 2017
Presenting a live 90-minute webinar with interactive Q&A
James O. Lang, Shareholder, Greenberg Traurig, Tampa, Fla.
C. Randall Minor, Shareholder, Maynard Cooper & Gale, Birmingham, Ala.
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-866-258-2056 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can address the
problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
NOTE: If you are seeking CPE credit, you must listen via your computer — phone
listening is no longer permitted.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email that you
will receive immediately following the program.
For CPE credits, attendees must participate until the end of the Q&A session and
respond to five prompts during the program plus a single verification code. In addition,
you must confirm your participation by completing and submitting an Attendance
Affirmation/Evaluation after the webinar and include the final verification code on the
Affirmation of Attendance portion of the form.
For additional information about continuing education, call us at 1-800-926-7926 ext.
35.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
• Community Development Financial Institutions (CDFI) Fund
• Investor
• Qualified Equity Investment (QEI)
• New Markets Tax Credit (NMTC)
• Community Development Entity (CDE)
• Qualified Low-Income Community Investment (QLICI)
• Qualified Active Low-Income Community Business (QALICB) – Low-Income Community
• Leverage Lender
Introduction to Key Acronyms and Parties in New Markets Tax Credit Transactions
5
Structuring an NMTC deal (cont’d) • Identify Any Project Team Constraints
– Accounting Matters
– Bandwidth/Capacity for Complexity & Ongoing Reporting Requirements
– Debt Service Coverage Ratio / Project Economics
– Existing Loan Covenants
– Financial Return Hurdles
– Project Readiness
– Real Estate/Title Matters
– Required Authorizations/Approvals
– Required Fee Reserves
– Sponsor Equity
– Tax Matters
– Time
– Valuation (“true debt” tax opinions)
• Finalize the Transaction Team
– Sponsor
6
Tax Credit Investor Equity
QEI: $10,000,000
Tax Credit %: 39%
Investor Ownership %: 100%
Price/Credit: $0.84 ______________________
Investor Equity $3,276,000
Tax Credit
Investor
Investment Fund
(Investor Member)
$3,900,000 Credits $3,276,000 Cash
Borrower
(QALICB)
QLICI A $6,724,000
QLICI B 3,276,000
Total $10,000,000
Sub-CDE
99.9% owned by
Investment Fund
Source Loan/Sponsor Equity
(Leverage Lender)
Sub-Allocation
Fee of $X $6,724,000
QLICI A Note
$10,000,000
QEI
CDFI Fund Awardee
(CDE)
(Managing Member)
$6,724,000
Loan
$3,276,000
QLICI B Note
Figure 1. NMTC Structure on Closing Day
Typical NMTC Leverage Loan Structure
7
Typical NMTC Tax Opinions Related to Transaction Structure
• Importance of tax opinions and tax structure in NMTC leveraged transactions
• Typically “should” level analysis • Typical tax opinions:
– Entity tax classification – Non-Qualified Financial Property test opinion – True Debt opinion – True Lease (or tax ownership) opinion – Economic substance opinion/Substance over Form/Step Transaction – Reimbursable costs opinion (based on FAQ guidance and recent scrutiny) – Financing Transaction opinion – Tax credit pass through eligibility opinion – Long term indebtedness opinion – Tax entity differentiation opinion – Overall Tax Opinion
8
Typical NMTC Qualification Tax Opinions
• Typical Qualification Opinions: – Qualified Active Low-Income Community Business qualification status – Qualified Low-Income Community Investment status – “Reasonable Expectations” opinion – Gross Assets test opinion – Tangible Property/Services test opinion – Intangible Property (business in intangible property) test opinion – “Sin Business” opinion – Residential rental/housing opinion – Active business opinion – Farming opinion – Collectibles opinion – Control opinion – Portion of Business
9
NMTC Mechanics: Options for Funding/Structuring the Leverage Loan
• Sponsor/Affiliate Sources – New Equity – Upper Tier Debt
• primarily secured by pledge of investment fund’s membership interest in sub-CDE and direct guarantees (typically by the Sponsor/Affiliate)
• may be secured by other collateral • cannot be directly secured by QALICB assets • principal repayment possible • structured A Note
• Commonly Used Other Sources – Bridged Equity (reimbursable costs) – [bridged] EB-5 funds – State NMTCs – Grant Proceeds – Bonds (tax-exempt vs. taxable)
10
First Principals on Historic Tax Credits Historic Boardwalk
• Impacts from Historic Boardwalk Hall, LLC v. Commissioner
– True Partnership and Partnership reallocation
– Risk allocation
– Impact on tax credit industry
11
Historic Tax Credits Safe Harbor
• Revenue Procedure 2014-12 – Sponsor’s Interest
– Investor’s Interest
– Minimum Contribution (20%)
– 75% Fixed Contribution
– Permissible Guaranties
– Impermissible Guaranties
– Unwind (Partnership Flips and Sale of Interests)
– Examples
13
Twin Deals: HTC Safe Harbor and New Markets Tax Credits
• Debt versus Equity – Leveraged Model NMTC (most common) – Pooled Model – Direct Equity Investment
• HTC/NMTC Transactions • Risk Allocation • Special Issues with Same Investor • True Debt • Economic Substance Doctrine/Step
Transaction/Substance over Form Considerations
14
Typical NMTC Unwind
• Step 1: Exercise of Put/Call Option to Relating to Membership Interests in the Investment Fund (See Figure 2)
• Step 2: Exercise of Redemption Option Relating to Membership Interests in the Sub-CDE (See Figure 3)
• Step 3: Dissolution of Investment Fund (and/or Sub-CDE) (See Figure 4)
• Step 4: Refinance of QLICI A Note • Step 5: Forgiveness of QLICI B Note
15
CDFI Fund Awardee
(CDE)
(Managing Member)
Source Loan/Sponsor
Equity
(Leverage Lender)
$6,724,000
QLICI A Note
$3,276,000
QLICI B Note
Figure 2. NMTC Structure After Exercise of Put/Call Option Relating to Membership Interests in the Investment Fund
Borrower
(QALICB)
QLICI A $6,724,000
QLICI B 3,276,000
Total $10,000,000
Investment Fund
(Investor Member)
$10,000,000
QEI 100% Ownership
Sub-CDE 99.9% owned
by Investment Fund
16
Source Loan/Sponsor
Equity
(Leverage Lender)
$6,724,000
QLICI A Note
$3,276,000
QLICI B Note
Figure 3. NMTC Structure After Exercise of Redemption Option Relating to Membership Interests in the Sub-CDE
Borrower
(QALICB)
QLICI A $6,724,000
QLICI B 3,276,000
Total $10,000,000
Investment Fund
(Sponsor as Investor Member)
100% Ownership
Note: For simplicity, this step depicts the typical unwind sequence preferred by investors and CDEs in NMTC
transactions; transaction documents executed in connection with a given transaction may permit other
unwind sequences that may be employed at the option of the parties thereto.
17
$6,724,000
QLICI A Note
$3,276,000
QLICI B Note
Figure 4. NMTC Structure After Dissolution of Investment Fund (and/or Sub-CDE)
Borrower
(QALICB)
QLICI A $6,724,000
QLICI B 3,276,000
Total $10,000,000
Sponsor
18
Allocation of Costs in an Unwind
• Put/Call Considerations • Repayment/Refinance of A Note/Leverage Loan • B Note Considerations/COD Income • General Timing Considerations • Loss of Institutional Knowledge • Transaction Costs
– Accounting – CDE – Legal – Other
20
Cancellation of Indebtedness Considerations
• Unwind Process – Discuss Potential Acquisition of Debt by an Affiliate
• Tax Exempt vs. For Profit Entities
• Discussions prior to closing NMTC transaction
• Tax Strategy Planning during life of transaction
• Section 108(e) and (i) of the Internal Revenue Code
• Impact of Tax Reform and corporate structuring considerations
21
Restructuring/Workouts; Recapture Risk
• “Reasonable Expectations” Test – definition of “control”
• Recapture Events During 7-year Compliance Period – CDE ceases to be a QCDE – “Substantially All” requirement is not met – Redemption of QEI by CDE
• Statutory Cure/Reinvestment Options • Key Transaction Document Provisions
– Cure/Reinvestment – Limitations on Redeployment – Investor Indemnifications/Guarantees – Removal of Managing Member/General Partner
• New QALICB • New Tax Opinions
22
Legislative Developments
• Unified Framework • Future of Tax Credit Programs • NMTC Program Developments
– FEMA Designations and Resiliency Efforts – Go Zone Proposals – Healthy Foods – Healthcare – Nonmetropolitan Counties – Targeted States – Minority Impacts
• Infrastructure Tax Credits • Tax Rates and Pricing
– Community Reinvestment Act
• Status of State NMTC Programs
23
Thank You
James O. Lang
Greenberg Traurig
C. Randall Minor
Maynard Cooper & Gale
24