Historic Tax Credits for Developers:A Guide to Syndication and Beyond

10:45am – 12:15pmThursday, February 8

Combining Historic Tax Credits and New Markets Tax Credits

New Markets Tax Credits and Historic Tax Credits

New Markets Tax Credits and Historic Tax Credits

New Markets Tax Credit FundamentalsNew Markets Tax Credit Fundamentals

NMTC SynopsisA federal tax credit available to those that provide equity to certain certified community development entities (CDEs) that in turn lend or invest in qualified businesses located in low-income communities.

• 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

What is a CDE?New Markets Tax Credits

What is a CDE?

New Markets Tax Credits

What is a Qualified Business?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?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.cdfifundhelp.gov and click on “NMTC” tab

New Markets Tax Credits

How They WorkNew Markets Tax Credits

How They Work

Tax Credit Investor

CDE (Subsidiary)

QEI ($100)

Tax Credits over 7 years ($39) and Cash Return

QALICB

Suballocation of Tax Credit Authority

QLICI (85%+ of QEI)

CDE (Allocatee)

Typical HTC Structure (Single Entity)Typical HTC Structure (Single Entity)

TenantsTenants

RentalPayments

Tax Credit Investor LLC

Tax Credit Investor LLC

Construction/Perm Lender

Construction/Perm Lender

Managing Member(Developer Affiliate)

Managing Member(Developer Affiliate)

HistoricTax Credit

Equity

99.99% Credits, Profits & Losses and Cash Flow

LoanProceeds

DebtService

Payments

Tax Credit, LLC(Property Owner)

Tax Credit, LLC(Property Owner)

Tax Credit InvestorTax Credit Investor

.01% Credits, Profits & Losses, Fees and

Cash Flow

DeveloperEquity

DeveloperDeveloperDev.Fee

Master Tenant/NMTC StructureMaster Tenant/NMTC Structure

Sub-Tenants/End Users

Sub-Tenants/End Users

RentalPayments

Tax Credit Investor LLC

Tax Credit Investor LLC

Construction/Perm Lender

Construction/Perm Lender

Managing Member(Developer Affiliate)

Managing Member(Developer Affiliate)

100% Credits, Profits & Losses, and Cash Flow

LoanProceeds

DebtService

Payments

.01% Credits, Profits & Losses,

Fees andCash Flow

DeveloperEquity

HistoricTax Credit

Equity

Master Tenant, LLC(Master Tenant)

Master Tenant, LLC(Master Tenant)

Landlord, LLC(Property Owner/Lessor)

Landlord, LLC(Property Owner/Lessor)

99.99% Credits, Profits & Losses, Fees and Cash Flow

Pass-through of Historic Tax Credits & Share of Residual

Lease Payment &Equity Investment

Tax Credit Investor

Tax Credit InvestorCDECDE

QLICI

Single Member LLC(Disregarded Entity)

Single Member LLC(Disregarded Entity)

Non-Member Manager

QALICBQALICB

QLICI

Tax Credit Investor

Tax Credit Investor

QEI

Sample Transaction

Calculating the HTC EquitySample Transaction

Calculating the HTC Equity

Qualified Rehab Expenditures 24,060,799

Credit Rate 20.00%

Total Calculated Credit 4,812,160

Tax Credit Investor Allocation 99.99%

Total Credit to Investors 4,811,679

Credit Price Per Each $1 of Credit

Equity Contributions by Investors 4,727,474

0.98

Sample Transaction

Calculating the NMTC Equity Sample Transaction

Calculating the NMTC Equity

Gross HTC Equity 5,252,800

Credit Rate 39.00%

Total Calculated NMTC Credit 2,048,592

Iterative Effect 124.21%

Total Credit to Investors 2,544,556

Price per Each $1 of NMTC Credit 0.65

Add’l Equity Contributions by Investors 1,653,961

Key Business IssuesKey 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’dKey Business Issues cont’d

• Guarantees (expanded – negotiable; adjuster gross up)

• Reserves (no change)

• Cash Flow Participation (3% industry standard)

• Operational limitations (subtenant mix)

Dia:BeaconBeacon, New York

Dia:BeaconBeacon, New York

Portland ArmoryPortland, Oregon

Portland ArmoryPortland, Oregon

Thank you

Merrill Hoopengardner, Esq.401 9th Street, NWSuite 900Washington, DC 20004

202.585.8169

202.585.8080 (Fax)

mhoopengardner@nixonpeabody.com