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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.

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• 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

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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

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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

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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.

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$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

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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

langjim@gtlaw.com

C. Randall Minor

Maynard Cooper & Gale

rminor@maynardcooper.com

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