2013-03-21 NMTC & Zone Bonds

Olivia Shay-Byrne 202-414-9370

[email protected]

Overview and Eligibility Benefit to Borrowers Deal Structures Who are the Investors? Who are the Borrowers? Which deals qualify? What are some examples of NMTC deals?

Reed Smith LLP 2013 2

Purpose: To provide Borrower's equity (25 to 28 percent) and low interest loans for their capital projects in economically challenged communities. (Target Zones).


The New Markets Tax Credit program provides: Financing at below below-market interest

rates for the construction or renovation of health care centers in qualified census tracts.

Substantial equity for the healthcare project which will never have to be repaid

Low cost of capital resulting from the forgiveness of the equity combined with the interest rate on the leveraged loan

Obtained a 1% interest rate for a project that closed in 2012.


The “Leverage Lender” ◦ -- typically a Bank that has agreed to participate in the program. We

have relationships with these lenders. The “Investment Fund” ◦ -- the entity that receives the equity investment and leverage loan

owned by the investor The “Investor” ◦ -- typically a Bank that provides the equity financing and receives the

benefit to the tax credit. We have relationships with these investors. CDE (or Sub CDE’s) ◦ -- the entity that holds the tax credit allocation awarded by CDFI

required to utilize the NMTC program. We have relationships with the CDEs.

QALICB -- the Borrower


Is the business a QALICB? Does your project qualify? How does it work? What is a CDE? Build your story (i.e. mission, job creation,

community investment) Build a team lawyer, accountant, lender,

investor


A corporation (publically traded or privately held), a partnership or a proprietorship can operate as a “QALICB” borrower.

To qualify, the business must generally have: (1) at least 50 percent of total gross income derived for the

active conducted of a qualified business within any low-income community

(2) a substantial portion of the services performed must occur in any low-income community; and

(3) a substantial portion of the tangible property must be used within a low-income community.

* There are some exceptions to these rules so not all provisions have

to be met.


NMTC proceeds can be used for a wide variety of projects:

Healthcare facilities Offices Retail Mixed used projects Manufacturing plants Sporting facilities Grocery Stores Charter Schools Museums Medical Clinics


a corporation that acquires, develops or improves facilities such as its hospitals, surgical centers or healthcare facilities.

an operating business that is located

within a target zone. a developer that develops or improves

commercial, industrial, retail and mixed-use real estate projects (consisting of less than 20% residential) in a LIC;

A business that relocates to & improves

real estate located within a target zone.


Banks Businesses that purchase and hold unimproved real

estate Businesses that derive 80% or more of its income stream

from residential rental income Country clubs Golf courses Hot tub facilities Liquor stores Massage parlors Tanning salons


1. Berkshire Arts & Technology Charter Public School, Adams, MA 2. Challenge Foundation Academy, Indianapolis, IN 3. Oakland School of the Arts, Oakland, CA 4. Pikes Peak Prep, Colorado Springs, C0 5. Thurgood Marshall Academy, Washington, DC 6. Progression Place (United Negro College Fund Headquarters Project) –

Washington, D.C. 7. Hudson River Healthcare - New York 8. Oasis Orthopedic Hospital - Arizona 9. Kootenai Medical Center - Idaho 10. VNA Health Center - Illinois 11. St Bernard Parish Hospital - Louisiana 12. Holyoke Health Center - Massachusetts 13. Delta Memorial Hospital - Arkansas 14. Children’s Aid Society – New York 15. Delta Memorial Hospital – Arkansas (new medical facilities and equipment) 16. Native American Health Center – California 17. Hoku Scientific Inc. – Hawaii (publically traded as “HOKU”) 18. Fox Valley Health Care Center – Illinois 19. Health & Science Building – Kentucky



Example of Project Using NMTC

Talk to your Board Structure the transaction Help locate the allocation and equity provider Draft the documents and review Close the Loan Answer questions about the transaction


25%-28% Equity Contribution by equity which may be forgiven with a put/call provision after 7 years

Reduced Interest Rates Flexible structure



Lender Investor

CDE

QALICB (Hospital)

($15,000,000) ($5,000,000)

(QEI - $20,000,000)

(Tax Credit $7.8MM)


Diagram: Example of NMTC Structure

Subject to recapture for 7 years Recapture amount is total of NMTC allocated plus interest

Subject to recapture if: CDE ceases to be certified or Substantially all of the QEI proceeds are not used (one-time

six-month cure period) or CDE redeems equity investment

No recapture if QALICB ultimately fails (CDE must pass reasonable expectations test)


Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853) passed on December 17, 2010

Renewed Enterprise Zone

Bonds in the District of Columbia through December 31, 2011 (retroactive January 1, 2010).


What size project can utilize this form of financing?

◦ A qualified Enterprise Zone business entity (including any related person) can borrow up to $15 million for a project. Because of the higher up-front issuance costs associated with tax-exempt bond financings, as a general rule banks have provided that it is best to use this form of financing for borrowings exceeding $2 million.


Where must my project be located to qualify for Enterprise Zone bonds?

◦ You must be conducting business in a D.C. Enterprise Zone, one of the District’s 65 Census Tract with a 20% or greater poverty rate. These tracts include, but are not limited to;

all of Pennsylvania Avenue between the Capitol and the White House,

areas by the Navy Yard in Southeast, and sections of Georgia Avenue and the N.Y. Avenue corridor.



500 New Jersey Avenue, NW

Olivia Shay-Byrne [email protected]

202.414.9370


Thrive. Grow. Achieve.

New Market Tax Credits Jane Horn, CPA, - Partner, Tax Debra Santos, CPA - Manager, MAS March 21, 2013

RAFFA HISTORY

IN 1984, TOM RAFFA SET OUT TO CREATE MEANINGFUL ACCOUNTING WORK THAT

SUPPORTED GIVING BACK TO THE COMMUNITY.

RAFFA’S VISION IS TO BE THE MOST CARING AND EFFECTIVE PROFESSIONAL FINANCIAL SERVICES

PARTNER IN THE INDUSTRY.

250 Employees, in 3 separate companies:

•Raffa PC

•Raffa Financial Services In

•Raffa Wealth Management LLC c.

EACH DEAL IS UNIQUE!

Raffa clients say “wow my deal is so unique. Please don’t talk about it”

Prior organizations (charters) say “of course share anecdotal comments about our deals, just don’t talk about the deal”

”Its confidential”

DEALS ARE COMPLEX!

Multiple entities

Multiple funding sources (NMTC represents “gap”)

“But for” requirement

Timing critical

A lot of lawyers and lenders! Necessary, but never easy!

HOW COMPLEX?

IN A REPORT PUBLISHED BY THE GOVERNMENT ACCOUNTABILITY OFFICE, JANUARY 2010

ENTITLED:

“NEW MARKETS TAX CREDIT

THE CREDIT HELPS FUND A VARIETY OF PROJECTS IN LOW-INCOME COMMUNITIES, BUT COULD BE SIMPLIFIED”

Report to Congressional Committees

Diagram: Example of NMTC Structure

Source: Reed Smith, 2013 Presentation

ANATOMY OF A DEAL – MULTI- USE

•PROJECT (COULD BE A NON PROFIT OR A CMO – BUT IT’S NOT)

•Residential Condominiums •Retail Condominiums •Retail and Commercial Office Space •Market rate rentals •Affordable rental units

•FUNDING SOURCES

•Conventional Financing •Developer Equity •NMTC

Raffa role – financial advisor to:

•CDE

•Investor

•Lender

•QUALIFIED ACTIVE LOW INCOME COMMUNITY BUSINESS (QALICB)

EARLY STEPS – PRE CDE

1. CONTROL OF SITE OBTAINED FROM THE SELLER BY THE DEVELOPER

2. COMPLETE ENVIRONMENTAL DUE DILIGENCE

3. REQUIRED APPROVALS OBTAINED OR SCHEDULED IN A REASONABLE PERIOD OF TIME

4. COMPLETE DEVELOPMENT PLAN INCLUDING CONSTRUCTION COSTS AND THE FULL CONSTRUCTION SCHEDULE

5. REVIEW FINANCIAL FEASIBILITY

6. IDENTIFY SOURCES OF FINANCING, CONVENTIONAL AND OTHER

7. OBTAIN EQUITY AND DEBT COMMITMENTS OR TIMELINE TO OBTAIN

8. IDENTIFY GAP AND “BUT FOR” TEST

9. REVIEW, ESTIMATE AND DOCUMENT IMPACT

CONSIDERING NMTC’S

•RUN FINANCIAL PRO-FORMA’S DOCUMENTING THE “GAP”

•SEEK OTHER GAP FINANCING FIRST “NMTC’S RARELY CONSIDERED FIRST”

•IDENTIFY CDE’S (MISSION, GEOGRAPHIC PREFERENCE, TIMELINE)

•IDENTIFY IF PROPERTY MEETS LOCATION REQUIREMENTS

•BE ABLE TO COMMUNICATE AND DEMONSTRATE IMPACT

•Jobs created/maintained •Affordability of housing/number of units •Students served •Community involvement •Other impact

• ALLOW TIME FOR APPROVALS (BOARD, INVESTORS, ETC)

TAX BENEFITS

Internal Revenue Code Section 45D creates a tax credit for equity investments in CDEs.

The American Taxpayer Relief Act extended the Credit through 2013. Applicable Percentage • The credit provided to the investor equals 39% of the QEI and is claimed over the

seven-year credit period. Under IRC Section 45D(A)(2), the applicable percentage is 5 % for the first 3 credit allowance dates and 6% for the last 4 credit allowance dates.

Manner of Claiming the NMTC • A taxpayer may claim the NMTC for each applicable year by filing Form 8874 with

the taxpayer’s federal income tax return. Interaction with Other Federal Tax Benefits • The availability of other federal tax benefits does not limit the availability of the

NMTC including the following: –The Rehabilitation Credit under IRC Sec 47. – First year depreciation under IRC Sec 168(k) and the expense deduction allowed

under IRS Sec 179. –All tax benefits relating to designated empowerment zones and enterprise

communities, DC Enterprise Zones and the NY Liberty Zone.

RECAPTURE RISK

If at any time during the 7 years beginning on the date of the original issue of a QEI in a CDE, there is a recapture event with respect to the investment, the credit must be recaptured. The recapture applies to the taxpayer who purchased the equity investment from the CDE at its original issue and to all subsequent holders of that investment.

There is a recapture event with respect to any equity investment in a CDE of one of the following events occurs:

1. The CDE ceases to be a CDE.

2. The taxpayer’s investment ceases to meet the substantially-all requirement, which involves investments in qualified low-income community investments (QLICIs), or

3. The investment is redeemed or otherwise cashed out by the CDE.

Disposition of a holding in a qualified equity investment is not a recapture event, however the timing of the disposition will determine the tax impact for the investor.

RECAPTURE RISK

THE RECAPTURE AMOUNT IS DEFINED AS THE DECREASE IN THE NMTC ALLOWED TO THE TAXPAYER, AS IF NO CREDIT HAD BEEN ALLOWABLE FOR THE INVESTMENT, PLUS INTEREST (AT THE UNDERPAYMENT RATE) BEGINNING ON THE DUE DATE FOR THE FILING OF THE TAX RETURN ON WHICH THE NMTC WAS ORIGINALLY CLAIMED.

POST CLOSE

•CDE INVOLVED WITH DEVELOPMENT FOR 7 YEARS

• SUBSTANTIALLY ALL TESTING

•MAINTAIN COMPLIANCE – TO AVOID RECAPTURE

• DRAW DOWN OF PRINCIPAL ON A TIMELY BASIS

•COMMERCIAL RENTAL INCOME TESTING

• PLACEMENT OF FOR-SALE PRINCIPAL

• ACTUAL COMMUNITY IMPACT ANALYSIS REQUIRED

• REGULAR REPORTING TO CDFI AND INVESTOR

CONSULTANTS HELP!

THANK YOU!

Jane Horn, CPA Direct: 240-283-1385 Email: [email protected] Debra Santos, CPA Direct: 202-555-5555 E-mail: [email protected]

www.raffa.com

mailto:[email protected]

mailto:[email protected]

http://www.raffa.com/

2013-03-21 NMTC & Zone Bonds

Economy & Finance

Transcript of 2013-03-21 NMTC & Zone Bonds