The Source forHousing Solutions

Pennsylvania Housing Alliance Webinar:

New Markets Tax Credits (NMTC) and How They Work

Jennifer Trepinski, Senior Loan Officer, CSHJill Steen, NMTC Program Director, CSH

May 12, 2017csh.org

General Disclaimers

All copyrightable text and graphics, the selection, arrangement, and presentation of all materials (including information in the public domain), and the overall design of this Power Point are ©2017 CSH (Corporation for Supportive Housing). All rights reserved. Permission is granted to use this Power Point for the purpose of viewing, reading, and retaining for reference. Any other copying, distribution, retransmission, or modification of information or materials, whether in electronic or hard copy form, without the express prior written permission of CSH, is strictly prohibited.

DisclaimerThe materials and advice available in this Power Point slide deck are for informational purposes only and not for the purpose of providing legal counsel. You should contact your attorney to obtain advice with respect to any particular issue or problem. The opinions expressed are the opinions of the individual author(s) and may not reflect those of CSH.

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Community Investment Staff

Locations where CSH has staff stationedLocations where CSH has helped build strong communities

Locations where CI staff is stationed

CSH Loan Products

Early-stage financing for supportive housing typically taken out at construction

Project Initiation Loans

Acquisition Predevelopment

Interest rate 0% 6% 6%

Term <2 years 2-3 years 2-3 years

Amount <$50K <$8MM <$500K unsecured

Collateral No Collateral <130% LTV <130% LTV

Today’s Topic and Objectives

1.Understand NMTCs and How They Work

2. NMTC Benefits/Considerations & How to Access Them

3. Two Philadelphia NMTC Project Examples with housing

NMTC Program Overview

Federal program authorized by the Community Renewal Tax Relief Act of 2000

Managed by the U.S. Department of Treasury’s CDFI Fund, and jointly administered with the IRS.

Purpose: to stimulate private investment low income communities (qualified eligible census tracts) and to expand jobs and services for low income people.

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NMTC Program Overview

Program Currently Authorized Through 2019

Total $50.5 billion authorized in 13 NMTC allocation rounds.

2015-2016 double round-$7 billion in NMTCs

Future Risk of Tax Reform & Reauthorizations

Program has had Bipartisan Support

CSH NMTC Program: Linking Support Services to Housing

$130 million in NMTC allocation, with $65 million award in 2016.

CSH invests its NMTCs in projects that: Provide healthcare and/or other support

services to homeless and high health need populations, and

Are co-located with or have other connections to supportive housing.

With NMTCs, CSH provides free TA and training to Sponsors to help strengthen connections between housing and supportive services.

How NMTCs Work

NMTC allocation awarded annually to Community Development Entities (CDEs) through competitive application process.

Awarded CDEs (“NMTC Allocatees”) select investments/projects to finance.

NMTC equity is raised from an Investor who in turn receive a seven-year stream of credits against federal tax liability.

Used mostly for real estate/facility development projects.

How NMTCs Work

NMTCs are generated by leveraging other project sources (rather than being based on project expenditures like LIHTC and HTCs)

NMTC financing can fill a 15%-25% financing gap, depending on: Pricing of NMTC equity NMTC fees & expenses Size of project

The 75%-85% of capital to be “Leveraged” needs to comply with NMTC financing requirements.

NMTC financing is typically structured as a loan, and NMTC equity may realized at end of 7 year compliance term.

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NMTC Eligibility: Project Located In Qualified Census Tract

Qualified Census Tract (Based on 2010 Data)

Eligibility: https://www.cdfifund.gov/Pages/cims3.aspx

Eligibility Mapping System:https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml

*OR Two or more secondary factors as defined by CDFI Fund:

Poverty Rate >25%; MFI ≤70% or Unemployment Rate ≥1.25x; Medically Underserved Area (if improves healthcare access) Federal, State, or Local Economic Redevelopment Areas Hope VI Redevelopment Areas Food Deserts (if will improve healthy food Access) Brownfields, FEMA Disaster Area, or Others

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Minimum SeverelyRequirement Distressed*

Poverty Rate ≥20% >30%OR Median Family Income ≤80% ≤60%Unemployment Rate (x Nat'l Avg) N/A ≥1.50Rural/Non-Metro County N/A Yes

Allowable Uses of NMTCs

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Eligible Businesses/Uses: Industrial/Manufacturing Commercial Office/Retail Community facilities: Health Centers Social Service Centers Community Centers Child Care Charter Schools Recreation Centers

Mixed Use Commercial & Apartments where >20% of Income of Project is from commercial portion

Ineligible Businesses/Uses: Golf Courses/Country Clubs Race Tracks Gambling Facilities Massage Parlors Liquor Stores Sun Tan or Hot Tub

Facilities Certain Farming Businesses Residential Rental Property

(with no commercial)

Financing Mixed Use Projects With Housing

1. Finance Entire Building With NMTCs >20% revenue of Project must be from the commercial

portion 20%+ of the housing units affordable to tenants earning

<=80% of AMI Compared to 9% LIHTC projects, NMTCs are a shallow

subsidy.

2. Create Condo Structure to Use Both LIHTCs & NMTCs LIHTCs & NMTCs cannot be used as part of same

financing, but Mixed-use building can if the commercial and residential

components are separate condos, financed separately.

Key Acronyms

Community Development Entities must use…

Substantially All of the proceeds from…

Qualified Equity Investments to make…

Qualified Low-Income Community Investments in…

Qualified Active Low-Income Community Businesses

located in…

Low-Income Communities.

Leveraged Structure Overview

Investment Fund

Leverage LenderLeverage LenderNMTC Equity

InvestorNMTC Equity

Investor

Sub-CDE

QALICB/Borrower

$ Loan$ Equity

$ QEI

$ QLICI

Allocatee (CDE)ManagingMember

Project Sponsor/ Guarantor

Creates SPE

InterestPayments

NMTCs

NMTCs InterestPayments

Lease

NMTCs

Participants In The Financing

NMTC Equity Investor

Typically Major Bank: Chase, US Bank, Wells Fargo, Capital One, BofA

Invests equity in Investment Fund which makes a QEI into a sub-CDE to receive tax credits. Current equity pricing= $.86 to $.88 per credit

Investor is able to take NMTCs in an amount equal to 39% of the QEI over 7 years (5% ($50,000) in years 1-3, 6% ($60,000) in years 4-7

Qualified Equity Investment (QEI) $1,000,000 Tax Credit Over 7 Years 39%Total Credits To Investor $390,000 Price Per Credit $0.87 Gross NMTC Equity to Project $339,300

Participants In The Financing

Leverage Lender

Makes loan to Investment Fund which is pooled with the NMTC equity to make the QEI in the sub-CDE

Required Loan Terms: Fully funded at closing Generally 7 year interest only payments with balloon or amortization

thereafter No direct real estate collateral from project; secured by Investment

Fund’s interest in Sub-CDE Forbearance of foreclosure

Can be a bank, CDFI, or other lender, but is often the project’s Sponsor or an affiliate. Allows Sponsor to efficiently leverage multiple funding sources like

grants, capital campaign, cash in hand Bridge financing maybe required

Participants In The Financing

Community Development Entity (CDE) CDEs can be a CDFI, affiliate of bank, affiliate of

government agency, or other nonprofit or for-profit entity with a mission to serve low-income communities.

Applies to and receives an allocation of credits from CDFI Fund. Selects Projects in which to invest.

Acts as intermediary between Investment Fund and QALICB that must invest the QEI as a QLICI to QALICB for 7 year term.

Must be certified by CDFI Fund and maintain accountability to low-income communities through governing board or advisory board.

Key Players In The Financing

QALICB/QLICI Borrower Typically a business or developer that is undertaking a real

estate/facility expansion project in a low income community and is looking to fill a capital financing gap.

Often a Special Purpose Entity established by a business (project Sponsor) to develop and own the Project and lease it back to the operating business.

Can be operating business but must meet various tests related to conducting business in the low income community (gross income, tangible property, and services)

Typical QLICI Loan Terms

25-30 year term Interest only payments for first 7 years Put/Call Option at the end of 7 year NMTC compliance

term may allow QALICB to realize equity; Collateral is usually first position mortgage on the

project Interest rate is generally the average of 0% on the

equity portion of the QLICI and the rate on the leverage loan;

Fully funded at closing in disbursement account-Spent in 12 months (possibly up to 18 months)

Sponsor guarantees: Construction completion, QLICI loan, CDE Fee and expense payments, and Environmental and tax credit indemnities.

NMTC Financing Benefits

Sponsor Benefits: Fills financing gap at closing Below market, interest-only loans for at least 7 years with favorable

terms At end of year 7, there may be NMTC equity benefit

For Banks/Investors: Lending/Investing in a New Markets Tax Credit project may satisfy

Community Reinvestment Act requirements of financial institutions Investors get return in the form of federal income tax credit

Community Benefits (CDE Motivation): Projects have positive community impacts on low income neighborhoods

furthering community and economic development goals

NMTC Financing Risks

Investor Redeployment Risk-of returned principal Recapture of Tax Credits Reputational Risk and Future NMTC Awards

Leverage Lender Repayment Risk (seven years is a long time, and NMTCs raises unique

underwriting and credit concerns)

CDE Compliance/asset management Return of Principal/Redeployment Risk Mission Risk-Not Generating LIC benefits Reputational Risk and Future NMTC/Funding Awards

Sponsor/Borrower Underwriting/Compliance Considerations

The financing is a 7 year construction/perm loan and is underwritten: Can be constructed/completed (and leased up if needed) Capacity/financial strength to grow operations Project can service debt and ongoing CDE fees & expenses Can be refinanced after 7 years or fully amortize

Compliance/Reporting Requirements-7 Years Maintain status as QALICB Service Loans Community Impact Reporting—job creation, persons

served by tenant, & other community impacts Audit and tax reports

Accessing NMTCs

NMTCs can be accessed through investors, CDEs, NMTC consultants

In 2015-2016 round, 120 CDEs Awarded $20 to $100 Million

Most CDEs provide $5.0 million to $15 million per project

CDEs vary in terms of geography served, asset type priorities, and business strategy to prioritizing and selecting investments.

https://www.cdfifund.gov/Documents/FINAL%202015%202016%20NMTC%20Award%20Book%20Nov2016.pdf

What CDEs Look For:

Meets CDE mission/investment strategy Will generate positive community impact:

Meets needs of and is supported by local community Creates quality jobs (construction and permanent), especially

those for low-income people or community residents Job training/advancement and workforce programs Above living wage pay

Expands access to goods & services, and people served Clearly serves low income people

Timing Considerations CDEs generally accept ongoing requests year-round NMTC applications due June with awards at year end with

funding available in 2018/early 2019 Last funding in and NMTC commitments contingent on

readiness to close in 3-6 months

Asociación Puertorriqueños en Marcha (APM) and Jonathan Rose CompaniesPaseo Verde TOD Project, Philadelphia, PA

Type of Organization: Human Services Provider and Housing Developer

Project Basics: 7,200 SF Community Health Center Operated

by Public Health Management Corporation 1,900 SF pharmacy operated by Pharmacy of

America 21,000 SF Office and Program Space for APM

Health/Housing Partnership: Co-Locate Health, Social Services, and

Affordable Housing 120 units of housing (67 funded with NMTCs

and 53 with LIHTCs) 70 Affordable Housing Units (43 Units =<60%

of AMI, 10 units =<50% of AMI, and 17 units +<80% of AMI)

Total NMTC Project Cost- $30,000,000Total NMTC Allocation - $30,000,000

($7,000,000 From CSH)

Community Demographics: 61.6% Poverty Rate Median Family Income: 23.6% of AMI Unemployment Rate 4.4x Nat’l

Average

Paseo Verde TOD Project(Continued)

Financing:NMTC Leverage Source(s):Chase Loan $9,010,000 TRF Loan $3,000,000 Sponsor Leverage Loan $9,046,000 Total Leverage Sources $21,056,000

NMTC Net Equity $7,897,000Deferred Developer Fee $1,130,000Total Financing $12,575,250

Total Development Costs $30,083,000

NMTC Investor: Chase Community Equity, LLC

Leverage Lenders: Chase, The Reinvestment Fund, and Sponsor

CDEs: CSH, LISC, WNC, Building America Fund Community Impacts:

First Platinum LEED-Neighborhood Project 43 Retained and 127 new permanent jobs 112 construction jobs 3,600 low-income patients served annually

with primary health care and 700 with behavioral healthcare

200 provided housing counseling

222 provided with financial counseling

600 households provided over 60,000 lbs. of produce through food buying club

New Courtland Elder Services (“Sponsor”)LIFE Center at St. Bartholomew-Philadelphia, PA(Closed & Under Construction)

Type of Organization: Healthcare and Housing ProviderProject Basics: 15,000 SF LIFE Center for Seniors, based on

National PACE Model: Primary Care Specialist Care Physical, Occupational, and Speech

Therapy Pharmacy and Prescriptions Home Modifications (if needed) Health Insurance

Health/Housing Partnership: Co-Located with 42 LIHTC units for seniors,

all targeted at or below 30% of AMI with RAD 101 additional units planned Support Services: meals, adult day care,

transportation, home health care

Total Project Cost- $12,600,000CSH NMTC Allocation - $11,000,000

Chase New Markets Allocation - $1,400,000

Community Demographics: 32.5% Poverty Rate Median Family Income: 49% of

AMI Unemployment Rate 14.6%

New Courtland LIFE Center at St. Bartholomew(Continued)

Financing:NMTC Leverage Source(s):PIDC Loan $2,100,000 CIP Loan $1,900,000 Sponsor Leverage Loan $4,241,000 Total Leverage Sources $8,241,000

NMTC Net Equity $3,939,000Sponsor Cash Equity $395,250Total Financing $12,575,250

Total Development Costs $12,575,250

NMTC Investor: Chase Community Equity, LLC

Leverage Lenders: PIDC, Capital Impact Partners, & Project Sponsor

CDEs: CSH & Chase

Projected Community Impact: 62 new permanent jobs 111 construction jobs 30% of jobs target to Low Income

Community residents 200 nursing home eligible seniors served

per year Green Building standards met

CSH Contacts

Jennifer Trepinski, Senior Loan Officer-NE Regionjennifer.trepinski@csh.org212-986-2966 x 290

Jill Steen, NMTC Programjill.steen@csh.org312-332-6690x2812

Brigitt Jandreau-Smith, Chief Lending Officerbrigitt.jandreau@csh.org415-460-0899