Integrating New Markets and Historic Tax Credits North Carolina Affordable Housing Conference...
-
Upload
alicia-newman -
Category
Documents
-
view
223 -
download
5
Transcript of Integrating New Markets and Historic Tax Credits North Carolina Affordable Housing Conference...
Integrating New Markets and Historic Tax Credits
North Carolina Affordable Housing Conference
September 16, 2010
Fundamentals of Federal Historic Tax Credits
• HTC program has been in existence over 20 years.
• Provides dollar for dollar federal income tax credit for rehabilitation of historic income producing properties (commercial, industrial, agricultural, or residential rental).
• National Park Service and State Historic Preservation Officer approve and monitor (i) qualification of building for HTC and (ii) development of and compliance with plans and specs for rehabilitation to ensure historic character is maintained.
• HTC is equal to 20% of “qualified rehabilitation expenditures.” Qualified rehabilitation expenditures must exceed the acquisition costs of the “Historic Building.”
• HTC is not competitive, but National Park Service must certify that building qualifies for credit and that rehabilitation was completed in accordance with approved plans and specs.
2
Fundamentals of Federal Historic Tax Credits (cont.)
• Building must be listed on the National Registry of Historic Places or be located in and add to the significance of a registered historic district.
• HTC is taken all at one time when the project is placed in service.
• Subject to recapture for 5 years.
• Less technical than LIHTC, but requires substantial interaction with National Park Service on Plans and Specs.
• As with LIHTCs, some states have state HTC programs, many of which “piggy-back” on Federal HTC programs.
• Allocation of HTCs among partners follows profits.
3
Historic Tax Credit Project – Single Tier Structure Diagram
• Property must be located in a qualifying area or be listed on National Register of Historic Places. (Part 1)• Developer/GP work with National Park Service on satisfactory plans and specs for qualified rehabilitation of
Historic Building. (Part 2)• HTC based on 20% of qualified rehabilitation expenditures.• HTC claimed on date project is placed in service.• No significant future monitoring by National Park Service after building receives certification that
rehabilitation was completed in accordance with agreed upon plans and specs. (Part 3)• Five year compliance period during which Property Owner must remain owner of property and Investor
must remain partner in Property Owner in order to avoid recapture.• Tax basis in historic building is reduced by amount of HTC.
Developer
Property Owner
General Partner
InvestorLender(s)
DeveloperFee
99.99%Interest
(including 99.99% of HTCs Profits
and Losses)
Cash
Cash
Services
.01%Services
4
Historic Tax Credit Project – Lease Pass-Through Structure Diagram
• Substantially similar to single tier structure on technical points, with addition of Master Lease and Master Tenant between Investor and Property Owner.
• HTCs are allowed to be passed through to Master Tenant upon Property Owner/Landlord and Master Tenant making valid Pass-Through Election.
• Important to maintain integrity of Master Lease.• No reduction in tax basis of historic building, instead Master Tenant must include HTC amount in annual
income pro rata over term of lease.
Developer
Property Owner / Landlord
General Partner
InvestorLender(s)
DeveloperFee
99.99%Interest
(including 99.99% of HTCs, Profits
and Losses)
Cash
Cash
Services
15% Interest
Services
Master Tenant
Sub Tenants
Rent
Cash & Services
.01% Interest
85% Interest
Rent
Master Lease &“Pass-Through”
of HTCs
5
Cash
Historic Tax Credit Project StructuresComparing Advantages and Disadvantages
Single Tier Lease Pass-Through
Advantages – Simplicity – fewer entities, fewer documents required
– No mandatory basis reduction in property or HTC Investor’s partnership interest
– GP receives higher tax basis and depreciation with respect to property
– Minimizes HTC Investor’s participation in property owner’s cash flow
Disadvantages – Investor has potential to receive higher distributions of cash flow and losses
– Mandatory basis reduction of depreciable property and HTC Investor’s basis in partnership interest
– More complex, leading to higher transaction costs and higher on-going administrative costs
– Master Tenant recognizes income in amount of HTC via amortization over term of Master Lease (Note: this result may be attractive to some Investors)
6
Diagram of Combined LIHTC and HTC Project with Lease Pass-Through Structure
DeveloperProperty Owner/
Landlord
General Partner
HTCInvestor
Master Tenant
LIHTCInvestor
Lenders
(99.99%Interest
Including 99.99% of HTCs)
DeveloperFee
Cash
Services
Cash
Rent
Cash
Cash
89.99% Interest
(Including 99.99%
Special allocation
of Depreciation &
LIHTCs)
Cash
.01% Interest
.01% Interest10% Interest
Master Leaseand Pass-Through ofHTCs
7
Combined LIHTC and HTC Project with Lease Pass-Through Structure
Comments
• LIHTC Investor holds 89.99% limited partner interest in Property Owner receiving 99.99% special allocation of depreciation on property.
• Lease Pass-Through Structure avoids reduction in basis of property and accordingly no reduction in LIHTC.
• Can dismantle HTC Structure at end of 5 year HTC compliance period.
• Can have different investors for LIHTCs and HTCs.
8
Fundamentals of New Market Tax Credits
• NMTC program has been in existence for almost 10 years.
• Provides dollar for dollar federal income tax credit for investments in community development entities (“CDEs”) that use substantially all the invested funds to make investments in qualifying low-income community businesses (“QALICBs”).
• QALICBs must be located in low-income communities designated by census tract. Certain businesses are excluded (e.g. residential rental activities, golf courses, country clubs, horse tracks and other gambling businesses, massage parlors, stores where principal business is sale of alcohol for consumption off-premises).
• The U.S. Treasury through the Community Development Financial Institutions Fund (“CDFI”) allocates to CDEs the dollar amounts on which NMTC can be claimed through highly competitive process.
9
Fundamentals of New Market Tax Credits (cont.)
• CDEs are domestic corporations, limited liability companies or partnerships certified by the CDFI. They must demonstrate a primary mission of servicing or providing investment capital for low-income communities and maintain accountability to residents of low-income communities (representation on governing or advisory boards).
• CDE must invest substantially all of the QEI in QALICBs through “Qualified Low-Income Community Investments” (“QLICIs”). Can be debt or equity (but not a “grant”). QLICIs must stay “invested” during 7 year compliance period to avoid recapture.
• NMTC = 39% of QEI taken over 7 years (5% first 3 years and 6% last 4 years).
• Requirements for qualification as QEI, CDE, QLICI and QALICB are very technical with primary burden on CDE.
10
Sample StructureNew Markets Tax Credit Structure
• QEI triggers credit delivery period. Total NMTC = 39% of QEI delivered over 7 years.
• Loan A = Qualified Low Income Community Investment (QLICI) based on market rate interest. Interest-only with balloon payment at end of 7 year compliance period.
• Loan B = Also a QLICI. Typically has below market interest rate (e.g. 2%) and, provided all other requirements are met (e.g. debt service on Loan A and Loan B paid, no violations of NMTC requirements by QALICB), final payment generally reduced to fraction of principal outstanding (but QLICI must be characterized as “bona fide debt” versus a “grant”).
Investor
Community Development Entity (CDE)
Qualified LowIncome CommunityBusiness (QALICB)
QualifiedEquityInvestment(QEI)
100% Interest in CDE,NMTCs, Profits, Lossesand Cash Flow
$10M
Loan A Loan B$7M $3M
11
The Tax Credit Marketplace
Federal North Carolina South Carolina
Low Income Yes Refundable No
Historic / Mill Yes Yes Yes
New Markets Yes No Yes
Renewable Energy Yes Yes Yes
Brownfields No Yes Yes
12
Which Credits Work Well Together?
Low Income and Historic
Low Income and Renewable Energy
New Markets and Historic
New Markets and Renewable Energy
13
HTC Funding
Developer
Managing Member:
NOLA Manager, LLC
HTC InvestorNTCIC Investment
Fund X, LLC
Lessor (Landlord) NOLA Operating Co., LLC
89% Man. Member: NOLA Mgr, LLC10% Member: NOLA Operating Co., LLC
1% Member: State HTC Investor, LLC
Master Tenant NOLA Operating Co., LLC
99.99% Man. Member: NTCIC IFX, LLC.01% Member: NOLA Manager, LLC
Project LenderLocal/Regional Bank
State HTC Investor
LA State Credit Fund
HTC
Master Lease
Lease Payment
HTC Equity
HTC HTC Equity
Tenants
HTC & NMTC Funding
Developer
Managing Member:
NOLA Manager, LLC
HTC & NMTC Investor
NTCIC Investment Fund X, LLC
Lessor (Landlord) NOLA Operating Co., LLC
89% Man. Member: NOLA Mgr, LLC10% Member: NOLA Operating Co., LLC
1% Member: State HTC Investor, LLC
Master Tenant NOLA Operating Co., LLC100% Member: NTCIC IFX, LLC
State HTC Investor
LA State Credit Fund
HTC
Master Lease
Lease Payment
HTC Equity
HTC
HTC Equity
Tenants
NTCIC Sub-CDENTCIC Investment
Fund X, LLC
Project Investment Fund
NOLA Investment Fund, LLC100% Member: NTCIC IFX, LLC
Leveraged LenderLocal/Regional Bank
SHTC
SHTC Equity
Repay HTC Bridge Loan
Repay SHTC Bridge Loan
AffiliatedDeveloper
EntityEquity
Equity Bridge Loans Constr./Perm Loans
QEI NMTC
QLICI 1
NMTC
NMTC Equity
Second Sub-CDENOLA Investment
Fund III, LLC
QEI NMTC
QLICI 2
Combining The Tax Credits
Federal Historic Tax Credits:
Total Qualified Costs:
QREs $12 M
Tax Credit Percentage 20%
Federal Credits $2.4 M
Federal Credit Price $1.00
Total Equity to Developer $2.4 M
Combining The Tax Credits
New Markets Tax Credits:
NTCIC CDE Allocation $ 11 M
2nd CDE Allocation $ 5 M
Total QEI $ 16 M
Tax Credit Percentage 39%
New Markets Credits $6.24 M
New Markets Credit Price $.70
NMTC Equity to Project $4.37 M
Combining The Tax Credits
Total Tax Credit Investment:
Federal Equity $2.40 M
NMTC Equity $4.37 M
TOTAL EQUITY $6.77 M
What Makes a Project Attractive to Investors
• Tell a good story
– Project Economics (low loan-to-value, strong debt service coverage ratios, pre-leasing)
• Minimize risk of something going wrong
– High level of Community Impact
• Job creation
• Grocery or other services
– Developer Experience
• Market (CRA)
Issues for Lenders with NMTC
• Lack of direct security interest
• Forbearance
• 7 years, interest-only
• Limited reserve accruals
Sponsor as Leveraged Lender
• Sponsor receives grants, pledges or other funds and loans them through the new markets structure
• Caveats
– Understand the restrictions on the money being enhanced
• Some grants only fund on a % of completion basis,
• Some grants/loans need to be secured by mortgage on property (AHP)
– Labor Intensive for Sponsor
• Set up new entity to act as QALICB
• Annual reporting requirements
• Need to have cash at closing for leveraged loan
NMTC Equity 2,925,000$ 7,075,000$ NMTC Leveraged Loan
Total 10,000,000$
QEI 10,000,000$ NMTC 3,900,000$
QLICILoan 7,075,000$
Equity 2,925,000$ Total 10,000,000$
Rent paymentsvia
operating lease
CDE
Investment Fund 100%IM
INVESTOR SPONSORLeveraged Lender (LL)
TBD LLCQALICB
SPONSOR(operating entity)
Legislative Update & Current Bills
• Codification of Economic Substance – impact on Tax Credit Transactions
• HR 4213
– Extend LIHTC 1602 for 9%, extend NMTC program, extend GO Zone Deadlines for LIHTC and GO Zone HTC
• S 3326
– 5 year carry-back provision for LIHTC investments, extend 1602 for a year and expand 1602 to 4% credits
• HR 2628 / S 1583
– Multi-year extension of NMTC program, increase the annual funding and exempt NMTC from AMT
• HR 3715 / S 1743
– Several enhancements to the HTC program
• HR 2336
– Energy retrofits for real estate owners
• HR 4868
– Affordable Housing preservation bill
Contact Information
Robert L. [email protected]
Marshall [email protected]
Kirk [email protected]
Leigh Ann [email protected]