Michael J. GoldmanNixon Peabody LLP

Financing Wind Power: The Future of Energy

Introduction to New Markets Tax Credits

May 9, 2008

Sample Wind PTC Structure

Tax Credit InvestorTax Credit Investor

Wind Production Partnership

Wind Production Partnership

Turbines

Developer

LENDER

$7,000,000 Loan7-year, 7.0% ($490,000/year)

$3,000,000(99.0%)

$30,000(1.0%)

NMTC Structure

LENDER

Allocatee, LLC

NMTC InvestorNMTC Investor

CDE, LLCCDE, LLC

Leverage

Fund

Leverage

Fund

$3,900,000 New Markets Tax Credits over 7 years

$7,000,000 Loan7-year, 7.0% ($490,000/year)

$3,000,000

$10,000,000(99.99%)

$1,000(0.01%)

Wind Production Partnership

Wind Production Partnership

PTC InvestorPTC Investor

$9,500,000 Loan7-year, 5.3%($503,500/year)

$503,500Debt service

$500,000(99.0%)

Developer

$500(1.0%)

Turbines

Qualified Active Low-Income Community Business(QALICB)

• General definition: A corporation or partnership having significant ties to one or more low-income communities and being engaged in the active conduct of a qualified business

Low-Income Community Defined

• Census tracts where:

– Poverty rate equals or exceeds 20%, OR

– Median income is below 80% of the greater of:

• Statewide median income if in non-metropolitan area

• Metropolitan area median income

– Certain designated “Targeted Populations”

– Census tracts with less than 2,000 people that are contiguous to a LIC and within an empowerment zone

– High migration rural counties (use 85% vs. 80%)

– Special GO Zone rules

QALICB Requirements

• Must generate revenues within 3 years, unless the entity is a nonprofit and uses the proceeds in furtherance of its nonprofit mission

• There are also 5 ongoing financial requirements:

– Gross Income

– Tangible Property

– Services Performed

– Collectibles

– Nonqualified Financial Property

QALICB Requirements

• At least 50% of the business’ gross income is from the active conduct of a qualified business in LICs

• At least 40% of the use of the tangible property of the business is located in LICs

• At least 40% of the services provided by the business’ employees are performed in LICs

QALICB Requirements

• Services Test

– At least 40% of the services performed for the business by its employees (amount paid) is performed in any LIC

If the business does not have employees, it can meet the Gross Income and Services tests if it meets the Tangible Property test at a minimum of 85%

QALICB Requirements

• Nonqualified Financial Property Test

– Less than 5% of the average adjusted bases of the property of the entity is attributable to certain nonqualified financial property

• Includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property with a term in excess of 18 months

– Exception: reasonable amount of working capital

• Safe Harbor: for construction loans, if the proceeds of the loan will be expended by the QALICB within 12 months after the loan is made, then it is treated as a reasonable amount of working capital

QALICB Ineligible Business Activities

• Operation of residential rental property– Buildings which derive 80% or more of gross rental income from residential

dwelling units

• Properties where no substantial improvements are made

• Development or holding of intangibles for sale or license

• Operation of certain ineligible businesses– Golf courses

– Race tracks

– Gambling facilities

– Certain farming businesses

– Stores where the principal business is the sale of alcoholic beverages for consumption off premises

Available NMTC Investment Authority

2001 $ 1.0 billion

2002 $ 1.5 billion

2003 $ 1.5 billion

2004 $ 2.0 billion

2005 $ 2.0 billion

2006 $ 3.5 billion + $400 million

2007 $ 3.5 billion + $600 million

2008 $ 3.5 billion

Total $ 19.5 billion

Process Overview

Step 1: Entities apply to the CDFI Fund for certification as Community Development Entities (“CDEs”)

Step 2: CDEs apply to the CDFI Fund for an award of NMTC allocation authority

Step 3: CDFI Fund selects CDEs to receive NMTC allocations

Step 4: CDEs use allocations to offer NMTCs to investors

Step 5: Investors make Qualified Equity Investments (“QEIs”) in CDEs and are entitled to NMTCs

Step 6: CDEs use QEI proceeds to make Qualified Low-Income Community Investments (“QLICIs”) in Qualified Active Low-Income Community Businesses (“QALICBs”)

Recapture

• NMTCs may be recaptured from investors during the

7-year credit period if:

– The CDE ceases to qualify as a CDE

– The CDE redeems the investment

– The “Substantially-All” requirement is not met

Indemnification/Guaranty

Typically, a QALICB is asked to:

• Covenant to maintain status as a QALICB throughout the term of the loan

• Indemnify the Tax Credit Investor for loss of NMTCs plus any interest and penalties imposed by the IRS

How to secure NMTC financing

• How to locate CDEs

– Talk to CDEs (See QEI Report)

– Talk to industry experts

• How to locate Investors

– Talk to industry experts

• How to sell your project

– LIC is in an area of higher distress

– Project would not be completed but for NMTCs

Require Additional Information?

Michael J. GoldmanNixon Peabody LLP

202-585-8289

mjgoldman@nixonpeabody.com

To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.