Combining NMTCs with LIHTCsCombining NMTCs with LIHTCs
NH&RA 2008 Summer Institute
The Myth
NMTCs and LIHTCs are mutually exclusive tax credits.
Questions to Consider
• What are the statutory or regulatory prohibitions regarding low-income housing?– Restrictions on use with LIHTCs.
• Does the business the CDE will be lending to or investing in qualify as a QALICB?– Restrictions on residential rental property.
Project Type: “Mixed-Use” Developments
• QALICBs must be engaged in the active conduct of a qualified business.
• Rental of real estate qualifies only if the property is not depreciable as residential real property and there are substantial improvements on the property.
• Residential rental property is defined in Section 168(e)(2)(A) of the IRC as “any building or structure if 80 percent or more of the gross rental income from such building or structure is rental income from dwelling units.”
“Mixed-Use” (cont’d)
• Mixed-Use must have less than 80% of income from rental housing plus 20% or more of income from:– Office space– Retail– Other commercial space
Can Mixed Use Projects Combine NMTCs and LIHTCs?
• Generally speaking, not allowed– CDE’s loan/investment will not be a
QLICI to the extent it finances building’s eligible basis under Section 42(d)
• Solutions– Use condominium structure– Finance non eligible basis items
Condo Structure: NMTCs and LIHTCsNMTC Investor
CDE LIHTC Investor
Partnership One Partnership Two
Mixed Use Building
Owns Residential Condominium
Owns Commercial
Condominium
Loan or Equity
NMTCs and LIHTC: Eligible Basis
• NMTCs cannot finance eligible basis items
• Can finance– Land– Infrastructure/sitework– Commercial portion of building
• Importance of tracing funds, no cross-collateralizing, no cross- defaults
More Information?
Gregory N. Doran, Esq.401 9th Street, NW
Suite 900Washington, DC 20004
THE BETHANY SQUARE PROJECTLeveraging NMTC for Land Acquisition
& Predevelopment Costs
NATIONAL HOUSING & REHABILITATION ASSOCIATION SUMMER INSTITUTE
Santa Fe, New MexicoJuly 24, 2008
AGENDA1. WHO WE ARE2. WHAT WE DO3. EXPERIENCE4. TOOLS WE USE5. THE BETHANY SQUARE PROJECT – Problem statement
and possible solutions
THE URBAN GROUP OF COMPANIES
The Urban Group of Companies is a full service
real estate development, management, investment
banking and finance group focused on
opportunities in the urban core.
COMPANIES• Urban Development & Finance, LLC• Urban Holdings, LLC• Urban-Eco Housing LLC• Urban Housing (Property Management)• Urban Construction• Urban Consulting• Urban Seminars• Urban Protective Services
NORRIS LOZANOCEO & President, Urban Development & Finance, LLC
• More than 25 years experience in large commercial and business finance, venture capital and banking law
• Founded United Fund Advisors, Portland Family of Funds - $1.1 billion in NMTC-related deals in 4 years
• “25 Green Building Leaders in the NW” - Sustainable Industries NW Magazine
• Semi-finalist, “Innovations in American Government Award” – Harvard U• Board of Directors, ecoAmerica• Board of Directors, Hayward Corporation• Juris Doctorate, Southern Methodist University School of Law• Bachelor of Arts in Political Science from the University of Texas
WHAT WE DOUrban Group:
• Analyze market opportunities• Acquire, master plan, develop, finance and manage and operate single purpose and mixed-use real estate projects in the urban core• Manage real estate investment funds• Source debt and traditional and tax credit equity• Structure and close transactions• Analyze and report community impacts• Provide investor reporting services
PROJECT TYPES:• Historic Rehabilitation• Section 8• LIHTC including rehab• New Markets Tax Credits• Senior affordable housing• Workforce housing - family• Commercial• Retail • Faith-based• Light industrial
ACCOMPLISHMENTS• Principals have closed 20 NMTC transactions (total project
cost: $1.2 billion) since 2004 • $150 million invested and syndicated directly• $650 million in green buildings financed• Consulted on $645 million in NMTC utilized allocations• Public/Private partnerships• Numerous historic projects• Own/manage over 40 buildings and 1,000 units of
affordable housing• Los Angeles, Chicago, New York City, Portland, New
Orleans, North Carolina, Texas.
ECONOMIC IMPACTS
Jobs created
Fiscal impacts
Total economic impacts
~8,000
~$528.8 million
~$3.8 billion
IMPLAN estimate of direct, indirect and induced impacts of Construction and first 10 years of Operations.
TRIPLE BOTTOM LINE RETURNS- PEOPLE-PLANET-PROFIT
• Financial – provide market yield returns to investors
• Social – new commercial and retail services, jobs, wages, cultural and community benefits
• Environmental – LEED construction, Transit- oriented Developments, education, green housekeeping plans, tenant recycling plans, healthier built environment
REPRESENTATIVE URBAN PROJECTS
• Some of the Projects structured and closed by Urban principals during the past five years
(* indicates project was structured and closed as CEO of previous firm)
CAHUENGA – Los AngelesWorkforce housing over retail in 1925 Hollywood hotel – historic rehabilitation – nearing compeltion
$10.5 mm project
Goals:• Preserve historic character• 104 units of affordable housing• Energize street with 8,100 SF of active, ground floor retail
CARONDELETHistoric rehabilitation - Architectural gem restored – near McArthur Park – Los Angeles
$3.0 mm project
Components:• Historic Rehabilitation• Office • Community social space• Movie and television set location
1848 N. GRAMERCYHistoric Restoration 1929 Hollywood multifamily affordable apartment building
$4.1 mm project
Goals:• Restore historic luster• 34,000 SF; 5 floors• Studios and 1BR
THE CIVIC*Blighted apartment becomes retail, green housing and condo – Portland, Oregon
$97.5 mm project
Components:• Affordable Housing• Condos• Retail• Community open space• Underground parking
THE NORMANDIEAffordable housing in historic 1926 Los Feliz (Los Angeles)
$3.2 mm historic rehabilitation
Goals:• High quality historic restoration• Preserve 1920’s character• 30 new housing units
12W* NMTC allocationNew office, retail and housing in West End
$137.8 mm project
Goals:• Job retention• Creative services• Workforce housing• New retail and jobs• “Carve-out” for Head Start
FEATURED PROJECT: BETHANY SQUARE
• South Central LA – 4 acre land assembly
• 1 mile from epicenter of 1992 Civil Unrest
• Assembled over 15 years• Strong community and
political support
FOUR CHALLENGES 1 Development Challenges – year 20042 Predevelopment Financing - year
20063 What to build in an uncertain market
– year 20084 How to use LHTC,NMTC, ITC and
Gap funding together in the project and meet new LA Green Building Standards
Final Problem Statement – How to structure it?
CHALLENGE #1 DEVELOPMENT CHALLENGES – 2003-2005
• South Central LA• 1 mile from epicenter of 1992 Civil Unrest• Few mixed-use developments in the area in
2 generations• Few amenities, groceries, schools,
services• “A neighborhood in need of a pioneer”• GETTING TAX CREDITS - application filed
for NMTC in 2004 with an option to acquire the land
DEVELOPMENT PLAN
• Senior Affordable• Workforce housing• Retail + commercial• LEED target• Community + political support• $80+ mm project• ~$5 mm needed for
acquisition
NEW MARKETS TAX CREDITS• $11 million NMTC award (2005) to Bethany
Square, LLC• “… to provide a debt investment in a highly
distressed inner-city area in South Central Los Angeles…to support a 3.7-acre mixed-use development ...”
BETHANY SQUARE NMTC STRUCTURE
POST-ACQUISITION• NMTC funds function exactly as intended,
allowing a project in deeply underserved area to move forward –used acquisition financing for leverage which provided almost $2 million for pre development
• Urban funds some predevelopment costs - $1 million
• Needs additional predevelopment funds to continue – strategic considerations
• WE ARE NOT COMPLETED IN PREDEVELOPMENT – STILL DECISIONS TO BE MADE
CHALLENGE #2: PREDEVELOPMENT FINANCING -2006 -2008
• Predevelopment activities required for permits and construction financing – NMTC derived capital funds initial activities:• Market Feasibility and appraisals• Design development drawings and
environmental and LEED considerations• Entitlement• LIHTC AND GAP FUNDING APPLICATION
COSTS are next
• CHALLENGE #3: IN UNCERTAIN MARKET OF 2008, WHAT TYPE OF HOUSING TO BUILD? How do we approach LEED standards in LA?
• In 2004, Bethany Square was conceived as mixed- use with workforce condos over commercial and retail and LHTC Senior Housing.
• In 2008 market constraints forced reconsideration of workforce program leaving 100 units of senior affordable, 35% - 60% MFI and commercial for a total development of 137,648 square feet
2008 MULTIFAMILY MARKET RESEARCH
“…as a result of foreclosures on the single-family side, we are seeing an increase in the renter pool from 30.9 percent to 32.2 percent. That's 1.5 million new renters looking for an apartment…. Some of the forecasting at NMHC indicates that by 2011 we might even be facing rental shortages."
-Ric Campo, CEO Camden Property Trust, Houston, in Multifamily Executive Magazine
RESEARCH
“…With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced
momentum as the guiding force for housing prices" -NY Times, July 19, 2008
MULTIFAMILY STRATEGY• Demographic trends indicate senior and multifamily,
coming online in 2009/10, are well-timed• California markets fundamentally sound• Strong rent growth• Low vacancy rates• Moderate growth but large base• Generation-Y and Baby Boomers huge potential
CHALLENGE #4: WHY USE NMTC AND LIHTC IN ONE PROJECT IN UNCERTAIN TIMES?
• Tightened credit means multiple sources needed to finance large-scale projects• Lenders in their own swim lanes• Mixed-use addresses multiple needs and spreads
risks• Mixed-use is the seed of community
• NMTC + LIHTC can be utilized together in condo structure
DEMOGRAPHIC DEFINITIONS
Largest Demos are Boomers (age 43-62 today) and Gen-Y (8-27 today)
% OF RENTERS, BY AGE OF HOUSEHOLD
Source: US Census Bureau
Source: US Census Bureau
Apartments and Condos:Singles, Roommates; Entry‐
Level & First
Move‐Up Condos
Apartments & Condos: Move‐
Down, Down‐sizing, Lifestyle –
ALL QUALIFY FOR SENIOR
HOUSING (55+)
PROJECTED POPULATION GROWTH RATE 2008-2018
OIL PRICES FORCING LONG-TERM CHANGES
TYPICAL HOUSEHOLD
BUDGET IN 2006
2006‐2008 EFFECTS
HOUSING: 29%
TRANSPORTATION:
14%
GAS PRICES +30% INCREASED GAS AND
FOOD COSTS
EQUIVALENT TO 7%
OF HOUSING BUDGET
FOOD & BEV: 11% FOOD PRICES + 20% MOVE CLOSER TO
WORK
MOVE CLOSER TO
TRANSIT
DOWNSIZE
THE URBAN GROUP’S GREEN BUILDING IMPERATIVE
• LEED or beyond• Create productive, healthy places
to live, work and play• Transit-oriented development• Improve air and water quality• Reduce solid waste• Conserve natural resources
ECONOMIC BENEFITS - OWNERSINCREASE PROPERTY VALUATION
• Efficient systems more valuable• Healthy, i.e. productive indoor environment – residents,
workers, visitors, shoppers• Enhanced rental margins, especially NNN
MARKETING/RESALE• Lease up faster• Decrease vacancy• Improve retention• Improve occupant performance• Higher visitor traffic• Improved sales
BENEFITS – RESIDENTS AND PROPERTY MANAGEMENT
$$ SAVINGS• Utilities cost savings – energy, water – 20% -
50%
HEALTH• Low VOC: improved indoor air quality• Daylighting: productivity, well being• Natural ventilation: more comfortable• Increased density: more interaction
ENERGY EFFICIENCY OPPORTUNITIES
SOLAR POWER• Southern California location• Silicon Valley intensely
focused on quality, output• Bethany: Rooftop or Sky
Bridge PV arrays• Can be economically neutral,
depending on structure
ADDITIONAL FUNDING RESOURCES
ENERGY TAX CREDITS• “Businesses are eligible for tax credits for buying hybrid
vehicles, for building energy- efficient buildings, and for improving the energy efficiency of commercial buildings (as outlined in the Energy Policy Act of 2005).”
– US Department of Energy
ADDITIONAL FUNDING RESOURCES
ENERGY CREDITS - EXTENSIONS• “By a vote of 25-12 the House Ways and Means Committee
today approved H.R. 6049, the Energy and Tax Extenders Act of 2008. The bill includes a six-year extension of the investment tax credit (ITC) for solar energy; three-year extensions of the production tax credit (PTC) for energy derived from biomass, geothermal, hydropower, landfill gas and solid waste; and a one-year extension of the PTC for energy derived from wind.” – Novogradac & Company
ADDITIONAL FUNDING RESOURCES
ENERGY CREDITS – MAINTAINING BASIS• “In PLR 200820011, the IRS ruled that no reduction in
investment credit basis was required for solar equipment placed in a tax-exempt bond-financed affordable housing project where:
• bond loan documentation prohibited the use of bond loan proceeds to finance the solar equipment;
• the bond proceeds were not actually used to finance the solar equipment;
• and the solar equipment did not serve as collateral for the bond loan.” – Novogradac & Company
ANSWER TO CHALLENGES # 3 and 4 – What to build and how to finance it
Seek additional gap financing resources to build LHTC Senior housing and commercial/retail built hitting LEED Standards for efficiency and to meet new City of Los Angels standards
TAX CREDITS TO UTILIZE• New Markets Tax Credits• LIHTC (4% credits) and Bonds or (9%)• Energy ITC
ADDITIONAL FUNDING RESOURCESLOW-INTEREST LOANS - CALIFORNIA
• LA/Community Redevelopment Agency• HCD - Transit-Oriented Development• HCD – Infill Grant Program• HCD -Multifamily Housing Program• Los Angeles Housing Department -AHTF• City of Industry Funds
ADDITIONAL FUNDING RESOURCES
MISCELLANEOUS• Infill Infrastructure Grant• Local Utility Equipment and Conservation funds• Federal Modified Accelerated Cost-Recovery System (MACRS)
(accelerated depreciation for solar equipment)• State of California: numerous programs• Utilities: numerous low-interest loans, rebates and credits for
energy efficient equipment and solar products
FINAL CHALLENGE-
STRUCTURING ADDITIONAL NMTC, LHTC, GRANTS, ENERGY (ITC) AND GAP FINANCING INTO EXISTING STRUCTURE- ADDITIONAL PREDEVELOPMENT TO CONSTURCTION
-Herb Stevens and Greg Doran
BETHANY SQUARE NMTC STRUCTURE- adding the new resources- Herb Stevens and Greg Doran on structure
URBAN DEVELOPMENT & FINANCE, LLC
CONTACT:Norris Lozano, CEO & President2719 Wilshire, Suite 200 Santa Monica, CA [email protected]
(310) 315-7226 office(310) 740-7011 cell
Combining New Markets and
Solar Tax Credits
Herb Stevens July, 2008
Overview of ETCs
•Energy Tax Credits are generally 30% of “facility” cost (e.g., transmission lines and substations are not eligible for the ITC)
•Includes Photovoltaic (PV) Concentrated Solar Power (CSP) & fuel cells
•Must generate electricity, heating, cooling, hot water, or fiber-optic lighting. Sale of elec. is not required
Placed in Service
When is a facility placed in service?
• Usually when completed, with licenses and after pre-operational testing
• “Daily operation” can matter• Acquired property must be delivered and ready
to use; mere purchase is not enough
The Tax Benefits and Timing
30% ETC is usually taken in the year the facility is “placed in service”
Possible recapture for 5 years (100% in first year, 80% in second year, etc.)
• Mostly 5-year MACRS depreciation, but new rules permit 50% depreciation in first year (PIS in 2008).
Other Subsidies
• Bonds and “subsidized energy financing” generally reduce federal credits. (Full reduction)
• State programs usually don’t reduce solar credit, but may be taxable, e.g., state grants)
Technical Rules
• Almost all investors are corporations because of “At Risk” and “Passive Loss” Rules
• Basis reduction of 50% of ITC, meaning less depreciation
• Profit motive -- But compare Rev. Proc. 2007-65 (for wind) with Reg. 1.42-4 (for LIHTC)
Solar/New Markets Lease Pass Through Structure
NMTC and Solar/Investor Credit
CDE
Master Tenant
Project Owner
Solar Project
LenderLoan and 49%
Equity
Power Purchase
Agreement or Sublease
Credit Pass ThroughEnergy User
Lease
Developer 51% Equity
Lease
Equity
Loan
$10 million cost
$3.5 million
$6 million allocation
Solar $4.2 million NMTC $1.8 million
$6 million
Credit Equity $6.0 millionDebt $3.5 million Need $ .5 million REC or Rebate
Solar/New Markets Single Equity Structure
CDE
Fund
Project Owner
Solar Project
Leverage Lender
Energy User
NMTC Investor
Solar Credit Investor
Power Purchase Agreement or Lease
Developer .01%
Loan and Equity
Equity 99.99%
Equity
Equity
Loan
$10 million cost
Allocation of $5 million NMTCs
$1.5 million$3.5 million
$5million
$4.2 million
NMTC 5.0 million Solar 4.2 million Need .8 million
Thank you
Herb Stevens
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