utilizing new market utilizing new market tax credits ... - Plante Moran

WEBINAR
COLLABORATE WITH PLANTE & MORAN EXPERTS:
UTILIZING NEW MARKET
TAX CREDITS TO FILL
FUNDRAISING GAPS
TOPIC CS4THET TIMES
plantemoran.com
May 11, 2010

GETTING STARTED
• Utilizing new market tax credits to fill fundraising gaps
– Today’s session begins at 2 p.m. EDT
– To join the audio portion of the event:
• 1 (866) 639-9991 (Toll-Free (US & Canada))
• +1 (678) 302-3571(International Dial-in (Toll))
– Questions
• You can submit questions at any time to the “Q&A Group” through the chat
feature located on the right of your webcast console
– Presentation slides
• You will receive a follow-up email with a link to download today’s
presentation. The webinar archive will also be posted to
webinars.plantemoran.com two to three business days after the webinar.
– For technical support, please contact:
• E-mail — support@atconference.com
• Phone — 877.480.4300 or *0 from the conference
1

PRESENTERS
TIM FRENS
Plante & Moran
MARY KING
Invest Detroit
Partner and specialist in
Vice President
new market tax credits
2

NMTC PROGRAM OVERVIEW
• Goal
– Provide incentives to invest in low-income communities
• Structure of program
– Federal government provides subsidy to taxpayers who make
such investments
– Form of subsidy = Federal tax credit
• Federal credit = 39% of investments made
• Credit is taken over a seven-year period
• Credit is subject to 100% recapture (non-vested)
3

NMTC PROGRAM OVERVIEW
• Not-for-profit — NMTC illustrations
– Theaters in Davenport, Iowa, and Utica, New York, both
received more than $1.0 million in financial benefits from
NMTC.
– Day care center in Woonsocket, Rhode Island, financed with
NMTC received $1.2 million in benefits.
– Two charter schools in Detroit, Michigan, netted more than
$7.0 million in financial benefits from the NMTC program.
4

NMTC PROGRAM OVERVIEW
• Not-for-profit — NMTC illustrations
– YMCA in Southeast, Michigan received more than $1.0 million in
financial benefits from the NMTC financing it received
– Community Center in Langley Park, Maryland, received benefits
in excess of $3.0 million
5

NMTC PROGRAM OVERVIEW
Program definition — Community development entities
(CDEs) must use substantially all of the proceeds from
qualified equity investments (QEIs) to make qualified
low-income community investments (QLICIs) in qualified
active low-income community businesses (QALICBs)
located in low-income communities
6

NMTC PROGRAM OVERVIEW
CDE
QLICI
QLICI
QALICB
QALICB
QEI
QLICI
QALICB
7

BENEFITS TO THE NOT-FOR-PROFIT
• Investor receives tax credit
– An investor will receive a total tax credit equal to 39% of the
approved investment (allocation) made in a community
development entity (CDE)
– The tax credit is spread out over a seven-year period. The
investor will receive 5% in each of the first three years
beginning on the date of the investment and 6% in each of the
next four years totaling 39%
– Thus, for an investment of $10 million the total tax credit over
seven years would be $3.9 million
8

BENEFITS TO THE NOT-FOR-PROFIT
• Investor shares benefit with the not-for-profit
• Examples of benefits to not-for-profits
– Enhance loans to project
• New markets enhanced debt may be 100-300 basis points below
market rates of interest
• Portion of debt may be forgivable (i.e., permanent equity) — Up to
approximately 30% of principle
9

TRANSACTION COSTS
• Complexity = Cost
– These are complex and expensive transactions
– There are multiple parties with multiple legal counsel, tax
counsel, accountants, and consultants
– Total professional fees paid out of the proceeds are significant
costs
10

TRANSACTION COSTS
• Complexity = Cost (continued)
– Additional fees from CDEs, banks and investors often run from
6% to 12% of the investment (allocation) amount, including:
• Origination fees
• Compliance fees and costs (including annual audited financial
statements)
• Administrative fees
• Asset management fees
• Investor exit fees
11

ADDITIONAL CONSIDERATIONS
• Transaction size
– Generally, transactions require an investment of at least
$4 - 5 million to generate a net benefit after transaction
expenses
12

PARTICIPANTS
• Community development entity (“CDE”)
– For-profit or non-profit entity having a primary mission of
serving low-income communities
– Vehicles through which the CDFI Fund awards NMTCs to enable
tax credit investors to infuse capital into low-income
communities
– Must be certified by the CDFI Fund to be eligible to receive an
allocation of NMTCs
– Certified CDEs apply for NMTCs through a highly competitive
annual competition conducted by the CDFI Fund
13

PARTICIPANTS & TERMINOLOGY
• Qualified active low-income community
business (“QALICB”)
– A business that meets the qualification requirements to
generate an investment that is eligible for NMTCs
• Tax credit investor
– A taxpayer that is interested in providing equity financing in
exchange for NMTCs
• Leveraged lender
– A lender that makes a loan to an “Investment Fund” instead of
making the loan to the QALICB so that the loan proceeds can be
used to make a QEI which will generate NMTCs
14

TERMINOLOGY
• Qualified census tract (“QCT”)
– A U.S. census tract that meets the criteria to qualify for NMTCs
• Compliance (or recapture) period
– The seven years immediately after the date of a QEI, during
which a recapture event could occur
15

LOW-INCOME COMMUNITY
• Criteria
– Statutory criteria — Based on poverty rate and median income
in census tracts
– Contractual criteria — Many CDEs have an “allocation
agreement” with the CDFI Fund that requires more that just the
minimum low-income community requirements
• Determining census tract eligibility
– Use address to determine eligibility from mapping system on
the CDFI Fund website
16

QUALIFIED ACTIVE LOW-INCOME
COMMUNITY BUSINESS (QALICB)
• Eligible businesses
– Any trade or business is eligible
– Non-profit entities are also eligible
– Rental of improved nonresidential real estate is eligible
• Residency of employees
– There is no requirement that the employees be residents of a
low-income community
17

EXCLUDED BUSINESSES
• “Sin” businesses: A qualified business does
not include any trade or business consisting
of the “operation” of any:
– Private or commercial golf course
– Country club
– Massage parlor
– Hot tub facility
– Suntan facility
– Racetrack or other gambling facility
– Any store whose principal business is the sale of alcoholic
beverages for consumption off premises
18

RECAPTURE RISKS
• Penalty for recapture — If there is a
recapture event at any time during the seven
years immediately after a QEI is made, then:
– The entire amount of the NMTCs claimed by the investor with
respect to that QEI must be repaid to the IRS with interest, and
– The investor will not be able to claim any remaining i NMTCs with
respect to that QEI
19

RECAPTURE EVENTS
• Redemption
– All or any portion of the QEI is redeemed by the CDE
– Distinguishing between a return of capital and distribution of
profits.
• Bankruptcy not a recapture event
– Bankruptcy of a QALICB or a CDE is not a recapture event
20

SIMPLE STRUCTURE
NMTC
Investor
99.99%
$10 Million
$3.9 million
NMTCs
Managing
Member
.01%
$500,000 Fees
CDE
Allocation of
NMTCs and
Certification of
CDE
CDFI Fund
$9.5 Million
QALICB
21

LEVERAGED STRUCTURE
Managing
Member
.01%
$280
99.99% 99%
$2.7 Million
NMTC
Investor
Leveraged
Lender
$7.3 million
Investment
LLC
$3.9 million
NMTCs
Managing
Member
.01%
$500,000 Fees
CDE
99.99%
$10 Million
Allocation of
NMTCs and
Certification of
CDE
CDFI Fund
$9.5 Million
QALICB
22

PITFALLS & OPPORTUNITIES
• Finding allocation of NMTCs
– Limited resource
– Match project with CDEs business plan
– Negotiating benefit sharing and fees/costs
• Transaction costs — Need to include in budget
• Timing — Early approval needed to meet “but
for” test (if applicable)
23

PITFALLS & OPPORTUNITIES
• Avoiding recapture
– Seven-year interest only loan
• No mortgage for leveraged lender — Need to
educate lender
• Related party restriction
– Determine if CDE is subject to restriction
– Opportunities to structure transaction to avoid related party
restriction
24

LEVERAGED STRUCTURE
Managing
Member
.01%
$280
99.99% 99%
$2.7 Million
NMTC
Investor
Leveraged
Lender
$7.3 million
Investment
LLC
$3.9 million
NMTCs
Managing
Member
.01%
$500,000 Fees
CDE
99.99%
$10 Million
Allocation of
NMTCs and
Certification of
CDE
CDFI Fund
$9.5 Million
QALICB
25

THANK YOU FOR ATTENDING
Stay up to date on the latest thinking about today’s
critical business topics via Plante & Moran’s webinars
that are delivered directly to your desktop.
To view a complete calendar of upcoming Plante &
Moran webinars,visit webinars.plantemoran.com
Tim Frens, Partner
Plante & Moran Housing and Community Development Team
Phone: 847.628.8789 8789 E-mail: tim.frens@plantemoran.com
Mary King, Vice President
Invest Detroit
Phone: 313.259.6368 E-mail: mary.king@investdetroit.com
26

THANK YOU!
TOPIC CS4THET TIMES
plantemoran.com