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New Market Tax Credit. Prepared by Albert A. Bogdan Wednesday, April 2, 2014. NMTC Executive Summary. Bill Signed 12/21/2000 Purpose - Attract $15 Billion to Low-Income Communities $2.5 Billion Allocated for 2001 and 2002 $3.5 Billion Allocated for 2003 and 2004
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New Market Tax Credit Prepared by Albert A. Bogdan Wednesday, April 2, 2014
NMTC Executive Summary • Bill Signed 12/21/2000 • Purpose - Attract $15 Billion to Low-Income Communities • $2.5 Billion Allocated for 2001 and 2002 • $3.5 Billion Allocated for 2003 and 2004 • One In Michigan ($27 Million - Wayne County – Detroit CDE Inc.) • Value of Total Investment Targeted to Michigan • MI – 4 for $157.5 Million • $2.0 Billion Targeted for 2005 • Decision in May, 2005 Prepared by Albert A. Bogdan
NMTC Executive Summary • 39% Investment Tax Credits to Investor for Over 7 Years • First Three Years = 5%/Year • Next Four Years = 6%/Year • Total = 39% • Funds Used to Invest Almost Any Businesses Located in a Low Income Census Tract • Tax Credits Allocated to a Community Development Entity (CDE) by US Treasury • A Nonprofit Must Set up For-Profit Subsidiary • Cash Flows to CDE as Equity Investment • Qualified Equity Investment • Must Stay in Deal For 7 Years • 85% Must be Invested in Business Within 1 Year • Flows Out as Equity, Loan or Loan Purchase • Deals May Be Pooled or Pass-Through Investments • Tax Credit to Investor Regardless of Investment Success or Failure Prepared by Albert A. Bogdan
New Market Tax Credit Flow Chart Prepared by Albert A. Bogdan
Criteria for Eligible Location • Census Tract with • Poverty Rate > 20% or • Greater of the Following Two: • Median Family Income < 80% of MSA Median Income or • Median Family Income < 80% of Statewide Median Family Income • Additional Levels of Distress, Poverty Rate > 30%, Median Family Income < 70%, Brownfield, Urban Renewal Area, Enterprise Zone, etc. Go to AABDS.com to: Verify Census Tract Look at Wayne County Map Prepared by Albert A. Bogdan
Potential Wayne County Locations • Place Map Here Prepared by Albert A. Bogdan
What Type of Business Can Receive NMTC Financing? • Almost Any Business Units Located In Low To Moderate Income Areas Can Qualify • Definition Of Business Unit • May Be Branch Or Division • Investment Must Be Traced To The Facility • Typical Businesses • Shopping Center, LLC • Small Technology Firm • Hotel • Manufacturer • Retail Store • Micro Entrepreneur • Single Family Home Developer • No Rental Residential – However, Residential Defined as Project Where More Than 80% of Income Comes from Residential Portion Prepared by Albert A. Bogdan
Who Can be an Eligible Equity Investor? • Any Taxable Investor • Individual • Company • Investment Fund • Examples • Banks • Insurance Company • Venture Capitalist & Other Investment Funds • Any Corporation • Individual • Debt Investor Can Be Anyone – HUD, Bank, Pension Fund • Debt Investor Receives No Collateral – Nonrecourse Loan Prepared by Albert A. Bogdan
Leveraged Real Estate Investment • Commodity Market for NMTC Slowly Taking Shape • Tax Credit May Not Go to Principal Investor • Have Used HUD 108 as Debt – Can Use Pension Funds • CDE is Facilitator – Need Debt & Equity – Price & Deal Negotiable – Tax Credit Value Can Vary $100,000/Million Prepared by Albert A. Bogdan
Doing the DealNo Repayment for 7 Years • Assumptions • Bank Lends $700,000 to “Investment LLC” for 7 Years • CDE Provides Tax Credit Allocation to ILLC • ILLC Sells Tax Credit for $300,000 • Interest 6.0%, • CDE Invests $1 Million in Firm • 25 Year Amortization • Balloon Repayment in Year 8 • Results • FirmRepays CDE $1,000,000 • Firm Receives $300,000 Incentive • Subtract up to $100,000 in Fees • Based on Wayne County Model • Not Much Consistency in Product – Each CDE Can Do Own Thing • The Tax Credit Portion is Easiest Part of the Deal Prepared by Albert A. Bogdan
Negotiating the Deal • Points of Negotiation • The Term and Conditions of Investment Loan • No Collateral • Interest Only • Internal Rate of Return for Tax Credit • Fees & Professional Charges • Try to Keep it Simple – Costs Add Up Quickly • Normally Real Estate Deals – Prepare Check List – Complete It • CDE Loan – Must Cover Above Commitments • Negotiate Residuals Prepared by Albert A. Bogdan
Nationwide 2001-02 NMTC Allocatees Prepared by Albert A. Bogdan
Nationwide 2003-04 NMTC Allocatees Prepared by Albert A. Bogdan
Nationwide 2003-04 NMTC Allocatees Prepared by Albert A. Bogdan
Nationwide NMTC Allocatees • LISC CDE in Kalamazoo • First Deal in Detroit by SEEDCO • Go to AABDS.com to Link with CDFI FUND • Get name, address, • e-mail, and • Background Information • Bring Money & Deal to Table • Don’t Wait to Get Allocation • Do the Deal Now! • Next Round Only $2 Billion with 100 Repeaters – It is Going to be Tough!! Prepared by Albert A. Bogdan