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New Markets Tax Credits Investing in Underserved Areas

Utah Housing Coalition. 2. New Markets Tax Credits ? Investing in Underserved Areas. Who Is NDC? The National Development Council Is the Nation's Leading Non-profit Provider of Community Development Technical Assistance and TrainingPartners With Government Agencies Throughout the United States S

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New Markets Tax Credits Investing in Underserved Areas

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    1. Utah Housing Coalition 1 New Markets Tax Credits – Investing in Underserved Areas ARTSPACE UTAH NATIONAL DEVELOPMENT COUNCIL NEW MARKETS TAX CREDITS 101 UTAH HOUSING COALITION UTAH HOUSING MATTERS PARK CITY, UTAH OCTOBER 16, 2007

    2. Utah Housing Coalition 2 New Markets Tax Credits – Investing in Underserved Areas Who Is NDC? The National Development Council Is the Nation’s Leading Non-profit Provider of Community Development Technical Assistance and Training Partners With Government Agencies Throughout the United States Since 1969 Awarded $286 Million in NMTC Program Capacity Through HEDC New Markets, Inc. Affiliate Entity Closed On Investments Totaling $220 Million

    3. Utah Housing Coalition 3 New Markets Tax Credits – Investing in Underserved Areas

    4. Utah Housing Coalition 4 New Markets Tax Credits – Investing in Underserved Areas

    5. Utah Housing Coalition 5 New Markets Tax Credits – Investing in Underserved Areas

    6. Utah Housing Coalition 6 New Markets Tax Credits – Investing in Underserved Areas

    7. Utah Housing Coalition 7 New Markets Tax Credits Fills Financing Gaps on a Range of Community Development Projects by Attracting Equity and Debt with NMTCs Downtown revitalization projects Industrial projects Mixed-use projects Community facility projects

    8. Utah Housing Coalition 8 New Markets Tax Credits Program Description Created December 21, 2000 as Part of the Community Renewal Tax Relief Act of 2000 CDFI Fund of the U.S. Treasury Department Administers the NMTC Program Certifies Community Development Entities (CDEs) Allocates NMTCs Monitors CDEs

    9. Utah Housing Coalition 9 New Markets Tax Credits Program Description PROGRAM STATISTICS 5 Funding Rounds to Date - $15.0 Billion 2 Funding Round Specific to Gulf Coast $15.0 Billion provided through 294 Awards 61 Applicants awarded $3.5 Billion in 2007s expected Fall 2007) Program Extended by Congress Through 2008 Efforts Underway to Extend to 2013!!!

    10. Utah Housing Coalition 10 New Markets Tax Credits Program Description What Makes the NMTC Program DIFFERENT from other credits? Credits are awarded to a Community Development Entity (CDE) – NOT TO A PROJECT Equity attracted for credits must ultimately provide benefits to a project in a Low-Income Community (LIC) How a CDE uses the credits to attract equity and make funds available to a project is very flexible Every deal is potentially different!

    11. Utah Housing Coalition 11 New Markets Tax Credits NMTC Basic Flow of Funds

    12. Utah Housing Coalition 12 NMTC Initial Flow of Funds $1.0 Million Investment New Markets Tax Credits Upper Tier Investment - Qualified Equity Investment (QEI)

    13. Utah Housing Coalition 13 New Markets Tax Credits Credit Value

    14. Utah Housing Coalition 14 NMTC Initial Flow of Funds $1.0 Million Investment New Markets Tax Credits - Lower Tier Investment Qualified Low-Income Community Investment (QLICI)

    15. Utah Housing Coalition 15 MAJOR NMTC BENEFIT CDE FINANCING FLEXIBILITY New Markets Tax Credits - Lower Tier Investment Qualified Low-Income Community Investment (QLICI)

    16. Utah Housing Coalition 16 TYPICAL CDE FINANCING PRODUCTS EQUITY PRODUCTS Subordinate “ Soft” Equity LOAN PRODUCTS Senior “Hard” Debt (“A” Loans) Subordinate Debt (“B” Loans) Flexible Terms and Interest Rate CDE can give an investors a return ON their investment but not OF their investment inside 7 Years. So loans are typically interest-only with balloon payments. Lenders may require sinking funds to capture principal payments. New Markets Tax Credits - Lower Tier Investment Qualified Low-Income Community Investment (QLICI)

    17. Utah Housing Coalition 17 CREDIT RECAPTURE Recapture risk is not based on any of the financial operation of the investment. Instead: CDE must continue to be certified as a CDE; and CDE must use substantially all (85%) of cash; or 80% with reserves included, to make Qualified Low Income Community Investments. New Markets Tax Credits CDE – Investor Issue

    18. Utah Housing Coalition 18 New Markets Tax Credits Who is the Borrower or Beneficiary Qualified Active Low-Income Community Business ? The First Decision: Is the Project or Business in an Eligible Area? NMTCs are geographically targeted A business or project must be located in an eligible census tract – typically one with a poverty level of greater than 20 percent or where the median income is below 80% of the state or metropolitan area, whichever is greater Some new areas are eligible in 2005 Federal Empowerment Zones and Enterprise Communities Rural counties that lost more than 10 percent of their population

    19. Utah Housing Coalition 19 New Markets Tax Credits Who is the Borrower or Beneficiary Qualified Active Low-Income Community Business ? Additional Requirements - 2006: Bulk of Allocation Must also be Located in a census Tract which has: Poverty Rate = 30% Median Family Income = 60% of Statewide MFI Unemployment Rate = 1.5 x National Average Also Local Distressed Designations: Empowerment Zone Enterprise Community Renewal Community SBA HUBZone Brownfields Redevelopment Area HOPE VI Redevelopment Area CDFI Hot Zones TIF Districts FEMA Disaster Area

    20. Utah Housing Coalition 20 SECOND, the QALICB Must Have a Substantial Connection with the Community as Measured by Three Tests Gross Income Test: > 50 percent of the QALICB’s gross income must be generated from activities performed in the LIC Tangible Property Test: > 40 percent of the QALICB’s tangible property must be located in the LIC Services Test: > 40 percent of the services of the QALICB’s employees must be performed in the LIC New Markets Tax Credits Qualified Active Low-Income Community Business ?

    21. Utah Housing Coalition 21 New Markets Tax Credits Qualified Active Low-Income Community Business Qualifiers The gross income test is met if either the tangible property or the services test is met at 50 percent or higher A business with no employees (i.e., potential real estate partnership) meets the services and gross income tests if it meets the tangible property test at 85 percent or higher “Active conduct” includes start-ups (for-profits and non-profits) if the entity is reasonably expected to generate revenue (receive donations for non-profits) within three years of the date of the loan or investment (QLICI) A real estate partnership has 100% of its income generated from the site so they are the QALICB!

    22. Utah Housing Coalition 22 New Markets Tax Credits Qualified Active Low-Income Community Business Further Clarification Rental real estate okay but cannot be residential. Exception – mixed use buildings depreciated as a commercial building - >20% of effective income generated from non-residential uses

    23. Utah Housing Coalition 23 New Markets Tax Credits Ineligible Businesses Rental of real property where no substantial improvements are made The IRS is currently determining “substantial improvements,” but essentially, you cannot just land bank or refinance existing debt Golf courses, country clubs, massage parlors, hot tub or tanning facilities, gambling facilities, farming businesses, stores whose principal business is the sale of alcoholic beverages Rental of real property where any lessee is not a qualified business

    24. Utah Housing Coalition 24 New Markets Tax Credits NMTCs and RTCs Historic Rehabilitation Tax Credits (RTCs) Can Be Combined with NMTCs Can combine the two federal tax credit programs to increase the amount of equity raised for a project However, each tax credit’s requirements need to be met, so lose track of individual requirements Combining both tax credits increases the complexity of the transaction as well as the legal and accounting costs for a project Master tenant structure Passive loss limitations Transaction costs

    25. Utah Housing Coalition 25 New Markets Tax Credits NMTCs and LIHTCS NMTCs Can Be Combined with LIHTCs Only Through Use of a Condominium to Separate Respective Project Basis NMTCs Can Be Used for Commercial Portion

    26. Utah Housing Coalition 26 Artspace City Center Salt Lake City, Utah Redeveloped Office Space 22,500 SF Artist Live/Work Loft Space 18 UNITS Part of an area-wide revitalization effort in downtown Salt Lake City Nonprofit developer Project cost - $6.2 million Project value - $3.8 million 60% Equity Generated

    27. Utah Housing Coalition 27 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT FINANCING TIMELINE SEPTEMBER 2003 NDC/ARTSPACE BEGIN JUNE 2004 NMTC INVESTORS SOLICTED SEPTEMBER 2004 INVESTOR SELECTED MARCH 2005 INVESTOR CHANGED JULY 2005 NMTC FINANCING CLOSED LESSON: NMTC ARE NOT FOR THE IMPATIENT

    28. Utah Housing Coalition 28 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT FINANCING PROBLEM PROJECT SOURCES AND USES – SEPTEMBER 2003 DEVELOPMENT COSTS: $ 5,518,907 DEVELOPMENT SOURCES: $ 4,661,805 FUNDING GAP $ 857,002 PROJECT’S FMV $ 3,400,000

    29. Utah Housing Coalition 29 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT FINANCING PROBLEM PROJECT USES – JUNE 2004 DEVELOPMENT COSTS (2003): $5,518,907 DEVELOPMENT COSTS (2004): $6,012,373 INCREASE $ 493,466 PROJECT’S FMV $ 3,900,000

    30. Utah Housing Coalition 30 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT FINANCING SOLUTIONS PROJECT SOURCES INITIALLY IDENTIFIED THESE FINANCIAL BENEFITS: FEDERAL HISTORIC TAX CREDITS PARALLEL STATE HISTORIC CREDIT (ONLY AVAILABLE ON HOUSING PORTION) DEBT FINAL SOLUTION REQUIRED THE ADDITION OF: NEW MARKETS TAX CREDITS

    31. Utah Housing Coalition 31 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT VALUING THE FINANCIAL BENEFITS

    32. Utah Housing Coalition 32 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT Historic Rehabilitation Tax Credit 20 percent, one-time credit on rehab costs Must qualify certified historic structure or contributing building in National Register historic district commercial, industrial or rental housing substantial rehabilitation – spend greater of $5,000 or property’s adjusted depreciable basis

    33. Utah Housing Coalition 33 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT TOTAL PROJECT COSTS = $6,012,373 ELIGIBLE PROJECT COSTS = $4,506,723 Tax Credit Rate = 20% Total federal Historic Credits $ 901,345 State of Utah only counts residential costs for the state program so state credits are less - $408,128.

    34. Utah Housing Coalition 34 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT WHAT ARE THEY WORTH? Total federal Historic Credits $ 901,345 CURRENT INVESTOR MARKET - $0.92 - $0.96 HISTORIC CREDIT VALUE $829,000 - $865,000 State of Utah credits impossible to value since so few investors have state tax liability.

    35. Utah Housing Coalition 35 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT DEBT PORTION – WHAT CAN THE PROJECT SUPPORT

    36. Utah Housing Coalition 36 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT LOAN SUPPORTED: $2,400,000 Hard Debt 1.30 DCR 83% LTV $ 400,000 Soft Debt

    37. Utah Housing Coalition 37 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT New Markets Tax Credits Credits provided to investors to reduce cost of investment capital. NOT PROJECT BASED

    38. Utah Housing Coalition 38 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT New Markets Tax Credits Must be in an eligible census tract. City Center is. Must be an eligible business (QALICB) Bridges LP – real estate partnership is.

    39. Utah Housing Coalition 39 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT New Markets Tax Credits VALUING THE CREDIT

    40. Utah Housing Coalition 40 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT CITY CENTER INVESTMENT PROVIDED $2,404,799 IN NMTC CREDITS TO INVESTOR

    41. Utah Housing Coalition 41 New Markets Tax Credits ARTSPACE – CITY CENTER REDEVELOPMENT

    42. Utah Housing Coalition 42 New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT PROJECT – ARTSPACE BENEFITS PROJECT FUNDED – JULY 2005 DEBT – REDUCED TO $2,757,462 ARTSPACED PAID $1,205,930 AS POTION OF ACQUISITION FINANCING (THESE FUNDS WILL BE HELD IN RESERVE AND USED TO REFINANCE PROJECT IN YR 7 TO REDUCE LONG-TERM DEBT – INCREASE CASH FLOW TO NON PROFIT.

    43. Utah Housing Coalition 43 ISSUES TO PAY ATTENTION TO: COMBINING CREDITS CAN COMBINE CREDITS TO INCREASE PROJECT FINANCING. EACH PROGRAM HAS UNIQUE RULES SO THE TRANSACTION IS MORE COMPLEX MORE COMPLEX MEANS MORE LAWYERS – HARDER CLOSING – INCREASED TRANSACTION COSTS CITY CENTER PAID $110,000 IN LEGAL COSTS. New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    44. Utah Housing Coalition 44 ISSUES TO PAY ATTENTION TO: NEW MARKETS TAX CREDITS FINDING THE CREDIT ALLOCATION Must have a CDE partner. They have the credit. Look to CDFI website or work locally to get your own allocation. Must have NMTC investors who are experienced OR very committed to the project. Start with your local bank partner. Artspace had to change investors when the first one just couldn’t get comfortable with construction risks. BE READY FOR A LOT OF CALLS WITH A LOT OF LAWYERS. The credit is still relatively new and there is a learning curve. Final regulations are new and there is no case law. The program can be very flexible and that means fewer deals are the same. FEES WILL BE HIGH AND THE PROJECT BORRWER IS RESPONSIBLE FOR ALL THOSE COSTS. Discuss capping fees early in the process and get the investor to agree. New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    45. Utah Housing Coalition 45 ISSUES TO PAY ATTENTION TO: NEW MARKETS TAX CREDITS FINANCIAL UNDERWRITING In the end, NMTCs are underwriting as a permanent lender to projects. So strong operating performance is essential. This is due to one of the few NMTC recapture concerns: NMTC Recapture. If: CDE ceases to be a CDE; or CDE doesn’t continually invest and reinvest at least 85% of investment; or CDE redeems the investment. The last event may happen in case of default. If the project goes into receivership and is liquidated, the CDE CANNOT return those proceeds to the investor. They must be reinvested in another eligible project. New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    46. Utah Housing Coalition 46 ISSUES TO PAY ATTENTION TO: NEW MARKETS TAX CREDITS SO – investor equity and investor debt have different risk concerns: EQUITY INVESTOR IS CONCERNED ABOUT RECAPTURE SO THEY FOCUS ON MAIING SURE THE CDE STAYS IN THE DEAL AND ANY DEFAULT PROCEEDS ARE NOT RETURNED TO THE LENDER. THEY REQUIRE ANY LENDER TO FORBEAR THEIR RIGHTS TO FORCLOSE ON INVESTMENT DEBT. DEBT LENDER WANTS TO BE ABLE TO ACCESS THE ASSETS IF THEY DON’T GET PAID. TO BE QUALIFIED DEBT – THEIR LOAN: CAN ONLY HAVE AN INTEREST IN THE PARTNERSHIP – NOT TYPICAL COLLATERAL – SO THEY ARE BASICALLY UNSECURED TYPICALLY HAVE INTEREST-ONLY TERMS DURING NMTC PERIOD SO THERE ISN’T ANY LOAN AMOTIZATION TYPICAL RESPONSES: Have the same equity investor and investment lender. Limits who can do deals. OR have “soft” public debt as alternatives or to reduce lender risks New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    47. Utah Housing Coalition 47 ISSUES TO PAY ATTENTION TO: NEW MARKETS TAX CREDITS Additional lender issues – NMTC transactions want to close at construction to bring the value of the NMTC into the construction phase. Brings ALL construction lender risks into play: Development Budget Accuracy General contractor experience Construction schedule GENEROUS CONTINGENCIES Since many NMTC lenders think like permanent lenders, you may have issues in closing for construction. CITY CENTER DID. New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    48. Utah Housing Coalition 48 ISSUES TO PAY ATTENTION TO FOR HOUSING: NEW MARKETS TAX CREDITS CAN’T FINANCE SINGLE-PURPOSE RESIDENTIAL AFTER CONSTRUCTION. Can use NMTC within interim financing to bring credit benefits into construction BUT Must have a strategy for placing the funds into other eligible projects or risk recapture CAN BE USED WITH LIHTC If its mixed use project (20% of effective revenues come from non-residential uses) – then NMTCs can generate more equity than 4% credits. Reason – NO INELIGIBLE PROJECT COST. ALL OF THE PROJECTS ARE ELIGIBLE FOR INVESTMENT. PERFECT INVESTMENT SOURCE FOR MIXED USE DEVELOPMENT SINCE ALL LAND USES ARE ELIGIBLE. New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    49. Utah Housing Coalition 49 CONCLUSIONS – WHY DO IT: For mixed use project – may be a last gap funding for projects in lower income communities There is a growing track record so transactions may get easier. Is the only place-based investment credit available to organizations focused in certain neighborhoods CAN BE FUN – YOU WILL DEFINITELY LEARN SOMETHING NEW New Markets Tax Credits ARTSPACE – CITY CENTER PROJECT

    50. Utah Housing Coalition 50 New Markets Tax Credits RESOURCES http://cdfifund.gov/index.asp CDFI Website http://www.newmarketstaxcreditcoalition.org/ New Markets Tax Credit Coalition http://www.novoco.com/NMTC/index.shtml Novogradic Website http://www.nationaltrust.org/ntcicfunds/NMTC.htm The National Trust Community Investment Fund

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