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How Credits Become Capital: When and How to Syndicate. National Historic Tax Credit Conference Wednesday, September 24, 2008 Chicago, IL. What is Syndication?.
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How Credits Become Capital:When and How to Syndicate National Historic Tax Credit Conference Wednesday, September 24, 2008 Chicago, IL
What is Syndication? • “Syndication” is the process by which the owner of a building brings an investor into the ownership structure of the building so that the investor can claim the credits (and other economic and tax benefits), typically in exchange for providing equity to the project.
What is Syndication? • Federal Historic Tax Credits are not sold directly to an investor. • Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company. • Some State Historic Tax Credits can be “certificated” and sold to investors.
Common Investment Structures • Single Entity Structure. • Master Lease/Credit Pass-Through Structure.
Single Entity Structure GP/Manager Investor 0.1% Management Fees, etc. 99.9% Tax Credits Owner (LP or LLC) Development Fee Developer Fee Ownership Property Lease Lease End User End User
Master Lease/Credit Pass-ThroughLessee Claims Credit Development Fee Developer Owner/Lessor (Affiliate of GP/Manager) GP/Manager Investor Master Lease 0.1% 99.9% Tax Credits Master Lessee (LP or LLC) Property Lease Lease End User End User
Should the Owner/Developer Syndicate? • Factors to Consider: • Does the Developer have limitations on claiming the credit for itself? • Is the Developer a tax exempt entity or have insufficient taxable income to be able to use tax credits? • Business Tax Credit Limitations ($25K +75%) • Passive Activity Rules Apply
Should the Owner/Developer Syndicate? Cont’d • Factors to Consider: • Net Economic Benefits • Equity raise versus lost cash and (sometimes) lost depreciation. • Transaction Costs (both closing and on-going).
Should the Owner/Developer Syndicate? Cont’d • Factors to Consider: • Is additional equity needed during construction (i.e. prior to completion of the rehabilitation)?
Should the Owner/Developer Syndicate? Cont’d • Factors to Consider: • Control: Are you willing to have a partner? • Loss of control issues. • Disclosure and Reporting. • Unwind concerns.
Finding Investors • Does your bank or its CDC make HTC investments? • Referral sources: • State Historic Preservation Office (SHPO) • State and local preservation organizations • Other developers • Experienced accountants and lawyers
Soliciting Investment Proposals —Things Investors Want to Know • Proposed Budget and Timing • Financing Commitments • Property Acquisition Status • Real Estate issues including title and environmental issues, zoning, parking and other permitting
Soliciting Investment Proposals —Things Investors Want to Know cont’d • Leasing Commitments/Market Study • Part 1 and Part 2 Status • Development Team—who they are, their experience and financial capacity
Key Syndication Business Issues — Picking The Best Offer • Pricing • Equity Pay-In Schedule • Reserves • Cash Flow, Fees, and other items that reduce the net economics to the developer
Key Syndication Business Issues — Picking The Best Offer cont’d • Exit Strategy (Put and Call Options) • Guarantees • Structure • Due Diligence Requirements • Experience/Reputation and Closing Process
More Information? John H. Cornell III, Esq. Nixon Peabody LLP 100 Summer Street Boston, MA 02110 • (617) 345-1127; jcornell@nixonpeabody.com