Using Historic Tax Credits in New York

2. Using Historic Tax Credits in New York Combining HTCs and NMTCs Wednesday, June 24, 2009

3. New Markets Tax Credit Fundamentals NMTC Synopsis A federal tax credit available to those that provide equity (QEIs) to certain certified community development entities (CDEs) that in turn lend or invest (QLICIs) in qualified businesses (QALICBs) located in low-income communities (LICs).

4. New Markets Tax CreditsWhat is a Qualified Business? • Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business; must meet requirements regarding gross income, tangible property, services performed, collectibles, and nonqualified financial property • No financing of residential rental property • Mixed use okay • Restrictions on certain types of business operations and tenants • E.g. massage parlor, hot tub facility, liquor store, gambling facility

5. New Markets Tax CreditsWhat is a Low-Income Community? • Generally, a census tract where • The poverty rate is at least 20%, or • The median family income is 80% or less of either statewide median family income, or the greater of statewide or metropolitan median family incomes. • Special rules for “Targeted Populations,” low population areas, and high migration rural counties • Go to: www.cdfifund.gov and click on “NMTC” tab

6. New Markets Tax CreditsWhat is a CDE? • A partnership or corporation who: • Has a primary mission of community development; • Maintains accountability to residents of low-income communities through their representation on any governing board or advisory board; and • Is certified by the CDFI Fund division of the Treasury • CDEs participate in national competition for allocations of NMTC authority

7. New Markets Tax CreditsFinding an Allocation • Confirm your project qualifies • Low-income community • Additional “distress” criteria • Reach out to CDEs who • Specialize in financing historic rehabilitation • Target allocation to your geographical area (city/state or urban/rural) • Prefer your tenant mix (retail, community facilities, etc.)

8. New Markets Tax CreditsHow They Work Tax Credit Investor CDE (Allocatee) Tax Credits over 7 years ($39) and Cash Return QEI ($100) Suballocation of Tax Credit Authority CDE (Subsidiary) Loan/Equity QLICI (85%+ of QEI) Property Owner (QALICB)

9. Typical HTC Structure (Single Entity) Tenants Tax Credit Investor LLC Tax Credit Investor Managing Member (Developer Affiliate) HistoricTax CreditEquity 99.99% Credits, Profits & Losses and Cash Flow .01% Credits, Profits & Losses, Fees andCash Flow DeveloperEquity Tax Credit, LLC (Property Owner) Developer Dev.Fee DebtServicePayments RentalPayments LoanProceeds Construction/Perm Lender

10. Sample TransactionCalculating the HTC Equity

11. Sample TransactionCalculating the NMTC Equity

12. Key Business Issues • Pricing (e.g. $.9825 vs. $1.24+) • Equity Pay-In Schedule (same or faster) • Exit Strategy (unwind may be delayed 2-3 years) • Put Option • Call Option

13. Key Business Issues cont’d • Guarantees (expanded – negotiable; adjuster gross up) • Reserves (no change) • Cash Flow Participation (3% industry standard) • Operational limitations (subtenant mix)

14. Master Tenant/NMTC Structure QEI QLICI QLICI Sub-Tenants/End Users CDE Tax Credit Investor LLC Tax Credit Investor Tax Credit Investor Managing Member (Developer Affiliate) Non-Member Manager 99.99% Credits, Profits & Losses, Fees and Cash Flow DeveloperEquity HistoricTax CreditEquity 100% Credits, Profits & Losses, and Cash Flow .01% Credits, Profits & Losses,Fees andCash Flow Landlord, LLC (Property Owner/Lessor) QALICB Pass-through of Historic Tax Credits & Share of Residual Single Member LLC (Disregarded Entity) Master Tenant, LLC (Master Tenant) Lease Payment &Equity Investment DebtServicePayments RentalPayments LoanProceeds Construction/Perm Lender

15. Thank you Merrill Hoopengardner, Esq. 401 9th Street, NWSuite 900Washington, DC 20004 202.585.8169202.585.8080 (Fax) mhoopengardner@nixonpeabody.com