2013 New Markets Tax Credit Symposium New Markets Transactional - - PowerPoint PPT Presentation

April 4 | NH&RA Conference Center | Washington, DC

2013 New Markets Tax Credit Symposium

New Markets Transactional Roundtable: Legal, Tax & Structuring Issues

Speakers: John Mackey, CohnReznick, Boston, MA, Moderator Bob Poznanski, LISC NMTC Program, Kalamazoo, MI Ben Swartzendruber, Applegate & Thorne‐Thomsen, Chicago Laura Vowell, US Bancorp, Arlington, VA

Bob Poznanski LISC NMTC Program Kalamazoo, MI

April 4 | NH&RA Conference Center| Washington, DC

NMSC Overview

• Manage the largest cumulative NMTC award in the industry
• $778 million in LISC allocation
• Provides compliance and asset management services to other NMTC

allocatees:

• Currently manage $105 million in allocation for four third party

allocatees

• Provide loan servicing for two third party allocatees
• Provide investor services to four investors
• Industry‐leading NewDL software, available for lease to other CDEs

April 4 | NH&RA Conference Center| Washington, DC

NMSC Overview

• $778 Million in allocations

received

• 79 Projects closed
• $723 Million in allocation

deployed

• 8.1 Million square feet of

commercial or community space

• 390 housing units
• 8,000+ permanent jobs
• 36,070 patients served
• 17,376 students served
• 140,569 other clients served
• 21 Investors
• 34,000 square foot federally

qualified health center

• 64 permanent jobs
• 10,000 medical patients
• 4,000 dental patients

East Side Health Clinic

• St. Paul, MN

April 4 | NH&RA Conference Center| Washington, DC

LISC NMTC Portfolio Overview

ASSET TYPE

• Community Facilities: 51%
• Commercial, Office, Retail:

27%

• Mixed Use Residential: 13%
• Industrial: 5%
• Other: 4%

PROJECT SPONSORSHIP

• Nonprofit: 64%
• For‐Profit: 36%

Hope Street Child Care

Providence, RI

Shops at Park Village

Washington, DC

April 4 | NH&RA Conference Center| Washington, DC

Small Business Loan Fund

• Goal: Provide low‐cost, long‐term SBA 504 financing to

small businesses that enable job creation in neighborhoods that align with LISC’s Sustainable Communities strategy

• LISC Partners:

– Morgan Stanley – provide debt and NMTC equity capital for 1st mortgage loans – CDC Small Business Finance – underwriting and servicing for 1st mortgage loans – Local Bank Partners – loan referrals and interim 2nd mortgage loans – Local 504 Companies – underwrite and service 2nd mortgage loans

April 4 | NH&RA Conference Center| Washington, DC

Program Parameters

• First Mortgage loan amounts from $250,000 to $2,500,000 for for‐profit

businesses to be used for real estate acquisition and/or capital improvements

• Premium of 3.0% to selling bank (no mark‐up allowed)
• Morgan Stanley to direct fund all loans
• EPC must be created for all transactions
• Properties must be multi‐purpose (i.e. not single‐purpose/specialized), for

which the borrower occupies at least 51% of the space

• Collateral Coverage – Max 60% LTV
• Personal Credit – Minimum FICO of 680
• Cash Flow Coverage – Generally consistent with CDC global cash flow
• DSCR Requirement of 1:1 DSC for last fiscal year and interim
• 7‐year lock out with no prepayment allowed
• Loan Fee of 0.5% for SBA participation fee

April 4 | NH&RA Conference Center| Washington, DC

Rates & Terms

• 30‐year loan: interest‐only for 3 years followed by 27 year amortization
• Fixed at 5 year LIBOR swap + 275 basis points for 7 years
• After 7 years adjusted to 90 day Libor Swap + 350 basis points with

quarterly resets

• For current LIBOR swap rates:

http://www.federalreserve.gov/releases/h15/update/

April 4 | NH&RA Conference Center| Washington, DC

Healthy Futures Fund

• PROVIDE NEW CAPITAL to Federally Qualified Health Centers (FQHCs) at a

time of significant patient growth

• PROMOTE COLLABORATION among community development finance

leaders & INCORPORATE A “HEALTH” LENS into their activities and enhancing their capacity to support community health initiatives

• EXPAND HEALTH CARE PROGRAMS & SERVICES available to tenants in

projects financed with Low Income Housing Tax Credits

• ENCOURAGE COMMUNITY DEVELOPMENT ORGANIZATIONS &

COMMUNITY HEALTH CARE PROVIDERS to work together on mutually beneficial programs that improve the health of low‐income individuals and families

• ENHANCE CAPACITY of FQHC operators
• UTILIZE MORE EFFICIENT STRUCTURE for New Markets Tax Credit to

finance health centers, in an effort to reduce transaction costs & better leverage capital from investors

April 4 | NH&RA Conference Center| Washington, DC

HFF – FQHC Term Sheet

• Loan amounts from $2.5 million to $10 million
• Total financing up to 80% LTV w/ 1.20 DSCR
• 7‐year initial term, with first 30 months interest‐only then 19‐year

amortization schedule

• Renewal options for a 2nd 7‐year term
• Rate fixed at 7‐year LIBOR swap + 200 to 250 basis points for 7 years
• At least 20% of the total loan to borrowers will have the ability to be

cancelled (through a put‐call structure) upon successful third‐party refinance of the remaining principal balance

April 4 | NH&RA Conference Center| Washington, DC

Advantages vs. Standard Model

• Committed Sources of Capital
• Financing Product with Pre‐Established Terms & Documentation
• Grant Support toward Cost of Capital Link Technical Assistance Services for

Application Development

• Dramatically Reduce Borrower Need to Retain Other Consultants and / or

Develop Internal NMTC Expertise

• Lower Transaction Costs
• Shorter Closing Process

Ben Swartzendruber Applegate & Thorne‐Thomsen Chicago, IL

April 4 | NH&RA Conference Center| Washington, DC

Transaction Costs – Legal Fees

• Inefficiency – costs reduced without

compromising quality of legal services

• Complexity – costs reduced by

changing program requirements

April 4 | NH&RA Conference Center| Washington, DC

Inefficiency

All – Hands Calls

Duplicated Review

Duration to Closing

Delegation

Re‐Structuring False Starts

“Over‐Lawyering”

Over‐Staffing

April 4 | NH&RA Conference Center| Washington, DC

Market Incentives

Investor QALICB CDE CDFI Fund

$$ NMTC IMPACT $ BENEFIT ALLOCATION STATUTORY PURPOSE

April 4 | NH&RA Conference Center| Washington, DC

QALICB “Bar” Reduces Inefficiency

• QALICB ‐ Non‐Repeat Player, Inexperienced,

Few Relationship Benefits, “But For” Test and Viable Alternatives

• QALICB Counsel – Knowledge of economic and

legal market standards, relationships and “portable” agreements, closing procedure

April 4 | NH&RA Conference Center| Washington, DC

Costs of Simplification

• Regulatory – Are changes consistent with

programmatic purpose? (Ex. True Debt)

• Structural – Interaction of programs (HTC,

State NMTC, HRSA, EB‐5, TIF) and entities (Multiple CDEs, Investors) Cost > Benefit?

• Scope – Asset classes, QALICB Types, Location

April 4 | NH&RA Conference Center| Washington, DC

Complexity or Uncertainty?

• Guidance – CDFI Fund and Service reduce

uncertain legal positions

• Industry Standard – commonly accepted

answers in absence of guidance

• Industry Maturity – Fewer novel issues and

structures

Laura Vowell US Bancorp CDC Arlington, VA

April 4 | NH&RA Conference Center| Washington, DC

NMTC Market Update

Waiting for announcement

Expected late April More allocatees with smaller allocations

Competition for credits

Only the best community impact stories Must be ready to close Deals accept less allocation

Price/Investor view

April 4 | NH&RA Conference Center| Washington, DC

HTC Market Update

 Limited number of investors  Pricing has increased  Pricing and pay-in timing vary  Different responses to HBH and other recent cases

 Timing of closing/Pay‐in  Cash flow/Upside for investor  Guarantee limitations  Methods for exit  Guidance from IRS

April 4 | NH&RA Conference Center| Washington, DC

Twinning with NMTCs

 Types of “Twinned” transactions:

 REITC/NMTC  HTC/NMTC

 Is the project a good fit for NMTCs?

 Create or maintain quality jobs?  Provide needed goods and services?  Provide housing units at below‐market rates?  Provide demonstrable benefits for residents of a low‐income community and/or low‐income persons?  Provide environmentally sustainable outcomes?

 How will other credits flow to investor?

 Are there adequate cash flows to meet all demands, including “true debt” analysis?

April 4 | NH&RA Conference Center| Washington, DC

NMTC/HTC Twinned Structure

SUB-CDE 2 INVESTMENT FUND LEVERAGE LENDER: Project affiliate, Sponsor, Developer USBCDC

Equity – NMTC & HTC

QALICB: Property Owner SUB-CDE 3 SUB-CDE 1

Loan Loans

Master Tenant: Operator

Equity Lease/Equity Equity

Sources (TIF, Grant, Loans)

Bridge Loan

April 4 | NH&RA Conference Center| Washington, DC

Case Study: Howard Theatre

 Location: Washington, DC  Rehabilitation of historic theatre built in 1910.  Project cost: $30mm  Financing:

 Commercial debt  New Markets Tax Credits  Historic Tax Credits  TIF Loan  Grants (Municipal, Private)  Fundraising

April 4 | NH&RA Conference Center| Washington, DC

EB-5 with NMTCs

 EB‐5 Overview  Similarities with NMTCs:

 Invest in real estate and operating businesses  Provide financing with below market terms  Target impoverished areas and create jobs  Created by US Gov’t to stimulate the US economy through job creation and use US Gov’t approved financing intermediaries

 Differences:

 5 year versus 7 year timeframe  Unpredictable timing  “Know Your Customer” bank requirements on EB‐5 funds  Further complicates transaction

John Mackey CohnReznick Boston, MA

April 4 | NH&RA Conference Center| Washington, DC

Historical Perspective

• Put of Note to QALICB from CDE Funded with NMTC

Equity.

• For Profits experience cancellation of indebtedness

income with limited exceptions.

• Non‐Profits count on consistency with Not‐for‐Profit

Purpose in Articles of Organization to make such income not taxable to them.

April 4 | NH&RA Conference Center| Washington, DC

What Has Changed?

• Con Ed case to be discussed in next panel.
• Increase in Individual Tax Rates in January.

April 4 | NH&RA Conference Center| Washington, DC

Example of Economics

Tax Credit Equity on $10 Million Allocation at .75 $ 2,925,000 Conservative Fee to CDE at 3% (300,000) Annual Monitoring Fees at .5% (350,000) Minimum Legal and Accounting Fees to Close (300,000) Accounting and Filing Fees for 7 Years (100,000) Net Proceeds $ 1,875,000 Tax Cost of COD at 47% (880,000) Net Proceeds $ 995,000

April 4 | NH&RA Conference Center| Washington, DC

What Are The Problems?

• Psychological: $10 million allocation/$1,000,000.
• Practical: 7 years of restrictions and the time delay to

close vs. the shallow subsidy.

• The COD impacts the developer but doesn’t lead to

any understanding on the part of others.

• Are other sources available?

April 4 | NH&RA Conference Center| Washington, DC

Contact Information

John Mackey, CPA Partner CohnReznick, LLP 1 Boston Place Boston, MA 02108 (617) 648‐1401 john.mackey@cohnreznick.com