Presenting a live 110-minute teleconference with interactive Q&A New Market Tax Credits: Tax Issues for Investors and Developers in Structuring Transactions Meeting IRS Program Compliance Requirements for NMTC Deals WEDNES DAY, FEBRUARY 15, 2012 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Michael I. S anders, Partner, Blank Rome , Washington, D.C. Megan A. Christensen, Atty., Blank Rome , Washington, D.C. Donald Nimey, CF A, FRM, Principal, The Reznick Group , Bethesda, Md. Attendees seeking CPE credit must listen to the audio over the telephone. Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
Conference Materials If you have not printed the conference materials for this program, please complete the following steps: • Click on the + sign next to “ Conference Materials” in the middle of the left- hand column on your screen. • Click on the tab labeled “ Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon.
Continuing Education Credits FOR LIVE EVENT ONLY For CLE credits, please let us know how many people are listening online by completing each of the following steps: • Close the notification box • In the chat box, type (1) your company name and (2) the number of attendees at your location • Click the S END button beside the box For CPE credits, attendees must listen to the audio over the telephone. Attendees can still view the presentation slides online. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926- 7926 ext. 10 .
Tips for Optimal Quality S ound Qualit y For this program, you must listen via the telephone by dialing 1-866-927-5568 and entering your PIN when prompted. There will be no sound over the web connection. If you dialed in and have any difficulties during the call, press *0 for assistance. Y ou may also send us a chat or e-mail sound@ straffordpub.com immediately so we can address the problem. Viewing Qualit y To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.
NEW MARKET TAX CREDITS: Tax Issues for Investors and For-Profit and Non-Profit Developers Michael I. Sanders 202.772.5808 Sanders@BlankRome.com 5
NMTC Overview: ● Opportunity to subsidize or provide gap financing in a qualified census tract. ● Benefits to developers, businesses and charities. 6
● Major investors such as Goldman, JP Morgan or PNC buy credits for cash infusion to the development which may not be paid back at the end of the 7-year compliance period. ● Under leverage structure, investor may receive in excess of 9 to 10 percent return after tax. 7
New Markets Tax Credit – A Government Sponsored Joint Venture Vehicle -- $29.5 billion in NMTC allocated through 2011; subject to renewal by Congress. Purpose: The new markets tax credit (NMTC) serves as a way to provide subsidy or gap financing to real estate developments, business activities, or charitable operations planned in qualified census tracts (high unemployment or poverty rate, low median family income). What does it provide? 39% tax credit on the capital invested in a community development entity (CDE), over 7 years (5% in yrs 1-3; 6% in yrs 4-7). Who benefits from the credit? The investor (typically national banks, insurance companies) making an investment in a CDE gets a tax credit of $0.39 for every $1 invested and CRA credit, which under a “leveraged” structure yields in excess of a 10% after-tax return. The CDE directs capital into qualified projects or businesses. The investor is not repaid its equity investment. Eligible Investments: • Community businesses, including e.g. hospitals, charter schools. • Commercial or mixed-use real estate projects (at least 20% of gross income from commercial component). Examples: •105-Unit, The Bradford -- $45M affordable housing and ground floor retail space in Bedford-Stuyvesant. Innovative structure allowed HDC and HPD financing to be used, with Goldman Sachs as the equity investor; BRP and Bedford- Stuyvesant Restoration Corp were the development partners. • $100M charter high school in Mott Haven, Bronx. Robin Hood Foundation was sponsor; JPMorgan Chase was investor. 8
Use of Leverage Debt and Alternative Capital Sources ● In structuring an NMTC transaction one of the most important elements in structuring is the use of the leverage lender. ● Practitioners need to be creative in structuring; in this regard it is important to recognize that the lender may take a security interest in the investment fund borrower’s assets, but not QALICB/developer’s property. 9
● And, typically the leverage lender will be required to forbear from exercising any remedies during the 7-year NMTC compliance period. ● If leverage loan funds are not fully available at closing or are conditioned upon the completion of the project, a bridge financing source may need to be lined up; e.g., banks making short term bridge loans, provided that there is an anticipated take-out through government funds, such as HUD 108 program/tax-exempt financing, etc. 10
● Leveraged lenders who are currently making loans and what the general nature of the business is of these lenders (for profit, nonprofit, government, etc.). ● The pros and cons of the leverage structure compared to a single investor structure. 11
● The impediments keeping new investors from making leveraged loans and how can the NMTC industry address these impediments; e.g., 7-year forbearance and collateral issues. ● Leverage lenders demand more protection today than in the past, although they are not the direct lender. Assets that may be pledged in view of the IRS’ ruling position. How to protect the leverage lender. 12
● Examine the risks that the leverage loan will not be repaid. Use of the A note; how to handle the risks of foreclosure, casualty and condemnation. How to draft the consent provisions. ● The tax issues that nonprofits that act as leverage lenders in transactions that they sponsor: UBIT. 13
● Key steps to ensure coordination between all parties to make sure that key issues are being raised and addressed early in the process. 14
Unwind Exit Strategies: Put-Call Options, Planning Opportunities to Mitigate Burdens of Tax Consequences at Exit ● At the end of the 7-year compliance period, when the investor has received all the NMTCs for which it is eligible, it, along with the CDE, will likely want to unwind the transaction and exit the structure. ● This is typically accomplished through the use of a “put/call” technique that generates a subsidy or grant equivalent to the QALICB. 15
● Under one version of this technique, the investor has the right to require the QALICB, over a specified period, to purchase the investor's interest in the Fund for a specified price (the “put”). In the event the put is not exercised, the QALICB (or an affiliate) has the right to purchase the investor’s interest in the Fund over a specified period for fair market value (the “call”). 16
● The put and call will likely be priced substantially below the investor’s original investment in the Fund. ● If either the put or the call are exercised, the investor would be removed from the structure. An affiliate of the QALICB typically would be substituted in place of the investor, thereby controlling the Fund, and would take steps to redeem the managing member of the CDE. The result here is a net benefit to the project measured by the amount of the investor’s original funds less fees, professional and administrative costs and the price of the put/call. 17
● After the investor is removed, the QALICB may then cause the Fund to liquidate the CDE, often using the QLICI “A note” previously held by the CDE to repay the leverage lender, and subsequently liquidate the Fund, leaving the QALICB on its own and the leverage lender holding the A note. 18
● In the event that the leverage lender is controlled by a §501(c)(3) entity or is itself a charity, it may decide to forgive all or a portion of the leverage loan at the end of the compliance period, but it must not be legally obligated to do so at inception. ● Alternatively the QALICB may also “refinance” the property and use the funds it receives to repay to the CDE the QLICI note that mirrors the leverage loan (but not the QLICI note that reflects the investor's equity). The CDE will then use the funds received from the QALICB to repay the leverage lender. 19
● There is often tension manifested between the equity investor and the QALICB in negotiating the put/call structure. Equity investors are interested in protecting the value of their cushion while the QALICB is interested in assurance that the investor will indeed exercise the put and may use techniques that would devalue the call (through the use of a fair market value formula, annual interest accruals and a significant partial payment in year 7). The investor, however, wants to be assured that it will be treated as the owner of the equity piece. 20
Recommend
More recommend
