Using NMTCs to Support Operating Business & Non-Real Estate - - PowerPoint PPT Presentation

Using NMTCs to Support Operating Business & Non-Real Estate Transactions

David Gibson, PNC Financial Services Group Seth Harrop, Baker Tilly Virchow Krause, LLP Randy Kahn, Greenline Community Ventures, LLC

Presentation Outline

• Industry Basics
• Key Operating Business Issues
• Hypothetical Example
• Real Estate SPE Execution
• Business SPE Execution
• Overall Business Execution

Slide 1

Industry Basics - Diagram

NMTC Equity Investor Fund Lender Leverage Fund Allocatee Subsidiary CDE Project / QALICB NMTC Equity (Net of CDE Fees & Expenses) $2,500,000 Fund Loan $7,500,000 QEI $10,000,000 QLICI B Loan $2,500,000 QLICI A Loan $7,500,000

Slide 2

Industry Basics - Interests

Tax Credit Investors CDE Fund Lender

• Avoid Recapture
• CDEs must maintain its status as a

CDE

• Principal Employment- CDEs may

not provide a “return of” capital to the Investment Fund during the 7- year compliance period. However a “return on” capital is allowed.

• Meet Substantially All Test
• Taxable Income
• Liquidity of Investment
• Risk Evaluation
• No direct lien on business through NMTC

structure

• Able to obtain a “synthetic” first lien
• 7-year forbearance may be required
• Amortization difficult to implement
• Liquidity impaired by NMTC structure
• Understand risks and rights available through

NMTC structure

• Asset management and servicing
• Foreclosure procedures
• Redeployment
• Maintain Status
• Maintain requirements remaining a CDE
• Reporting Requirements of CDFI Fund
• Annual audit
• Portfolio reporting
• Comply with Allocation Agreement

Slide 3

Key Operating Business Issues

• General
• Industry straddles Institutional Boundaries
• Industry is highly real estate oriented
• Precedents and regulations for real estate more developed
• CDE Control Requirements
• Operating Business Definition Recently Changed
• Predominant activity can NOT include development, management or leasing of real-estate
• Use of proceeds can NOT be “connected” to development, management or leasing
• QALICB Compliance
• Operating Businesses not Place-Based
• QALICB Structuring more complex
• Asset, Services, Income & NQFP Tests
• Expanded QALICB Indemnities
• Debt / True Debt
• Business Valuation Differences
• Asset / Collateral Duration vs. NMTC Compliance Period
• Liquidity of Leveraged Loan and/or QALICB
• Pre-defined loan guarantee programs can be difficult to implement (SBA, USDA, etc.)

Slide 4

Hypothetical Example

Blue Ocean Development , LLC (Fictional RE Development Company)

• Assets:

$25MM

• Liabilities:

$15MM

• Average historic earnings over past 3 years
• $1MM from developing for 3rd parties
• $1MM from owned assets
• Average projected earnings over next 7 years
• $1MM from developing for 3rd parties
• $2MM from owned assets
• Current Project Ownership
• 4 mixed use projects each with $5MM in project costs
• 3 in LIC and 1 is not in an LIC
• Pipeline of Projects to be Owned
• 3 mixed use projects each $10MM total uses over next 7 years
• 2 projects in LICs and 1 project is not in an LIC

Slide 5

Hypothetical Example (Cont)

Blue Ocean Development, LLC

LIC Business

• 3 Existing LIC Projects
• 2 Future LIC Projects

Non LIC Business

• 1 Existing Non-LIC Project
• 1 Future Non-LIC Project

Overall Business Execution: Blue Ocean Development (QALICB) Business SPE Execution: LIC Business (QALICB) Project SPE Execution: Each of 5 LIC Projects (QALICBs)

Slide 6

Project SPE Execution (Diagram)

NMTC Equity Investor Fund Lender Leverage Fund 1 NMTC Equity (Net of CDE Fees & Expenses) $8,750,000 Fund Loan $26,250,000 Leverage Fund 2 Leverage Fund 3 Leverage Fund 5 Leverage Fund 4 $10,000,000 $10,000,000 $5,000,000 $5,000,000 $5,000,000 Allocatee Subsidiary CDE 1 Allocatee Subsidiary CDE 2 Allocatee Subsidiary CDE 3 Allocatee Subsidiary CDE 5 Allocatee Subsidiary CDE 4 $5,000,000 QEI $5,000,000 QEI $5,000,000 QEI $10,000,000 QEI $10,000,000 QEI Project / QALICB 1 (Existing LIC Project 1) Project / QALICB 2 (Existing LIC Project 2) Project / QALICB 3 (Existing LIC Project 3) Project / QALICB 5 (Future LIC Project 2) Project / QALICB 4 (Future LIC Project 1) $2,500,000 (B Loan) $7,500,000 (A Loan) $2,500,000 (B Loan) $7,500,000 (A Loan) $1,250,000 (B Loan) $3,750,000 (A Loan) $1,250,000 (B Loan) $3,750,000 (A Loan) $1,250,000 (B Loan) $3,750,000 (A Loan)

Slide 7

Project SPE Execution

• Advantages

– Limited Balance Sheet Distortion – Simplest Compliance and Monitoring – Least Liquidity Limitation

• Disadvantages

– Significant Duplicative Costs for each Project – Least Flexibility Delivering Subsidy to Projects – Identification of Funding Sources

• Additional Comments

– Capacity to utilize Maximum Allocation

(Each Project in an LIC is separate QALICB)

Slide 8

Business SPE Execution (Diagram)

NMTC Equity Investor Fund Lender Leverage Fund Allocatee Subsidiary CDE Project / QALICB (LIC Business) NMTC Equity (Net of CDE Fees & Expenses) $8,750,000 Fund Loan $26,250,000 QEI $35,000,000 QLICI B Loan $8,750,000 QLICI A Loan $26,250,000

Slide 9

Business SPE Execution

• Advantages

– Strong Flexibility Delivering Subsidy to Projects – Can be combined with Project SPE Executions – Pooled Costs over Multiple Projects

• Disadvantages

– Moderate Balance Sheet Distortion – Moderate Liquidity Limitations – Additional Compliance and Monitoring

• Additional Comments

– Comparable to Portions of a Business Execution

(LIC Business = QALICB)

Slide 10

Overall Business Execution (Diagram)

NMTC Equity Investor Fund Lender Leverage Fund Allocatee Subsidiary CDE Project / QALICB (Blue Ocean Development, LLC) NMTC Equity (Net of CDE Fees & Expenses) $2,500,000 Fund Loan $7,500,000 QEI $10,000,000 QLICI B Loan $2,500,000 QLICI A Loan $7,500,000

Slide 11

Overall Business Execution

• Advantages

– Maximum Flexibility Delivering Subsidy to Projects – Can be combined with SPE Executions – Pooled Costs over Multiple Projects

• Disadvantages

– Broadest Balance Sheet Distortion – Additional Compliance and Monitoring – Broadest Liquidity Limitations

• Additional Comments

– Business Valuation Difficult

(Blue Ocean Development = QALICB)

Slide 12