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 NMTC Equity Fund Loan (Net of CDE Fees & Expenses) $7,500,000 $2,500,000 Leverage Fund QEI $10,000,000 Allocatee Subsidiary CDE QLICI B Loan QLICI A Loan $2,500,000 $7,500,000 Project / QALICB Slide 2
Industry Basics - Interests Fund Lender Tax Credit Investors No direct lien on business through NMTC Avoid Recapture structure CDEs must maintain its status as a Able to obtain a “synthetic” first lien CDE 7-year forbearance may be required Principal Employment- CDEs may not provide a “return of” capital to Amortization difficult to implement the Investment Fund during the 7- Liquidity impaired by NMTC structure year compliance period. However a “return on” capital is allowed. Understand risks and rights available through NMTC structure Meet Substantially All Test Asset management and servicing Taxable Income Foreclosure procedures Liquidity of Investment Redeployment Risk Evaluation CDE 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 3 rd parties • $1MM from owned assets • Average projected earnings over next 7 years • $1MM from developing for 3 rd 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 NMTC Equity Fund Loan (Net of CDE Fees & Expenses) $26,250,000 $8,750,000 $5,000,000 $5,000,000 $5,000,000 $10,000,000 $10,000,000 Leverage Fund 1 Leverage Fund 2 Leverage Fund 3 Leverage Fund 4 Leverage Fund 5 $5,000,000 QEI $10,000,000 QEI $5,000,000 QEI $5,000,000 QEI $10,000,000 QEI Allocatee Allocatee Allocatee Allocatee Allocatee Subsidiary CDE 1 Subsidiary CDE 2 Subsidiary CDE 3 Subsidiary CDE 4 Subsidiary CDE 5 $2,500,000 $2,500,000 $1,250,000 $1,250,000 $1,250,000 (B Loan) (B Loan) (B Loan) (B Loan) (B Loan) $7,500,000 $7,500,000 $3,750,000 $3,750,000 $3,750,000 (A Loan) (A Loan) (A Loan) (A Loan) (A Loan) Project / QALICB 1 Project / QALICB 2 Project / QALICB 3 Project / QALICB 4 Project / QALICB 5 (Existing LIC Project 1) (Existing LIC Project 2) (Existing LIC Project 3) (Future LIC Project 1) (Future LIC Project 2) Slide 7
Project SPE Execution ( Each Project in an LIC is separate QALICB) • 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 Slide 8
Business SPE Execution (Diagram) NMTC Equity Investor Fund Lender NMTC Equity Fund Loan (Net of CDE Fees & Expenses) $26,250,000 $8,750,000 Leverage Fund QEI $35,000,000 Allocatee Subsidiary CDE QLICI B Loan QLICI A Loan $8,750,000 $26,250,000 Project / QALICB (LIC Business) Slide 9
Business SPE Execution ( LIC Business = QALICB) • 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 Slide 10
Overall Business Execution (Diagram) NMTC Equity Investor Fund Lender NMTC Equity Fund Loan (Net of CDE Fees & Expenses) $7,500,000 $2,500,000 Leverage Fund QEI $10,000,000 Allocatee Subsidiary CDE QLICI B Loan QLICI A Loan $2,500,000 $7,500,000 Project / QALICB (Blue Ocean Development, LLC) Slide 11
Overall Business Execution ( Blue Ocean Development = QALICB) • 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 Slide 12
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