Financing Mixed-Use and Commercial Real Estate

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  • 1. Financing Mixed-Use and Commercial Real Estate June 22, 2005 New Markets Tax Credit Financing
  • 2. What I Hope to Cover
    • Overview of New Markets Tax Credits (NMTC)
    • Potential “Commercial” Projects
    • What NMTC Can Do for Your Project
    • What NMTC Cannot Do
    • Challenges in Utilizing NMTC
    • Putting a Deal Together
    • MHIC’s Approach
    • Some Examples
    • Strategies When Considering
  • 3. New Markets Tax Credits Overview
    • 39% credit over 7 years for “qualified equity investments”
    • Eligible investments for real estate are largely determined by geography (“low income” areas)
    • Tax credits allocated to Community Development Entities (CDE’s) through annual national competitions
    • Credit is attached to the flow of capital, rather than to the real estate (as with LIHTC and historic credits)
    • Complex tax and compliance issues
  • 4. Potential “Commercial” Projects
    • Owner-occupied retail (or other commercial) building
    • “ Spec” commercial building
    • Mixed-use (residential/commercial), more than 20% commercial
    • Non-profit buildings (health centers, community centers, non-profit offices)
    • Cultural facilities
  • 5. What Can NMTC Do for Your Project?
    • Provide gap financing (20% to 40% of total development costs)
    • Leverage historic rehabilitation
    • Reduce hard debt
    • Reduce operating costs, rents
    • Strengthen otherwise “shaky” project
  • 6. What New Markets Tax Credits Cannot Do
    • Fill “unbridgeable” gaps – project must be able to support 60-80% of costs from other sources
    • Improve finances of underlying business (including non-profits)
    • Remove risks: construction, lease-up, re-leasing
  • 7. Challenges in Utilizing NMTC
    • Limitations of 7-year subsidy
    • Complexity of utilization
    • Working with a “CDE”
    • Limited availability of allocation
    • Planning and Predictability
  • 8. Putting a Deal Together
    • Pulling in other resources (public, private, philanthropic, historic credits)
    • Underwriting issues:
      • Debt amount and coverage
      • Master leases
    • Underwriting the tenants:
      • Value of “credit tenants”
      • “ Credit tenant” vs. “community-based”
      • Tenant improvements
  • 9. MHIC’s New Markets Program
    • MHIC’s initial mission: affordable housing. Yet, for number of years, MHIC has been financing mixed-use and commercial properties.
    • MHIC has received three NMTC allocations (in all 3 round) – $25 million in June 2003, $90 million in May 2004, and $54 million in May 2005.
    • MHIC’s goal is to finance projects that would otherwise be infeasible, projects with major financing gaps.
    • Eight projects have been underwritten, reviewed and approved. Six of these projects have closed. We have a pipeline of well over $250 million (far exceeding our allocation)
    • We closed our first New Markets Fund last year, and are well on our way to raising the capital for our second Fund.
    • MHIC makes extensive use of leverage to increase the impact of New Markets Credits – able to provide 22% to 44% of total project costs as gap-filling equity.
  • 10. Tier Structure MHIC New Markets Fund I
  • 11. MHIC NMTC Financing Impact Approved Approved Construction Construction Construction Construction Complete Complete Status 35% 21,940,055 Holyoke Health Center, Holyoke 44% 15,355,552 Colonial Theatre, Pittsfield 35% 4,862,725 Project Hope, Boston 39% 6,674,997 Hibernian Hall, Roxbury 37% 62,884,838 Total 25% 7,909,152 Palmer/Warren, Roxbury 37% 4,843,297 Lawton Corner, New Bedford 32% 5,804,991 Coffin Lofts, New Bedford 22% 1,902,855 Border Street Office, East Boston NMTC % Total Cost Financing Project
  • 12. Investor Benefits IRR: 10.8% Total Benefits Tax Benefits Cash Flow Tax Credits Capital Invested Year 1,259,941 65,922 72,813 1,121,206 (1,000,000) Total 0 0 0 0 0 2014 2,995 (10,924) 13,920 0 0 2013 (7,958) (28,516) 20,099 460 0 2012 138,035 8,482 6,667 122,886 0 2011 140,734 11,402 6,446 122,886 0 2010 144,843 15,166 6,791 122,886 0 2009 145,210 15,992 6,791 122,427 0 2008 126,426 18,497 5,524 102,405 0 2007 383,053 23,442 5,332 354,278 (344,962) 2006 186,603 12,381 1,243 172,979 (655,038) 2005
  • 13. New Markets Fund II Under Review 9,829,530 The Brewery, Jamaica Plain Under Review 4,256,383 Morehouse Bakery, Lawrence Approved 4,872,129 Project Hope, Roxbury $127,262,015 10,125,000 13,850,000 4,000,000 15,820,033 11,825,000 7,138,314 4,169,257 20,053,323 21,323,046 Financing Under Review Springfield Public Market Total Under Review Tyler Street Center, Boston Under Review Our House for Design, Lawrence Under Review Worcester Performing Arts Under Review Project Place, South End Under Review Cinema Center, Pittsfield Under Review Four Corners, Dorchester Approved Colonial Theatre, Pittsfield Approved Holyoke Health Center, Holyoke Status Project
  • 14.
    • Examples of MHIC New Markets Tax Credit Projects
  • 15. Border Street Offices East Boston Community: East Boston Sponsor: NOAH NMTC Investment: $0.6 million Closed Financing: March 2004 Construction Complete: March 2004 The Facts
  • 16. Border Street Offices East Boston New Markets help bridge financing gap for non-profit offices. The Story
  • 17. Hibernian Hall Roxbury Community: Roxbury Sponsor: Madison Park CDC NMTC Investment: $2.6 million Closed Financing: March 2004 Construction Complete: March 2005 The Facts
  • 18. Hibernian Hall Roxbury Irish dance hall to multi-functional cultural center, taking advantage of historic credits and significant fund-raising. The Story
  • 19. Coffin Lofts New Bedford Community: New Bedford Units: 18 Sponsor: Hall Keen LLC NMTC Investment: $1.9 million Closed Financing: April 2004 Construction Complete: November 2005 The Facts
  • 20. Coffin Lofts New Bedford Local leadership, working private developer and local bank, create mixed-use, mixed-income housing in downtown New Bedford. The Story
  • 21. Warren Palmer Roxbury Community: Roxbury Sponsor: Jubilee Christian Church International NMTC Investment: $2.3 million Closed Financing: December 2004 Construction Complete: December 2005 The Facts
  • 22. Warren Palmer Roxbury Church undertakes development of “spec” commercial building in Dudley Square, first new construction in 40 years. The Story
  • 23. Holyoke Health Center Holyoke Community: Holyoke Sponsor: Holyoke Health Center NMTC Investment: $7.96 million Closed Financing: March 2005 Construction Complete: December 2005 The Facts
  • 24. Holyoke Health Center Holyoke Combination of historic credits, federally-guaranteed debt, and New Markets credits allows consolidation of successful urban health center. The Story
  • 25. Holyoke Health Center Holyoke
  • 26. Colonial Theatre Pittsfield Community: Pittsfield Sponsor: Colonial Theatre Association NMTC Investment: $7.1 million Construction Complete: May 2006 The Facts
  • 27. Colonial Theatre Pittsfield Major fundraising, coupled with historic credits, leverages significant New Markets credits, and allows project to be built with no hard debt. The Story
  • 28. Strategies When Considering NMTC (Next Steps)
    • Make sure it’s the right fit
    • Understand limitations; confront risks
    • Start talking with potential CDE’s early in your planning
    • Cultivate partnerships
    • Balance your objectives
  • 29. Financing Mixed-Use and Commercial Real Estate June 22, 2005 New Markets Tax Credit Financing