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New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
New Market Tax Credits - Alan Kennard, Wildman Harrold
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New Market Tax Credits - Alan Kennard, Wildman Harrold

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  • 1. Introduction of Investors and Lenders to New Markets Tax Credit Financing GreenPearl: Beyond Distress Alan L. Kennard September 22, 2011 Wildman Harrold | 225 West Wacker Drive | Chicago, IL 60606 | (312) 201-2000 | wildman.com © 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 2. Alan L. Kennard Alan Kennard is a partner in the business transactions department of the Chicago office of Wildman Harrold. Mr. Kennard’s nationwide practice includes federal and state tax credit transactions, including new markets tax credits, historic tax credits, low-income housing tax credits and energy tax credits, as well as public finance. For example, he has represented investors, lenders, community development entities and taxable and non-profit borrowers in over 120 new market tax credit transactions totally more than $1.3 billion, many of which included other subsidies including the use of other tax credits, public finance, and grants. Most recently, was lead tax attorney with respect to the rare "80/20" transaction with respect to a 45-story historical building in downtown Chicago that involved approximately $150 million of financing including, historic tax credits, low-income housing tax credits, tax increment financing, 1602 grant money, tax-exempt and taxable bond financing and multiple bridge financings. Additionally, Mr. Kennard regularly assists community development entities in successfully obtaining new markets tax credit awards from the CDFI Fund. He is also active in drafting and revising various state tax credit and public finance legislation. Currently, he is developing tax credit financing involving HUD 232 programs and the SBA 504 loan programs. He regularly publishes articles regarding tax credits and related innovative financings and speaks at various local, regional and national forums. Currently, he is drafting a treatise on new markets tax credits. Mr. Kennard graduated, cum laude, from The Ohio State University in 1986, with a B.S.B.A. in Accounting, and graduated, cum laude, from The Ohio State University’s Moritz College of Law in 1991. He is a Certified Public Accountant, Certified in Financial Management, a Certified Managerial Accountant, a Certified Internal Auditor and a Certified Fraud Examiner. Currently, Mr. Kennard is licensed to practice law in Illinois, New York, the District of Columbia, Florida, Kansas Missouri and Wisconsin. His detailed biography can be found at http://www.wildman.com/kennard/ and his direct number is (312) 201-2778.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 3. What is the New Markets Tax Credit Program?  The NMTC program was created in 2000 as an incentive to generate and provide private investment capital (in the form of either debt or equity) to businesses and nonprofits located in qualifying urban and rural low-income communities that otherwise cannot obtain traditional financing in the marketplace. The program is facilitated by the Community Development Financial Institutions Fund (the “CDFI Fund”) which is administered by the US Treasury Department.  Provides a 39% tax credit based on the amount invested by private investor, which is recognized over 7 years: 5% over the first 3 years and 6% over the remaining 4 years.  Financing is facilitated by "qualified community development entities" ("CDEs"), which apply to the CDFI Fund for an allocation of tax credits each year.  CDEs are typically affiliated banks, municipalities and nonprofits.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 4. What is a New Markets Tax Credit Allocation?  It is not an award of money.  It is a "permission slip" to the CDE that permits the CDE to designate tax credits to an investor that provides investment money to the CDE, which the CDE in turn uses to provide beneficial financing to projects or businesses (or non-profits) in low-income communities.  The tax credits arise and are based on the investment money in the CDE (i.e., 39%).  However, in the case of most banks that receive an allocation, the banks will generally use the tax credits themselves.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 5. Basic Transaction Participants  Investors – Consist of banks and other financial institutions, as well as large corporations (subsequent transfer/syndication is possible). – Receive an average after-tax return of between 7% and 12% (including but not limited to the NMTCs), and CRA Credit (if needed). – If desired, ability to leverage their investments for economic benefits (for which the investors are not liable for such debt service payments). – Ability to combine with other subsidies for which they benefit (such as bond financing, historic tax credits, and renewable energy tax credits, etc.). – Ability to maximize economic return to investors while minimizing cost of capital to borrowers. – Ability to assist current customers to finance projects, businesses and nonprofits that need gap financing. – Receiving substantial public goodwill by financing high-profile projects/businesses with substantial community impact. – With a track record of participating in NMTC transactions, the ability to apply for up to $125 million of NMTC allocations themselves.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 6. Basic Transaction Participants  Leverage Lenders – Consist of banks, financial institutions, governmental entities (for bonds, grants or other subsidies), borrower affiliates, and other types of entities. – Receive 7 years of market rate interest only payments, with principal pay off or refinancing at the end of 7 years, and CRA Credit (if needed). – Receive guarantees from borrower affiliates, governmental entities (such as the USDA, FHA or HUD). – Receive collateral interest in investor’s wholly-owned investment fund which owns 99.99% of the CDE). – Ability to assist current customers to finance projects that need gap financing. – With a track record of participating in NMTC transactions, have the ability to apply for up to $125 million of NMTC allocations themselves.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 7. Basic Transaction Participants  Community Development Entities – Have the principle purpose to serve or otherwise benefit low-income communities or targeted populations, and facilitate NMTC financing fulfills such purpose. – Consist of affiliates of banks, financial institutions, states, cities, bond issuers, for- profits and nonprofits. – Facilitate all NMTC financings as the conduit between the Investor, the Leverage Lender and the Borrower. – Apply for and receive allocations of NMTCs up to $125 million per year. – Receive various fees (for example, placement fees, asset management fees, and reimbursement of operating expenses).  Borrowers – With rare exception, consist of for-profit and nonprofit organizations, and, indirectly governmental entities with the use of ground leases. – Generally receive (a) financing otherwise not available in the traditional credit market; (b) below-market interest only payments of approximately 1.0% to 1.5% below market over 7 years; (c) forgiveness of approximately 20% of total NMTC financing at the end of 7 years (structured to be nontaxable); and (d) several other forms of non-traditional financing.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 8. What Types of Projects Qualify for NMTC Financing? Prohibited Financing  residential rental housing (except certain mixed-use facilities)  farming  development/holding of intangibles  so-called "sin" businesses (i.e., any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises)  generally, refinancing unless in the form of a business loan (rather than real estate loan) Permitted Financing  anything other than what is prohibited above (for example: business operations office buildings, commercial and retail buildings, shopping centers, mixed-use projects, for-sale housing, hotels, solar panel manufacturing plants, arts centers, train stations, movie studios, theaters, charter schools, hospitals, college campuses, high-tech and biotech facilities, nursing homes, workforce housing, homeless shelters, transitional housing, facilities to assist educating the homeless, and assistance with home ownership etc.)© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 9. Threshold Requirements In order to qualify for NMTC financing, the project or business/nonprofit must:  be used for permitted financing;  be located in a "low-income community" (which is liberally defined to include roughly 40% of the United States and most central business districts)[1] or otherwise benefit "targeted populations ";  "but for" the NMTC financing, the project would not otherwise receive conventional financing (or be located in a low-income community);  provide substantial community impact; and  be owned by a "qualified active low-income community business" (a "QALICB"). 1] A “Low-Income Community” means any population census tract if either: (a) the poverty rate for such tract is at least 20%, or (b) (i) in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80% of statewide median family income, or (ii) in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80% of the greater of statewide median family income or the metropolitan area median family income.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 10. Qualified Active Low-Income Community Business  Generally a newly organized entity owned by the project sponsor (unless the borrower is a business or nonprofit itself).  5 Basic requirements:  at least 50% of the total gross income of such entity is derived from the active conduct of a qualified business within any low-income community (a "LIC") (a nonprofit corporation will be deemed to be engaged in the active conduct of a trade or business if it is engaged in an activity that furthers its purpose as a nonprofit corporation);  at least 40% of the use of the tangible property is located within a LIC;  at least 40% of the services performed for such entity by its employees are performed in a LIC;  less than 5% of the average of the aggregate unadjusted bases of the property of such entity is attributable to collectibles (unless inventory); and  less than 5% of the average of the aggregate unadjusted bases of the property includes "nonqualified financial property"© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 11. Community Impact A NMTC financing is intended for: (a) creating or maintaining jobs for low-income persons or residents of low-income communities; (b) increasing wages or incomes for low-income persons or residents of low-income communities; (c) financing or assisting businesses owned by residents of, or otherwise committed to remain in, low-income communities; (d) financing or assisting minority- or women-owned businesses, or businesses owned by low-income persons; (e) financing or assisting businesses (including non-profit organizations) or real estate projects that provide childcare, health care, educational or other benefits to low-income persons or residents of low-income communities; (f) facilitating wealth-creation or asset accumulation (such as home ownership) by low- income persons or residents of low-income communities; (g) providing goods and services to low-income persons or residents of low-income communities; (h) creating environmentally sustainable outcomes; (i) facilitating or assisting real estate businesses which will provide rent reductions, more flexible credit standards or lease provisions to businesses owned by low-income persons or residents of low-income communities, or that provide goods and services to low- income persons or residents of low-income communities; and (j) otherwise resulting in other community impacts.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 12. Nonconventional, Below-Market Financing to Projects or Businesses (a) equity (b) equity-equivalent financing; (c) below-market interest rate loans; (d) debt with equity features (i.e., debt with royalties, debt with warrants or convertible debt); (e) subordinated debt; (f) lower than standard origination fees; (g) longer than standard period of interest-only loan payments; (h) higher than standard loan to value ratio; (i) longer than standard amortization period; (j) more flexible borrower credit standards; (k) nontraditional forms of collateral; (l) lower than standard debt service coverage ratio; and (m) loan loss reserve requirements that are less than standard.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 13. $10 Million Example of Typical Leverage Transaction (assuming 67¢ pricing) Investor (100% Owner or Investment Fund) $2,613,000 • $3,900,000 new markets tax credits Equity Investment • Interest/return on capital, tax allocations $7,387,000 7-Year Leverage Loan Investment Fund Allocatee/CDE Leverage Lender (99.99% Member of (0.01% Managing Member of Interest SUB-CDE) SUB-CDE) Fees • $10,000,000 Qualified Equity • $10,000,000 • $3,900,000 new markets Investment (QEI) Sub-Allocation tax credit • Interest/return on capital, tax allocations SUB-CDE $ 7,387,000 Senior 7-Year Loan • Interest/return on capital, $ 2,613,000 Subordinate 30-Year Loan/Equity tax allocations $10,000,000 (exclusive of transaction costs) Borrower Example of Typical Issues: (Business or Non-Profit) 1. Related party debt 2. Forgivable indebtedness taxable income 3. Anti-Abuse Rule 4. Alternative minimum tax 5. 7-year forbearance 6. Fees Project or Operations© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 14. $30 Million Example Using NMTCs and Bond Financing (assuming 66¢ pricing) Investor (100% Owner or Investment Fund) $7,490,3403 Equity Investment • $11,349,002 new markets tax credits • Interest/return on capital, tax allocation $21,609,660 20-Year Bonds Investment Fund Bond Issuer (99.99% Member of CDE (as Leverage Lender) SUB-CDE) (0.01% Managing Member of SUB-CDE) Debt-service • $11,349,000 $29,100,000 Qualified new markets tax credits Equity Investment (QEI) Fees • Interest/return on capital, tax allocations SUB-CDE • $21,609,660 Senior 20-Year Loan (tax-exempt rate) • $ 7,490,340 Subordinate 30-Year Loan equity (1.5% interest, substantially forgiven at • Interest/return on capital, tax allocations end of 7 years) • $29,100,000 (exclusive of transaction costs) Borrower Some Issues: • Private business use • Bond volume cap $900,000 Cash Project© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 15. $5 Million Example Using NMTC and SBA 504 Loan (assuming 68¢ pricing) Investor (100% Owner or Investment Fund) $700,791 Equity Investment $1,030,575 new markets tax credits $1,941,709 10-Year Loan Investment Fund Allocattee Community Leverage Lender (99.99% Member of Sub-CDE) Development Entity (0.01%) $1,030,575 new $100 markets tax credits $2,642,500 Qualified Equity InvestmentsNotes: (QEI)SBA Loan (max) $1,750,000 (35.00%)Equity Sub-CDE CDE $ 142,500 Investors $ 607,500 $1,941,709 Senior 10-Year Loan $ 558,291 Subordinate Loan $ 142,500 EquityThird Party Debt $ 750,000 (15.00%) $2,642,500 (exclusive of transaction costs) Senior Loan $1,941,709 Subordinated $ 558,291 Loan $1,750,000 (max) 504 20-Year Loan $2,642,500 (50.00%) BorrowerTotal $5,000,000 (100.00%) Construction Lender (has title to project)Some Issues:1. Lender knowledge $607,500 Equity2. SBA coordination3. Leveraging Owners4. Priority of liens © 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 16. NMTCs with Historic Tax Credits Project Sponsor Bank NMTC/HTC Investor (Endorsements, Other Equity Investors) Senior Leverage Lender Junior Leverage Loan Senior Leverage Loan • Approx. $0.6MM • Approx. $3.1MM • 7+ Year Term Loan • 7 Year Term Loan • Disbursed up-front • Disbursed up-front • Interest-only @ “Sweep Rate” • Interest-only @ Market Rate NMTC Benefits • Subordinate to Senior and Junior Lev Loan #1 • Collateral; Senior pledge of Investment Fund’s $2.67MM spread w/no cross-default interest in Transaction CDE over 7 Years • 7-year standstill on foreclosure Investment Fund (100% NMTC Equity Investor Owned) NMNTC Qualified Equity Investment (QEI) Investment: $6.85 MM Property Operator Transaction CDE $6.85MM NMTC Allocation (Special Purpose LLC) Parent Allocatee CDE “QLICI” Equity Sublease of $1.32MM 99.99% Member-Investment Fund Administration, compliance for 7 years Property Allocation Placement 0.01% Member/Manager-Allocatee fee @ closing: 5% of QEI (~340k) “QLICI” “QLICI” Non-“QLICI” Master Tenant Loan A: Loan B: Loan C: $3.1MM $2.43MM $4.0MM (100% CDE-owned) Subordinate QALICB LLC (Special Purpose Participation in “QLICI” HTC CDE’s Loans: Parent Allocatee CDE Borrower Entity-Builds and Owns $4.0MM Funded as Equity $1.32MM Administration, compliance for 7 years Project) takeout of direct construction facility TDC of $11.9 MM Including from Senior NMTC Closing Costs Leverage Lender Total Equity: Bank $1.4MM (or no less than 51%) Project Sponsor(Endorsements, Other Equity Investors) © 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 17. Ten Differences Between New Markets Tax Credits and Historic Tax Credits 1. Tax Credit Percentage: NMTC: 39% HTC: 20% 2. Basis of Tax Credit: NMTC: “qualified equity investment” HTC: “qualified rehabilitation expenditures” 3. Recognition Period NMTC: 7 years (5% each of first 3 years, 6% each of remaining 4 years) HTC: 5 years (20% per year) 4. Recapture Period NMTC: 7 years (100% recapture at any time) HTC: 5 years (20% recapture burn off each year) 5. Types of Projects NMTC: Any type of project, except a “sin” business,” farming or residential rental property in a “low-income community” HTC: Historic structures in any geographic location 6. Types of Borrowers NMTC: Taxable and tax-exempt entities verses HTC: Taxable entities 7. Transferability of Investment NMTC: investment can be sold during 7-year recapture period HTC: investment cannot be sold during 5-year recapture period 8. Timing of Investment NTMC: majority at closing or soon thereafter HTC: majority closer to placed in service date 9. Flexibility/Complexity NMTC: Extremely flexible; typically complex (no structuring is the same), involving several transaction participants, several structuring scenarios, can be combined with other financing, including tax-exempt bond financing, other tax credits, grants, SBA, HUD, USDA, FHA and other programs. HTC: Established structures; generally, straightforward, established structuring scenarios 10. Opinions NMTC: Multiple opinions required by all parties HTC: Generally, straight-forward, or not required Note: Borrowers pay all transaction costs, including each participant’s legal counsel fees.© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 18. Example: August 2011 Closing of Demonstration Scale Biorefinery Facility in Alpena, Michigan© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 19. Borrower’s 7 Steps in NMTC Financing  Qualifying Project or Business – Low-Income Community. Identify the census tract in which the project or business (including nonprofits) will be located to determine if the census tract is in a low-income community. – "But For" Test. NMTC financing can only be used to provide a financing short fall (as opposed to provide better financing), or if it can be shown that the project or business would not otherwise be located in a low-income community, be substantially carved back in scope, be substantially delayed or otherwise not economically feasible. Hence, "but for" the NMTC financing, the project or business would not be feasible in the low-income community. – Nature of Project or Business. The project or business qualifies for financing (for example, it is not a massage parlor). NMTC financing can also be used to provide a business loan (or unlike a project financing, refinance an existing loan) to a qualifying business (including non-profits). – Shovel-Ready. The project must be shovel-ready (or business in need of immediate funds) at the time a potential project or business is considered for NMTC financing. For example, zoning should be completed, and permits pulled etc.  Sources and Uses of Financing. Identify all sources and uses of project or business financing in order to determine any short fall in financing.  Guarantors. Each transaction can underwrite differently; however, generally, the NMTC financing requires the following guarantees: (a) construction completion guaranty; (b) operating deficits guaranty; (c) environmental indemnification; (d) tax credit recapture guaranty; and (e) in todays credit environment, in addition to a mortgage a guaranty on the NMTC financing itself (either by an affiliate or principals of the borrower or any other credit-worthy source, including a letter of credit, the USDA, FHA, HUD).© 2011 Wildman, Harrold, Allen & Dixon LLP.
  • 20. Borrower’s 7 Steps in NMTC Financing  NMTC Questionnaire. Complete Wildman Harrold NMTC Questionnaire, which is either accepted by investors and community development entities ("CDEs"), or the information provided therein is used to complete questionnaires of investors and CDEs. CDEs are the entities that have been awarded the ability to provide NMTC financing. The Questionnaire requires information for financial underwriting purposes, as well as a description of the low-income community and a qualitative and quantitative description of the community impact that will result from the NMTC financing.  Obtain Commitment Letters/Term Sheets. Although all sources of financing are generally identified and pursued concurrently, commitment letters are typically obtained in the following order: – Leverage Lenders. Leverage lenders include investor affiliates, banks, financial institutions, municipalities (for bonds, tax increment financing, grants and other economic development incentives), as well as affiliates of the borrowing entity. – CDEs. CDEs that are a good fit with the project or business based on geographic footprint, project type and financial products. – Investors. There are several banks and large corporations that invest in NMTC transactions.  Negotiate NMTC Financing Documents. This is no different than any other financing scenario and will require many of the same types of documentation as a conventional financing.  Close NMTC Financing. Once all commitment letters and term sheets are finalized, a closing typically occurs between 60 and 90 days, assuming no unusual facts and circumstances.© 2011 Wildman, Harrold, Allen & Dixon LLP.

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