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A Banking Perspective on Historic Tax Credits - Michael Taylor
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A Banking Perspective on Historic Tax Credits - Michael Taylor

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Michael Taylor of PNC Bank discusses the banking perspective on historic tax credits at the Heritage Ohio Historic Tax Credit Workshop in Toledo, Ohio on March 25, 2011

Michael Taylor of PNC Bank discusses the banking perspective on historic tax credits at the Heritage Ohio Historic Tax Credit Workshop in Toledo, Ohio on March 25, 2011

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  • 1. 1 Toledo HTC Workshop March 25, 2011 MICHAEL J. TALYOR Senior Vice President – West Territory Executive PNC Community Development Banking (216)222-2293 Michael.J.Taylor@pnc.com
  • 2. 2 Banking Perspective of Historic Tax Credits  Commitment to Fostering Community and Economic Development  Help the Bank meet its Community Reinvestment Act Requirements  Profit Motive  “It just Makes Sense” - Leverage other private dollars - enhances property values - Creates affordable and market rate housing - Augments revenues for federal, state and local government
  • 3. 3 Project Structure/What the Developer Needs  GAP Financing  Part II certificate showing readiness to start construction  Additional equity equaling 5% - 10% of project costs  Complete development budget for the project  A forward commitment on the permanent mortgage is not required but is preferred  Developer must show experience in rehabilitation construction and have acceptable credit history
  • 4. 4 Evaluation Process/Determining Feasibility  Size of Allocation: The PNCCDC will consider both small investments and large investments, $500,000 - $20,000,000.  Debt Coverage*: Minimum of 1.20. * Depending on type of project  Deferred Development Fee paid out of cash flow prior to the ending of the 5-year compliance period is evaluated.  Environmental Assessment: Required  Term of Outstanding Debt: If a portion of the funding is raised through debt, the term of the loan must not be less than 5 years (tax credit compliance period).  Reporting: Annual tax returns (1065 & K-1) and annual financial statements.
  • 5. 5 Evaluation Process/Determining Feasibility (Cont.)  Project must meet the community development definition: Community development is defined as activities which primarily support affordable housing, and community services which are targeted at low-to-moderate income individuals or which promote economic development through financing of small businesses and farms or which revitalize or stabilize low-to-moderate income geographies.  CRA Requirements: Investments consistent with the requirement under the Community Reinvestment Act; - The innovativeness of the project - Responsiveness to credit and community development needs - Other economic and community development spin off and market impact
  • 6. 6 Calculating the Historic Preservation Tax Credit  Federal Credit 20% of a project’s qualifying rehabilitation expenditures (QRE’s)  State of Ohio Credit 25% of QRE and is a refundable tax credit. New legislation allows for the special allocation of the credit.  10% Federal Credit For restoring older buildings that predate 1936. This is a non-contributing structure by the department of interior.
  • 7. 7 Calculating the Historic Preservation Tax Credit  Acceptable - Hard construction Cost for Rehabilitation - Architect’s Fees - Construction Period Interest Allocated to the Rehabilitation - Development Fees Allocated to the Rehabilitation - Environmental Testing & Remediation - Properly Allocable Legal Expense - Historic Consultants - Insurance & Taxes During Construction  Unacceptable - Land - Acquisition Costs - Site Improvements - Syndication Expenses - Personal Property, e.g., Furniture & Equipment - Financing Fees (non- construction) - Marketing Costs General Examples of Acceptable and Unacceptable Cost for Historic Basis Purposes
  • 8. 8 Pricing of Historic Tax Credits  Depends on the following factors: - Developer strength - Investment size - Capital contribution pay-in schedule - Structure of return components - Local market dynamics Example: $1 million in Qualified Rehabilitation Expenditures X 20% = Your Credit or $200,000. NCCDC with a 99% partnership interest as a limited partner will receive $198,000 in credits. The market is approximately 85 - 95 cents of the dollar. At 90 cents the GP will receive $178,200 for the credits. State Credit Calculation: $250,000 x 99% = $247,500 x $.60 = $148,500. Total investment for Federal and State: $326,700.
  • 9. 9 Syndication Structuring  Limited Partnership/Limited Liability Company  Placed in Service: The appropriate work has been completed which allows for occupancy of either the entire building, or some identified portion of the building.  Project Completion Date  Timing of Pay-ins and Investment Horizon - Capital Contributions Can begin as early as construction start Can come in as late as near placement  Investment Horizon - Can begin as early as construction start - Can come in as late as near placement Developer owns 1% Investor owns 99% Pass-through Entity owns Land and Buildings
  • 10. 10 Guarantee Requirements  Historic Tax Credit guarantee  Construction completion guarantee  Operating deficit guarantee equaling six months of operating expenses and debt service coverage  Development Fee  Reserve Requirements - Minimum building reserves set by the first mortgage requirements - Operating reserves equal to six months of operating expenses and debt service
  • 11. 11 New Markets Tax Credits Fundamentals NMTC Synopsis A federal tax credit available to those that provide equity to certain certified entities that in turn lend or invest in businesses (including non-profits) located in low-income communities.
  • 12. 12 How They Work QALICB* CDE CDFI Investor Allocation Qualified Equity InvestmentRepayments * Qualified Low Income Community Businesses ** Qualified Low income Community Investments QLICIs ** Tax Credits & Return New Markets Tax Credits
  • 13. 13 New Markets Tax Credits When is Rehabilitating Real Estate Qualified?  Developing or renting non-residential real estate is qualified.  Financing the developing of residential real estate (including multi- family) is not qualified.  Lending or investing in developers of residential real estate may be qualified. Note: Residential real estate is defined as “any building or structure if 80% or more of the gross rental income from such building or structure is rental income from dwelling units.”
  • 14. 14 New Markets Tax Credits Recapture  Potential recapture for 7-year period from the date of investment in a CDE.  Occurs if: - The entity ceases to be a CDE; or - At least 85% of the proceeds of the investment cease to be invested in QLICIs (drops to 75% in year seven); or - The investment is redeemed.
  • 15. 15 Tax Issues  Profit Motive - Economic Profit Independent of Tax Benefits - Cash Flow Distribution - CRA Supporting Economic Participation  Exit Strategies/Investor Buyout Strategy - Fair Market Value Calculations - Put and Call Provisions
  • 16. 16 Due Diligence Items/Checklist  Existing Operating Agreement  Certified Copy of Articles of Organization and all amendments  Survey  Plans and Specifications  Building Permit  Availability of Utilities Letters  Deed  Owner’s Title Policy  Notice of Commencement  General Contractor  Architect  Corporate Resolutions  Certificate of Good Standing  Loan Documents  UCC, tax lien search  Litigation search  Environmental Report  Insurance Certificates  Appraisal  Initial Construction Budget  Zoning Letter  Financial Projections  Financial Statement(s) of Principals/Guarantors  Federal HTC Part I & II application  Local Approval  State Part I Approval  Federal and State Part III  Commitment Letter  Local Counsel Opinion  Tax Opinion  Development Agreement  Unconditional Guaranty  Estoppel Letter from Lender(s)
  • 17. 17 Common Pitfalls for First-Time Users of the Federal Historic Tax Credits  Having inadequate contingency in the development budget  Presenting final drawings and commencing construction prior to receiving Part II  Allowing the general contractor to value engineer without regard to NPS standards  Using third-party consultants inefficiently  Delaying contact with potential investors  Coordinating equity with debt