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  • 1. Tax Credits – Beyond the BasicsJames Beal, Partner, Tax ServicesRon Copher, CFO/EVP, Glacier Bancorp, Inc.Douglas P. Koch, MAI, AICP Director © 2012 McGladrey LLP. All Rights Reserved. © 2012 McGladrey LLP. All Rights Reserved.
  • 2. Agenda Low Income Housing Tax Credit (LIHTC) New Markets Tax Credit (NMTC) Historic Rehabilitation Tax Credit (HTC) Review mechanics of each credit Discuss the market for each credit Investor returns Risks and rewards Commentary on the current developments and the future 1 © 2012 McGladrey LLP. All Rights Reserved.
  • 3. Benefits for Bank LIHTC Investing Lower effective tax rate Qualifies for Community Reinvestment Act (CRA) credit After tax yield-market in the 6-7% range Promotes other banking relationships Low risk, good track record, 26-year history Precedent: Bank LIHTC investing at $8 billion in 2011 Established regulatory, finance and third party professional procedures/documentation 2 © 2012 McGladrey LLP. All Rights Reserved.
  • 4. Program OverviewApproximately $8 billion of LIHTC allocatedannually by federal government through tax IRS overseescode to 50 states based on population. programState HFAs administer program byawarding the credits & monitoringcompliance with program requirements State Housingover 15-year compliance period, LIHTC Financeawarded is used to reduce amount of debt Agenciesfinancing , which allows lower than marketrents.Developers apply for tax credits – ifsuccessful, seek equity investors andobtain debt financing, construct andoperate buildings in compliance with Developersprogram requirements, compensated withdeveloper fees and operating cash flow.Buildings are financed by debt and equityDebt sources can range from “soft,” quasi-grant government money to traditional Debt Equitybank lenders and tax-exempt bonds withmarket terms.Equity may be provided by a syndicator orby direct investor. Equity receives returnin form of LIHTC and tax losses withoccasional cash upside. Syndicator Syndicators Direct Equitycreates fund of properties –underwritesand asset manages properties. 3 © 2012 McGladrey LLP. All Rights Reserved.
  • 5. How the Credit Works Example of how amount of tax credit is calculated and how that translates into equity to the partnership Sources and Uses Credit calculation Tax credit equity $2,700,000 Depreciable basis $3,450,000 Hard debt $500,000 Percentage low-income 100% Soft debt $700,000 Credit rate 9% Unpaid development fee$100,000 Annual allocation $310,500 Total sources $4,000,000 Multiplied by 10 years $3,105,000 Land $200,000 Price paid for $ of tax credit $0.87 Depreciable costs $3,050,000 Tax credit equity $2,700,000 Development fee $400,000 Expensed costs $100,000 Reserves $250,000 Total Uses $4,000,000 4 © 2012 McGladrey LLP. All Rights Reserved.
  • 6. Investment Options Syndicators - (national and state and local) - Multi-investor funds (two tier-fund and operating) • Lower yield, higher load, less control, diversification of risk, no GAAP consolidation - Private label funds • Improved yield, lower load, some approval rights, no diversification, GAAP consolidation Direct investing - Highest yield, no load, most control, no diversification, GAAP consolidation, need staff to underwrite and asset manage Guaranteed investments - Insured benefits, lowest yield, least risk, possible accounting advantage (not always available) Secondary investments 5 © 2012 McGladrey LLP. All Rights Reserved.
  • 7. Example of Equity Investor Benefits Sample Investment Example of Applying the Equity Method of Accounting under EITF 94-1 Assumes a 35% tax rate and sale for $1 at the end of the LIHTC compliance period Investment Benefit Schedule Impact on Financial Statements Tax rate 35% Produces an IRR of approximately - 7.3% Taxable Low-Income Impact on Deferred tax Current Tax Impact on Impact on Capital Income/ Tax Benefit/ Housing Tax Total Net Benefits Book/Tax Pre-Tax Benefit/ Benefit/ Tax NetYear Contributions (Loss) (Cost) Credit Benefits Flow Difference Earnings (Cost) (Cost) Provision Earnings2012 300,000 (20,000) 7,000 7,000 (293,000) 20,000 0 (7,000) 7,000 0 02013 550,000 (120,000) 42,000 40,000 82,000 (468,000) 20,000 (100,000) (7,000) 82,000 75,000 (25,000)2014 150,000 (110,000) 38,500 80,000 118,500 (31,500) 20,000 (90,000) (7,000) 118,500 111,500 21,5002015 (100,000) 35,000 110,000 145,000 145,000 20,000 (80,000) (7,000) 145,000 138,000 58,0002016 (90,000) 31,500 110,000 141,500 141,500 20,000 (70,000) (7,000) 141,500 134,500 64,5002017 (80,000) 28,000 110,000 138,000 138,000 20,000 (60,000) (7,000) 138,000 131,000 71,0002018 (70,000) 24,500 110,000 134,500 134,500 20,000 (59,999) (3,500) 134,500 131,000 71,0012019 (60,000) 21,000 110,000 131,000 131,000 20,000 (110,000) 17,500 131,000 148,500 38,5002020 (50,000) 17,500 110,000 127,500 127,500 20,000 (110,000) 21,000 127,500 148,500 38,5002021 (40,000) 14,000 110,000 124,000 124,000 20,000 (110,000) 24,500 124,000 148,500 38,5002022 (40,000) 14,000 110,000 124,000 124,000 20,000 (110,000) 24,500 124,000 148,500 38,5002023 (40,000) 14,000 70,000 84,000 84,000 20,000 (70,000) 10,500 84,000 94,500 24,5002024 (40,000) 14,000 30,000 44,000 44,000 20,000 (30,000) (3,500) 44,000 40,500 10,5002025 (30,000) 10,500 10,500 10,500 20,000 0 (10,500) 10,500 0 02026 (30,000) 10,500 10,500 10,500 20,000 0 (10,500) 10,500 0 02027 (20,000) 7,000 7,000 7,000 20,000 0 (7,000) 7,000 0 02028 (20,000) 7,000 7,000 7,000 20,000 0 (7,000) 7,000 0 02029 (20,000) 7,000 7,000 7,000 20,000 0 (7,000) 7,000 0 0Sale (19,999) 7,000 7,001 7,001 20,000 (7,000) 7,000 0 0Total 1,000,000 (999,999) 350,000 1,100,000 1,450,001 450,001 380,000 (999,999) 0 1,450,000 1,450,000 450,001 Capital Contributions Calculation of Sale 2012 2013 2014 Capital Contributions 1,000,000Qtr 1 350,000 100,000 Taxable Income/ (Loss) (980,000)Qtr 2 50,000 50,000 Historic Rehab Tax Credit 0Qtr 3 250,000 200,000 Cash Distributions 0Qtr 4 Proceeds from sale (1)Total 300,000 550,000 150,000 Gain/(Loss) on Sale (19,999) Tax benefit/ (Cost) of Sale 7,000 For discussion purposes only. Note: GAAP policies will be established by investors 6 © 2012 McGladrey LLP. All Rights Reserved.
  • 8. Risks and Pricing Real estate investment risks - Development team, market, construction, operational underwriting - Considerations relevant to LIHTC: Tax, partnership structuring, compliance and investor tax/financial status - Typically, can be minimized with proper underwriting & transaction structuring and continuous monitoring Pricing factors - CRA and geography – urban vs. rural - Large direct investors can outbid multi-investor funds because of their lower load - Timing of equity payments - Quality of real estate, development team and fund sponsor 7 © 2012 McGladrey LLP. All Rights Reserved.
  • 9. Mitigation Risk mitigation (typically handled by syndicators) - Underwriting - Transaction structure • Equity holdbacks and adjusters • Guarantees • Reserves • Reserves may have also been established by the fund - Competent and committed partners Need competent & experienced professionals to serve as third party advisors 8 © 2012 McGladrey LLP. All Rights Reserved.
  • 10. Challenges in LIHTC Investor Due DiligenceSample Property 10/31 2 1 5 P M /1 :1Investment Dashboard DRAFT - For Management Review Only Versio n 3.00The Project Development Team Operations UnderwritingInvestment as percent o f fund 100.0% D e v e lo pm e nt T e a m 48) Overall rent advantage versus market 34.3%P ro perty lo catio n B ig City, CA 99999 1 Develo pment team experience (quantity/type) ) Yes 49) % with less than 1 market advantage 0% 49.7%New o r rehabilitatio n New 2) Develo pment team capacity versus pipeline Yes 50) Rents as % o f maximum LIHTC limit 99.7%Number o f units 48 3) Issues detected during backgro und checks Yes 51 Subsidy o verhang as % o f revenue ) 0.0%Financed by tax-exempt bo nds No 52) Co mmercial inco me underwriting No neLess than substantial rehab No G ua ra nt o rs 53) Overall vacancy rate in market 6.5%Scattered site pro perty No 5) M inimum net wo rth $1 3,863,091 54) M arket study co ncerns o r qualified o pinio n Inco mpleteM arket rate co mpo nent Yes 6) M inimum net current assets $ 1 0,1 ,91 76 56) 10-year M edian Family Inco me gro wth trend 3.3%Co mmercial rental inco me No 9) Evidence o f pipeline issues No 57) Overall capture rate 0.4%Hard requirement targeting special needs tenants No 1 ) Stabilized po rtfo lio o perating abo ve breakeven 1 Yes 59) Hard debt subject to re-sizing No Hard DebtHisto ric tax credits NoReal estate tax abatements No P ro pe rt y m a na ge r Ke y s e ns it iv it y m e a s ure sLead develo per name Sample Develo per 1 1 Experience (years - o verall / LIHTC) 4) No 60) B reak even o ccupancy % 81.6%P rice per $ 1o f LIHTC $ 0.830 1 Track reco rd 5) Yes 61 Deficits % o f reserves - 1 market decline ) 0% 0.0% 1 P ro perty manager revised 7) Yes 62) Deficits % o f reserves - 1 .5% rent trend 0.0% Missing Documents G e ne ra l C o nt ra c t o r P a rt ne rs hip m it iga t io n f e a t ure s1missing do cuments - 1 Hard debt 1 ) 1 Experience (years / pro perties) 8) Yes 63) A ffiliate subo rdinating management fee Yes 1 A ffiliate o f develo per 9) No t Related 64) Reserves - mo nths o f co verage 8.1 65) Reserve release pro visio ns Yes 66) Subsidy o verhang reserve -yrs deficit co vered Yes Development Budget Underwriting 21 A ll financing so urces co mmitted ) Yes O pe ra t ing G ua ra nt e e pro v is io ns 22) Hard debt as % o f so urces 0.0% 67) Operating deficit guarantee - mths o f co verage 2.7 Completeness of Documentation 23) Hard debt interest rate lo ck status No Hard Debt 68) Operating deficit guarantee - duratio n in years 15.04) Develo per credit and backgro und checks Yes 24) LP equity ho ldback after co mpletio n 50.0% 69) Operating deficit guarantee - o ther terms Yes8) Underwriting o f guaranto rs Inco mplete 26) A ny significant issues - co nstructio n review No 70) Tax credit co mpliance guarantee Yes1 Develo per pipeline underwriting 0) Yes 28) A ny significant issues - enviro nmental review No 71 LP appro val rights ) Yes1 Develo per stabilized po rtfo lio underwriting 2) Yes 29) Lo catio n with flo o d plain, earthquake issues Yes 72) LP rights to remo ve GP Yes1 Underwriting o f pro perty manager 6) Yes 31 Co mpletio n o r lease-up co ncerns ) No20) General Co ntracto r Financial capability Yes Common Tax and Tax Credit Issues25) Co nstructio n review Yes M it iga t io n f e a t ure s in t he pa rt ne rs hip ( % o f ha rd c o s t s ) 39) Capital acco unt pro jected to remain po sitive Thru Year 1527) Enviro nmental review Yes 33) Develo pment fee ho ldback Yes 40) M inimum gain exceeds negative capital acct No t Needed30) Underwriting o f flo o d plain, earthquake, etc. Yes 34) Co ntingency (Hard & So ft) 0.2% 41 B o na fide debt test do cumentatio n ) Inco mplete32) Co nstructio n co ntract Yes 35) Co nstr. co ntingency (pship so urces o nly) 16.4% 42) P laced in service timing issues within 4mths55) M arket study - no n-co mpliant with A HIC 9 o f 21 7) Co nstr. co ntingency exceed sensitivity results Yes 43) Excess eligible basis suppo rted 6.4%58) Operating expense underwriting Yes 1 Co nstr. co ntingency with guaranto r liquidity 3) 41 .4% 44) A ddl LIHTC o r tax underwriting issues Yes 45) "Sho uld realize" tax o pinio n o btained Inco mplete D e v e lo pm e nt G ua ra nt e e pro v is io ns 46) Develo pment fee size within guidelines Yes 36) Co mpletio n guarantee Yes 47) Develo pment fee repayment within guidelines Yes 37) Repurchase o bligatio n guidelines met 1 of 1 0 0 38) A djuster pro visio ns No © 2012 McGladrey LLP. All Rights Reserved.
  • 11. 3rd - Party Services Typically Required orRequested To banks and other investors - Initial advice, strategy and relationships -who to partner with, terms Due diligence services - New funds (If conducted by syndicator, no cost to investor – borne by fund) - Secondary – buying or selling - Three reports investors typically require: • Property investment, fund investment and sponsor reviews Already existing portfolio - Assist with disposition, buy-sell analysis, workout situations Users of 3rd Party Services - Syndicator/investor – due diligence or specialty services - Developers – tax and audit services - Housing agencies – IT, policies and procedures 10 © 2012 McGladrey LLP. All Rights Reserved.
  • 12. Regulatory Considerations: CRA Affordable housing is a fundamental element under CRA CRA consideration for investments in LIHTC funds creating affordable housing An investment in a LIHTC fund: - Receives positive CRA consideration, provided it benefits: • The bank’s assessment area OR • The broader statewide or regional area that includes the bank’s assessment area 11 © 2012 McGladrey LLP. All Rights Reserved.
  • 13. Regulatory Considerations: Part 24 National banks can make investments to promote the public welfare Affordable housing promotes the public welfare Investment authority is under 12 USC 24 (Eleventh) and 12 CFR Part 24 Part 24 authority limits were raised to 15 percent of a bank’s unimpaired capital and surplus Banks make investments through a filing process with the OCC - (See www.occ.gov/cdd/pt24toppage.htm) FDIC 12 © 2012 McGladrey LLP. All Rights Reserved.
  • 14. OCC Key Risks and Regulatory IssuesAssociated with Tax Credit Investments Liquidity risk Underwriting and credit risk - Management - Real estate underwriting Collateral risk Operational and reputation risk Part 24 Accounting considerations 13 © 2012 McGladrey LLP. All Rights Reserved.
  • 15. New Markets Tax Credits Overview - Background of the NMTC program - NMTCs: How do they work and what are the benefits? - How can you utilize NMTCs? - What are the obstacles in utilizing NMTCs? - Challenges of troubled Qualified Low Income Community Investments (QLICI) - Tax issues with insolvent or bankrupt Qualified Active Low Income Community Businesses (QALICB) - Options to simplify the NMTC Program - Regulatory considerations (CRA and Part 24 limits) and OCC key risks 14 © 2012 McGladrey LLP. All Rights Reserved.
  • 16. Background of the NMTC Program  The NMTC program was enacted in December 21, 2000 as a part of the Community Renewal Tax Relief Act of 2000 and provides for a 39% tax credit over a 7 year period (5% yrs 1-3 and 6% yrs 4-7) based on the investment (7 year compliance period)  The purpose of the program is to infuse investment dollars in low income communities where access to capital is generally more difficult to obtain 15 © 2012 McGladrey LLP. All Rights Reserved.
  • 17. Background of the NMTC Program  The NMTC program has a highly competitive allocation process where Community Development Entities (CDEs) apply for allocation through the CDFI Fund, which is a division of the US Department of the Treasury  The CDEs must use substantially all (85% or more) of the proceeds from Qualified Equity Investments (QEIs) to make QLICIs in QALICBs located in Low Income Communities (LICs) 16 © 2012 McGladrey LLP. All Rights Reserved.
  • 18. Prior NMTC Award Information: Awards toDate 5,780 CDEs were certified as of July 31, 2012 In allocation calendar year rounds 2002-2011, the CDFI Fund received 2,388 NMTC Allocation Applications These entities collectively requested nearly $229.3 billion in Allocation Authority The CDFI Fund has made 664 Allocation Awards totaling $33.0 billion in Allocation Authority 17 © 2012 McGladrey LLP. All Rights Reserved.
  • 19. Prior NMTC Award Information: Number ofApplicants and Awardees 18 © 2012 McGladrey LLP. All Rights Reserved.
  • 20. Prior NMTC Award Information: AmountRequested and Awarded 19 © 2012 McGladrey LLP. All Rights Reserved.
  • 21. NMTC Program History 20 © 2012 McGladrey LLP. All Rights Reserved.
  • 22. Summary by Round 21 © 2012 McGladrey LLP. All Rights Reserved.
  • 23. Prior NMTC Award Information: 2011Allocatees All 70 of the Allocatees committed to offering preferential rates and terms All 70 of the Allocatees indicated that 100 percent of their investment dollars would be made either in the form of equity, equity-equivalent or debt financing that is at least 50 percent below market and/or is characterized by at least five concessionary features All 70 of the Allocatees committed to providing at least 75 percent of their investments in areas characterized by: 1) multiple indicia of distress; 2) significantly greater indicia of distress than required by NMTC Program rules; or 3) high unemployment rates All 70 Allocatees indicated that they would invest at least 95 percent of QEI proceeds in QLICIs - In real dollars, this means at least $466 million above and beyond what is minimally required by the NMTC Program will be invested in LICs 22 © 2012 McGladrey LLP. All Rights Reserved.
  • 24. Prior NMTC Award Information: 2011Allocatees 23 © 2012 McGladrey LLP. All Rights Reserved.
  • 25. Projected Investment by Category – 2011Allocatees 24 © 2012 McGladrey LLP. All Rights Reserved.
  • 26. NMTCs: How Do They Work and What are theBenefits? Credit allowance period of 7 years - The NMTCs are claimed on the date of the investor(s) qualifying equity investment and the following six anniversary dates Basis reduction - The investor is required to reduce its tax basis in its qualifying equity investment by the amount of the NMTCs claimed on each credit allowance date NMTC can only be used to offset regular tax liability (unlike LIHTC and HTC) Unused NMTCs can be carried back 1 year and forward 20 years 25 © 2012 McGladrey LLP. All Rights Reserved.
  • 27. NMTCs: How Do They Work and What are theBenefits? Definitions of NMTC terms - Community Development Entity • Entity certified by the CDFI Fund which has a PRIMARY mission of community development serving low income communities • Is a domestic corporation or partnership that is a required intermediary vehicle in NMTC structures • CDEs apply for NMTC allocations through an annual competitive application process • Maintains accountability to residents of the low income communities it serves • Certification does not constitute an opinion by the CDFI Fund as to the effectiveness or financial viability of the CDE 26 © 2012 McGladrey LLP. All Rights Reserved.
  • 28. Summary Graphic 27 © 2012 McGladrey LLP. All Rights Reserved.
  • 29. NMTCs: How Do They Work and What are theBenefits? Definitions of NMTC terms (cont.) - Qualified Low Income Community Investment • Any capital or equity investment in, or loan to, any QALICB in a Low Income Community; • The purchase from another CDE of any loan made by such entity, if the loan is a QLICI; • Financial counseling and other services (i.e., advice regarding organization and operation) to businesses located in, and residents of, low income communities; • Any equity investment in, or loan to, any CDE 28 © 2012 McGladrey LLP. All Rights Reserved.
  • 30. NMTCs: How Do They Work and What are theBenefits? Definitions of NMTC terms (cont.) - Low Income Communities are census tracts where: • Poverty rate exceeds 20% or • Median income is below 80% of the greater of: - Statewide median income, or - Metropolitan area median income • www.cdfifund.gov 29 © 2012 McGladrey LLP. All Rights Reserved.
  • 31. NMTCs: How Do They Work and What are theBenefits? - Qualified Active Low Income Community Business • Can be rental real estate, but cannot be 80% or more residential and generally lessees cannot be involved in a Precluded Business • Excluded businesses: - A business which develops or holds intangibles for sale or license - A business which operates a country club, golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility or liquor store (“Precluded Businesses”) - Certain farming businesses 30 © 2012 McGladrey LLP. All Rights Reserved.
  • 32. NMTCs: How Do They Work and What are theBenefits? - Qualified Active Low Income Community Business (Continued) • Compliance tests to be met: - Must earn 50% of its gross income within a LIC; - Must have 40% of its tangible assets within a LIC; - Must have 40% of its employees providing service within a LIC (or have 85% of its tangible assets within a LIC if the entity does not have employees); - Exception: Gross income test is deemed satisfied if the business meets either of tangible property test or services test, applying 50% instead of 40% 31 © 2012 McGladrey LLP. All Rights Reserved.
  • 33. NMTCs: How Do They Work and What are theBenefits? Less than 5% of the average of the aggregate unadjusted basis of the property is attributable to collectibles (e.g., art and antiques), other than those held for sale in the ordinary course of business (e.g., inventory); and Less than 5% of the average of the aggregate unadjusted bases of the property is attributable to non-qualified financial property (e.g., debt instruments with a term in excess of 18 months) 32 © 2012 McGladrey LLP. All Rights Reserved.
  • 34. QALICB Examples An operating business located in a LIC A business that develops or rehabilitates commercial, industrial, retail and mixed-use real estate projects in a LIC A business that develops or rehabilitates community facilities, such as charter schools or health care centers, in a LIC A business that develops or rehabilitates for-sale housing units located in LICs 33 © 2012 McGladrey LLP. All Rights Reserved.
  • 35. Examples of NMTC Utilization Real estate developers to close the funding gap in real estate projects (commercial, mixed-use, or community facilities) Operating businesses for the purpose of the acquisition or the rehabilitation (including expansion) of facilities - Owner-occupied retail facilities - Industrial or manufacturing facilities - Warehouses and storage facilities - Community facilities Operating businesses for the purpose of expanding operations - Equity investments - Fixed asset loans (equipment, furniture, machinery) - Working capital loans to cover operating expenses Additional ways to boost the benefit - Can be “twinned” with certain other tax credit equity (i.e. HTCs) - Certain states have comparable NMTCs and HTCs creating additional equity for projects 34 © 2012 McGladrey LLP. All Rights Reserved.
  • 36. NMTCs: How Do They Work and What are theBenefits? NMTC Structures - Leveraged and non-leveraged structures • Non-leveraged structure typically provides a low interest rate loan that is required to be repaid after the 7 year compliance period. • Leveraged structure is much more complex but generates more bang for the buck. The leveraged structure typically results in a forgivable loan and equity through a put/call at the end of the compliance period to buy out the tax credit investor. • For both structures, interest only payments on QLICI loans are typical to mitigate tax credit recapture risk. 35 © 2012 McGladrey LLP. All Rights Reserved.
  • 37. Comparison of NMTC Investment Structures 36 © 2012 McGladrey LLP. All Rights Reserved.
  • 38. Example of Leveraged NMTC Structure NMTC Investor NMTC $10M Allocation NMTC Project Equity Leveraged $3.9 M NMTCs NMTCs $2.73M Lender $3.9M $2.73M in gross NMTC equity Loan $7.27M Less: CDE fees (5% of allocation) Investment Less: annual CDE fees ($35k a yr) Fund Less: Transaction costs (avg. $500k) Equity Equals approx. $1.485M in net equity Investments $10M (QEIs) CDE Fees $500K Asset mgmt fee CDFI $245K NMTC CDE Fund AllocationNote: Leveraged loan needs Award Equity and/or Loans to be repaid $1.485M (A) $7.27M Interest only debt (B) (QLICIs) service payments QALICB (Real Estate Entity) 37 © 2012 McGladrey LLP. All Rights Reserved.
  • 39. Example of Leveraged NMTC Transaction 38 © 2012 McGladrey LLP. All Rights Reserved.
  • 40. Example of Leveraged NMTC Transaction Exiting the Structure Through Put-Call Mechanism - QALICB “or it’s designee” tax liability - Cancellation of Debt (COD) income 39 © 2012 McGladrey LLP. All Rights Reserved.
  • 41. What are the Obstacles in Utilizing NMTCs? Finding a leveraged lender Getting a CDE to commit a NMTC allocation (chicken before the egg concept) Costly and lengthy timeframe to close a transaction Having to maintain the NMTC structure for the 7 year compliance period 40 © 2012 McGladrey LLP. All Rights Reserved.
  • 42. NMTCs: How Do They Work and What are theBenefits? Recapture - Subject to 100% recapture for 7 years for each QEI is made in CDE (7 year compliance period) - 3 ways to trigger recapture: • CDE ceases to be a certified CDE; or • CDE fails to continuously invest substantially all (85%) of its QEIs in QLICIs; or • CDE redeems investor’s equity investment (though a CDE is allowed to distribute operating income) * It is not an event of recapture if a CDE files for bankruptcy. An investor may continue to claim NMTCs 41 © 2012 McGladrey LLP. All Rights Reserved.
  • 43. NMTCs: How Do They Work and What are theBenefits? “Substantially all” of the QEI proceeds must be invested in QLICIs within 12 months - Years 1-6: Substantially All = 85% of amount paid by investor at original issue. Generally, returns of equity, capital or principal must be reinvested within 12 months. - Year 7: Substantially All = 75%. Reinvestment is not required in the final year of the 7-year credit period.* At all times, 5% of the original QEI issue amount may be used for certain reserves by the CDE and count towards meeting the substantially-all requirement 42 © 2012 McGladrey LLP. All Rights Reserved.
  • 44. NMTCs: How Do They Work and What are theBenefits? Recapture cure period (6 months) for failing to satisfy the sub-all test - 6 months AFTER the date the CDE becomes aware (or reasonably should have became aware) of the failure - Only ONE correction is permitted for each QEI during the 7 year credit period 43 © 2012 McGladrey LLP. All Rights Reserved.
  • 45. Challenges of Troubled QLICI Loans Restructuring vs. foreclosure Taking title to collateral Re-investment of QLICI proceeds 44 © 2012 McGladrey LLP. All Rights Reserved.
  • 46. Tax Issues with Insolvent or BankruptQALICBs OID and CDE distributions Basis reduction for worthless QLICI Constructive liquidation 45 © 2012 McGladrey LLP. All Rights Reserved.
  • 47. Options for Simplifying the NMTC Program 46 © 2012 McGladrey LLP. All Rights Reserved.
  • 48. Federal Rehabilitation Tax Credit Overview - How the credit works - What the credit is worth - Other considerations 47 © 2012 McGladrey LLP. All Rights Reserved.
  • 49. Federal Rehabilitation Tax CreditHow the Credit Works Types - Rehab of nonresidential structure placed in service before 1936 - 10% - Rehab of certified historic structures regardless of use and age - 20% • Structure listed individually or in historic district • Rehab certified by Secretary of Interior 48 © 2012 McGladrey LLP. All Rights Reserved.
  • 50. Federal Rehabilitation Tax CreditHow the Credit Works Tax implications - Property must be a building - Property cannot be a personal residence - Depreciable base reduced by credit - Recapture for early disposal (compliance period) • Five-year holding period • 20% of credit earned for every full 12 months held past date taken 49 © 2012 McGladrey LLP. All Rights Reserved.
  • 51. Federal Rehabilitation Tax CreditHow the Credit Works Tax implications (cont.) - At risk rules • Do not apply if widely held C corp. investor • Property cannot be financed by person related to buyer of property • Non-recourse financing cannot exceed 80% of credit base - Alternative minimum tax limits amount of credit allowed to be used for credits incurred prior to 2008 - Unused credits can be carried back 1 year and forward for 20 years - Credits are allocated based on profit percentage 50 © 2012 McGladrey LLP. All Rights Reserved.
  • 52. Federal Rehabilitation Tax CreditHow the Credit Works Credit base - Substantial rehabilitation required • At least $5,000 and exceed adjusted basis of property • Adjusted basis is acquisition cost or book value excluding land - Measurement period • Generally 2-year period commencing in year of rehab start and ending at end of tax year of 2-year period (period can be more than 24 months) • Optional 5-year period if project divisible and written plan and specifications prepared 51 © 2012 McGladrey LLP. All Rights Reserved.
  • 53. Federal Rehabilitation Tax CreditHow the Credit Works Credit base (cont.) - Qualified rehab expenditures (QRE) • Most are costs related to direct construction (plumbing, electrical, HVAC, tenant finishes paid by landlord, etc.) • Cost of enlarging, parking and site improvements excluded, with some limited exception • Many soft costs included - Regulatory - construction period interest and real estate taxes - Related to construction (architect, engineering, legal, accounting, etc.) 52 © 2012 McGladrey LLP. All Rights Reserved.
  • 54. Federal Rehabilitation Tax CreditHow the Credit Works Tenant rehab expenditures - Lease term at time of completion must exceed applicable recovery period • 27 ½ years for residential • 39 years for nonresidential - Excludes renewal options Landlord rehab expenditure pass thru to tenant - Lease must exceed 80% of applicable recovery period - Tenant records credit as income proportionately over recovery period 53 © 2012 McGladrey LLP. All Rights Reserved.
  • 55. Federal Rehabilitation Tax CreditWhat the Credit is Worth Ownership structure - Limited partnership • Developer/owner/contractor/non-profit as general partner, usually in corporate form • Investor(s) as limited partner(s) • Control to general partner with minimal ownership - Limited liability company • Similar structure as limited partnership except partners are called members • No need for corporate member due to liability shield • Employment tax issue 54 © 2012 McGladrey LLP. All Rights Reserved.
  • 56. Federal Rehabilitation Tax CreditWhat the Credit is Worth Valuation dependent on structure, pay-in, limited partner holding period and expected rate of return - Direct Investment - .85 to .92 - Lease pass thru - .95 to 1.40 55 © 2012 McGladrey LLP. All Rights Reserved.
  • 57. Federal Rehabilitation Tax CreditWhat the Credit is Worth Investor candidates - Investment funds/syndicators - Local financial institutions with unfulfilled community reinvestment requirements - Profitable locally-based national company - Most local companies are not profitable enough to overcome alternate minimum tax limitations - Large national companies 56 © 2012 McGladrey LLP. All Rights Reserved.
  • 58. Federal Rehabilitation Tax CreditOther Considerations Tax exempt tenants - Cannot participate in financing - Cannot have purchase option for a fixed sum - Cannot have used property prior to this lease - Lease cannot exceed 20 year 57 © 2012 McGladrey LLP. All Rights Reserved.
  • 59. Federal Rehabilitation Tax CreditOther Considerations New Market Tax Credit - Leverage historic equity with NMTC - CDE credit allocation Financing - First mortgage - Bridge loans 58 © 2012 McGladrey LLP. All Rights Reserved.
  • 60. Questions © 2012 McGladrey LLP. All Rights Reserved.
  • 61. Contact Us James Beal - Phone – 515.282-9287 - E-mail – jim.beal@mcgladrey.com Ron Copher - Phone – 406.751.7706 - E-mail – rcopher@glacierbancorp.com Douglas P. Koch - Phone – 617.241.1173 - E-mail – douglas.koch@mcgladrey.com 60 © 2012 McGladrey LLP. All Rights Reserved.
  • 62. DisclaimerThe information contained herein is general in nature and based on McGladrey LLP is the U.S. member of the RSM International (“RSMI”) McGladrey LLPauthorities that are subject to change. McGladrey LLP guarantees neither the network of independent accounting, tax and consulting firms. The memberaccuracy nor completeness of any information and is not responsible for any firms of RSMI collaborate to provide services to global clients, but are www.mcgladrey.comerrors or omissions, or for results obtained by others as a result of reliance separate and distinct legal entities which cannot obligate each other. Eachupon such information. McGladrey LLP assumes no obligation to inform the member firm is responsible only for its own acts and omissions, and not thosereader of any changes in tax laws or other factors that could affect information of any other party.contained herein. This publication does not, and is not intended to, provide McGladrey, the McGladrey signature, The McGladrey Classic logo, Thelegal, tax or accounting advice, and readers should consult their tax advisors power of being understood, Power comes from being understood andconcerning the application of tax laws to their particular situations. Experience the power of being understood are trademarks of McGladrey LLP.Circular 230 Disclosure © 2012 McGladrey LLP. All Rights Reserved.This analysis is not tax advice and is not intended or written to be used, andcannot be used, for purposes of avoiding tax penalties that may be imposedon any taxpayer. © 2012 McGladrey LLP. All Rights Reserved.