Using Historic Tax Credits in New York

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Using Historic Tax Credits in New York

• Combining HTCs and NMTCs
• Wednesday, June 24, 2009

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New Markets Tax Credit Fundamentals
NMTC Synopsis A federal tax credit available to
those that provide equity (QEIs) to certain
certified community development entities (CDEs)
that in turn lend or invest (QLICIs) in qualified
businesses (QALICBs) located in low-income
communities (LICs).
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New Markets Tax CreditsWhat is a Qualified
Business?

• Any corporation or partnership (including
  nonprofits) engaged in the active conduct of a
  qualified business must meet requirements
  regarding gross income, tangible property,
  services performed, collectibles, and
  nonqualified financial property
• No financing of residential rental property
• Mixed use okay
• Restrictions on certain types of business
  operations and tenants
• E.g. massage parlor, hot tub facility, liquor
  store, gambling facility

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New Markets Tax CreditsWhat is a Low-Income
Community?

• Generally, a census tract where
• The poverty rate is at least 20, or
• The median family income is 80 or less of either
  statewide median family income, or the greater of
  statewide or metropolitan median family incomes.
• Special rules for Targeted Populations, low
  population areas, and high migration rural
  counties
• Go to www.cdfifund.gov and click on NMTC tab

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New Markets Tax CreditsWhat is a CDE?

• A partnership or corporation who
• Has a primary mission of community development
• Maintains accountability to residents of
  low-income communities through their
  representation on any governing board or advisory
  board and
• Is certified by the CDFI Fund division of the
  Treasury
• CDEs participate in national competition for
  allocations of NMTC authority

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New Markets Tax CreditsFinding an Allocation

• Confirm your project qualifies
• Low-income community
• Additional distress criteria
• Reach out to CDEs who
• Specialize in financing historic rehabilitation
• Target allocation to your geographical area
  (city/state or urban/rural)
• Prefer your tenant mix (retail, community
  facilities, etc.)

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New Markets Tax CreditsHow They Work
Tax Credit Investor
CDE (Allocatee)
Tax Credits over 7 years (39) and Cash Return
QEI (100)
Suballocation of Tax Credit Authority
CDE (Subsidiary)
Loan/Equity QLICI (85 of QEI)
Property Owner (QALICB)
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Typical HTC Structure (Single Entity)
Tax Credit Investor LLC
Tax Credit Investor
Managing Member (Developer Affiliate)
HistoricTax CreditEquity
99.99 Credits, Profits Losses and Cash Flow
.01 Credits, Profits Losses, Fees andCash Flow
DeveloperEquity
Tax Credit, LLC (Property Owner)
Developer
Dev.Fee
DebtServicePayments
RentalPayments
LoanProceeds
Construction/Perm Lender
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Sample TransactionCalculating the HTC Equity
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Sample TransactionCalculating the NMTC Equity
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Key Business Issues

• Pricing (e.g. .9825 vs. 1.24)
• Equity Pay-In Schedule (same or faster)
• Exit Strategy (unwind may be delayed 2-3 years)
• Put Option
• Call Option

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Key Business Issues contd

• Guarantees (expanded negotiable adjuster
  gross up)
• Reserves (no change)
• Cash Flow Participation (3 industry standard)
• Operational limitations (subtenant mix)

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Master Tenant/NMTC Structure
CDE
Tax Credit Investor LLC
Tax Credit Investor
Tax Credit Investor
Managing Member (Developer Affiliate)
Non-Member Manager
99.99 Credits, Profits Losses, Fees and Cash
Flow
DeveloperEquity
HistoricTax CreditEquity
100 Credits, Profits Losses, and Cash Flow
.01 Credits, Profits Losses,Fees andCash
Flow
Landlord, LLC (Property Owner/Lessor)
QALICB
Pass-through of Historic Tax Credits Share of
Residual
Master Tenant, LLC (Master Tenant)
Single Member LLC (Disregarded Entity)
Lease Payment Equity Investment
DebtServicePayments
RentalPayments
LoanProceeds
Construction/Perm Lender
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Thank you

• Merrill Hoopengardner, Esq.
• 401 9th Street, NWSuite 900Washington, DC 20004
• 202.585.8169202.585.8080 (Fax)
• mhoopengardner_at_nixonpeabody.com

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