new markets tax credits understanding the program goals, financing structure and community impacts...

New Markets Tax CreditsUnderstanding the Program Goals, Financing Structure and Community Impacts

Drew MarlarKutak Rock LLP

(404) 222-4662Drew.Marlar@KutakRock.com

Brad Elphick, CPANovogradac& Company LLP

(678) 339-3675Brad.Elphick@Novoco.com

Eric RosenSunTrust Community Capital, LLC

(404) 724-3634Eric.Rosen@SunTrust.com

Program Qualification

• To qualify as a QLICI, the property or business for which an investment is being made must:Be located in a low-income census tract;Not derive more than 80% of its revenue from multi-

family rentals.

• Due to competitive nature of program, majority of projects are located in highly distressed communities.

• An easy check for qualification can be found at: http://www.novoco.com/new_markets/resources/maps_data.php

Program Qualification (QALICB)A QALICB is:

• An operating business located in a low income community (“LIC”)

• A business that develops or rehabilitates commercial, industrial, retail or mixed-use real estate projects in a LIC

• A business that develops or rehabilitates community facilities, such as a children’s museum, charter schools or health care centers in a LIC

• A business that develops or rehabilitates a project that may include for-sale housing units located in LICs

Limitations on businesses or tenants of a QALICB include: gambling, tanning salons, massage parlors, liquor stores, golf courses, farming and income from rental housing.

▫ Compliance covenants are required of QALICB in the loan agreement for the above business limitations.

Community Benefit

• NMTC eligible projects must be located in a qualifying census tract and will then be evaluated on the level of community benefit they are anticipated to provide:

Job creation (particularly for low-income community residents) Providing services or training to low-income persons/communities Value add project creating construction and permanent jobs High efficiency of tax credit usage Preferences for investment located in economically distressed

census tracts (highly distressed communities). State, City and local support Brownfield revitalization Renewable energy/Green construction Other social benefits specific to the business or real estate

investment

Pairing NMTC with Other Financing Sources• Generally speaking, the NMTC program works well with other

financing sources:

Leveraged Loans may be comprised from numerous financing sources including:• Hard bank debt• Community Development Block Grant• Tax Allocation District Bond Proceeds• Private Activity Bonds• Developer Equity• Charitable Contributions• Historic Tax Credits

NMTC program does not work well with LIHTC program or CDFI Fund Bond Guarantee Program.

$

Thriving Community

or

Low-Income Community

Tax Liability

ROI

Credits

$

IRC Section 45D

“New Markets Tax Credit”

Investor(s)

‘00

39%

NMTCs“Qualified Equity Investments”

“Qualified Low-Income Community Investments”

Low-Income Communities

$10 Mil

Investor(s)

CDE

CDFIFund

CDEApplication

NMTCAllocationApplication

$10 M

Investment Authority

$

$5 Bil

“Qualified Active Low-Income Community Businesses”

Tax Liability

QLICIs

Application

NMTCs

• Corporations

• Partnerships

• LLCs taxed as corporations or partnerships “Community Development Entity”

QEIs

I. Business Strategy

II. Community Outcomes

III. Management Capacity

IV. Capitalization Strategy

V. Info Re: Previous Awards

$3.9 Mil

$1.95 Bil

x 39% $3.9 Mil=

Year 1

Year 2

Year 3

$500k

$500k

$500k

Year 4

Year 5

Year 6

Year 7

$600k

$600k

$600k

$600k

Total $3.9 mil

“Substantially All”of =

“ ”

AllocationAgreement

QALICBs

85%

2015 Application:• 76 pages• 44 questions

Examples of QALICBs might include but are not limited to:

• Community centers

• Libraries

• Health care facilities

• Boys and girls clubs

• Charter schools

• Museums

• Grocery stores

• Drug rehab facilities

Examples of QALICBs might include but are not limited to:

• Community centers

• Libraries

• Health care facilities

• Boys and girls clubs

• Charter schools

• Museums

• Grocery stores

• Drug rehab facilities

Structures

Structures

•Self Leveraged•Leveraged•Unleveraged

NMTCs$10 Mil

Investor(s)

CDE

$

QEIsx 39% $3.9 Mil=

$2.56$7.2 – 7.4 Mil $2.6 – 2.8 Mil

Fund

Lender(s)

$10 MilQEIs

ROI

Loan Equity

The Leveraged Structure

NMTCs$3.9 Mil

$0.68 – $0.72

$Interest

$Distribution

$Interest

$2.5 MilB Loan

QEI

Fund

$7 MilLoan

$10 Mil

$7 MilA Loan

$500k Fees

99.99%

Self Leveraged Structure

Sub-CDE

CDE

$3 MilEquity

1% Int.

0.01%

100%

QALICBAffiliate

1% Int. 1% Int.

$2.5 MilB Loan

QEI

Fund

$7 MilLoan

$10 Mil

$7 MilA Loan

$500k Fees

99.99%

Self Leveraged Structure

with Short-Term Bridge

Loan

Sub-CDE

CDE

$3 MilEquity

1% Int.

1% Int. 1% Int.

0.01%

100%

Day Loan

$7 MilProperty Purchase

Day lender

QALICBAffiliate$7 Mil

$2.5 MilB Loan

QEI

Fund

3rd party leverage lender$7 MilLoan

$10 Mil

$7 MilA Loan

$500k Fees

99.99%

Leveraged Structure

Sub-CDE

CDE

$3 MilEquity

7% Int.

0.01%

100%

5% Int. 5% Int.

$2.5 MilB Loan

QEI

Fund

3rd party leverage

lender

$7 MilLoan

$10 Mil

$7 MilA Loan

$500k Fees

99.99%

Leveraged Structure

with Back-Leverage

Sub-CDE

CDE

$3 MilEquity

1% Int.

0.01%

100%

$7 MilBack

Leverage Loan

7% Int.

1% Int. 1% Int.

QALICBAffiliate

$2.5 MilB Loan

QEI$10 Mil

$7 MilA Loan

$500k

99.99%

Unleveraged Structure

Sub-CDE

CDE

0.01%

Fees

5% Int. 5% Int.

Grady Memorial HospitalAtlanta, GA

$31,000,000Emergency Department Expansion &

Renovation

Grady Memorial Hospital

• New construction of 90,000 SF and renovation of Emergency Department, a $68 million project

• Additional 20,000 patients per year served

• Creating up to 50 new full-time jobs.

• 3 CDEs – SunTrust ($5 million), Atlanta Emerging Markets ($12 million), Community Hospitality Healthcare ($13.5 million)

• SunTrust Bank - $9.0 million short-term bridge loan and a $12.4 million bridge loan

$31 Million New Markets Tax Credits

Sources AmountFundraising $36,400,000

SunTrust Bridge Loans

$21,400,000

Federal NMTC Equity

$10,000,000

Total $67,800,000

Census Tract DataPoverty rate – 35.8%Area Median Income – 64.3%Unemployment Rate – 16.3%Medically Underserved

Union MillBaltimore, MD

$21,500,000Apartments and office space for teachers

and non profits

Union Mill

• Historic adaptive reuse of stone mill into non-profit office space, affordable housing and retail

• 59 affordable housing units, all for Baltimore City teachers

• Created 160 new full-time jobs• All commercial space rented to

non-profits at 25% below market rates

• Baltimore Green Building• 2 CDEs – SunTrust ($8.6 million),

Capital Impact Partner ($11 million)

$21.5 Million New Markets Tax Credits

Census Tract DataArea Median Income – 49.2%

Sources Amount

Federal NMTC Equity

$5,110,000

Federal HTC Equity $2,950,000

State HTC Equity $1,885,000

Developer Equity $1,000,000

SunTrust Loan $7,000,000

City/State Loans $1,500,000

Deferred Dev. Fee $2,070,000

Total $21,515,000