Combining NMTCs with LIHTCsCombining NMTCs with LIHTCs

NH&RA 2008 Summer Institute

The Myth

NMTCs and LIHTCs are mutually exclusive tax credits.

Questions to Consider

• What are the statutory or regulatory prohibitions regarding low-income housing?– Restrictions on use with LIHTCs.

• Does the business the CDE will be lending to or investing in qualify as a QALICB?– Restrictions on residential rental property.

Project Type: “Mixed-Use” Developments

• QALICBs must be engaged in the active conduct of a qualified business.

• Rental of real estate qualifies only if the property is not depreciable as residential real property and there are substantial improvements on the property.

• Residential rental property is defined in Section 168(e)(2)(A) of the IRC as “any building or structure if 80 percent or more of the gross rental income from such building or structure is rental income from dwelling units.”

“Mixed-Use” (cont’d)

• Mixed-Use must have less than 80% of income from rental housing plus 20% or more of income from:– Office space– Retail– Other commercial space

Can Mixed Use Projects Combine NMTCs and LIHTCs?

• Generally speaking, not allowed– CDE’s loan/investment will not be a

QLICI to the extent it finances building’s eligible basis under Section 42(d)

• Solutions– Use condominium structure– Finance non eligible basis items

Condo Structure: NMTCs and LIHTCsNMTC Investor

CDE LIHTC Investor

Partnership One Partnership Two

Mixed Use Building

Owns Residential Condominium

Owns Commercial

Condominium

Loan or Equity

NMTCs and LIHTC: Eligible Basis

• NMTCs cannot finance eligible basis items

• Can finance– Land– Infrastructure/sitework– Commercial portion of building

• Importance of tracing funds, no cross-collateralizing, no cross- defaults

More Information?

Gregory N. Doran, Esq.401 9th Street, NW

Suite 900Washington, DC 20004

202.585.8266gdoran@nixonpeabody.com

THE BETHANY SQUARE PROJECTLeveraging NMTC for Land Acquisition

& Predevelopment Costs

NATIONAL HOUSING & REHABILITATION ASSOCIATION SUMMER INSTITUTE

Santa Fe, New MexicoJuly 24, 2008

AGENDA1. WHO WE ARE2. WHAT WE DO3. EXPERIENCE4. TOOLS WE USE5. THE BETHANY SQUARE PROJECT – Problem statement

and possible solutions

THE URBAN GROUP OF COMPANIES

The Urban Group of Companies is a full service

real estate development, management, investment

banking and finance group focused on

opportunities in the urban core.

COMPANIES• Urban Development & Finance, LLC• Urban Holdings, LLC• Urban-Eco Housing LLC• Urban Housing (Property Management)• Urban Construction• Urban Consulting• Urban Seminars• Urban Protective Services

NORRIS LOZANOCEO & President, Urban Development & Finance, LLC

• More than 25 years experience in large commercial and business finance, venture capital and banking law

• Founded United Fund Advisors, Portland Family of Funds - $1.1 billion in NMTC-related deals in 4 years

• “25 Green Building Leaders in the NW” - Sustainable Industries NW Magazine

• Semi-finalist, “Innovations in American Government Award” – Harvard U• Board of Directors, ecoAmerica• Board of Directors, Hayward Corporation• Juris Doctorate, Southern Methodist University School of Law• Bachelor of Arts in Political Science from the University of Texas

WHAT WE DOUrban Group:

• Analyze market opportunities• Acquire, master plan, develop, finance and manage and operate single purpose and mixed-use real estate projects in the urban core• Manage real estate investment funds• Source debt and traditional and tax credit equity• Structure and close transactions• Analyze and report community impacts• Provide investor reporting services

PROJECT TYPES:• Historic Rehabilitation• Section 8• LIHTC including rehab• New Markets Tax Credits• Senior affordable housing• Workforce housing - family• Commercial• Retail • Faith-based• Light industrial

ACCOMPLISHMENTS• Principals have closed 20 NMTC transactions (total project

cost: $1.2 billion) since 2004 • $150 million invested and syndicated directly• $650 million in green buildings financed• Consulted on $645 million in NMTC utilized allocations• Public/Private partnerships• Numerous historic projects• Own/manage over 40 buildings and 1,000 units of

affordable housing• Los Angeles, Chicago, New York City, Portland, New

Orleans, North Carolina, Texas.

ECONOMIC IMPACTS

Jobs created

Fiscal impacts

Total economic impacts

~8,000

~$528.8 million

~$3.8 billion

IMPLAN estimate of direct, indirect and induced impacts of Construction and first 10 years of Operations.

TRIPLE BOTTOM LINE RETURNS- PEOPLE-PLANET-PROFIT

• Financial – provide market yield returns to investors

• Social – new commercial and retail services, jobs, wages, cultural and community benefits

• Environmental – LEED construction, Transit- oriented Developments, education, green housekeeping plans, tenant recycling plans, healthier built environment

REPRESENTATIVE URBAN PROJECTS

• Some of the Projects structured and closed by Urban principals during the past five years

(* indicates project was structured and closed as CEO of previous firm)

CAHUENGA – Los AngelesWorkforce housing over retail in 1925 Hollywood hotel – historic rehabilitation – nearing compeltion

$10.5 mm project

Goals:• Preserve historic character• 104 units of affordable housing• Energize street with 8,100 SF of active, ground floor retail

CARONDELETHistoric rehabilitation - Architectural gem restored – near McArthur Park – Los Angeles

$3.0 mm project

Components:• Historic Rehabilitation• Office • Community social space• Movie and television set location

1848 N. GRAMERCYHistoric Restoration 1929 Hollywood multifamily affordable apartment building

$4.1 mm project

Goals:• Restore historic luster• 34,000 SF; 5 floors• Studios and 1BR

THE CIVIC*Blighted apartment becomes retail, green housing and condo – Portland, Oregon

$97.5 mm project

Components:• Affordable Housing• Condos• Retail• Community open space• Underground parking

THE NORMANDIEAffordable housing in historic 1926 Los Feliz (Los Angeles)

$3.2 mm historic rehabilitation

Goals:• High quality historic restoration• Preserve 1920’s character• 30 new housing units

12W* NMTC allocationNew office, retail and housing in West End

$137.8 mm project

Goals:• Job retention• Creative services• Workforce housing• New retail and jobs• “Carve-out” for Head Start

FEATURED PROJECT: BETHANY SQUARE

• South Central LA – 4 acre land assembly

• 1 mile from epicenter of 1992 Civil Unrest

• Assembled over 15 years• Strong community and

political support

FOUR CHALLENGES 1 Development Challenges – year 20042 Predevelopment Financing - year

20063 What to build in an uncertain market

– year 20084 How to use LHTC,NMTC, ITC and

Gap funding together in the project and meet new LA Green Building Standards

Final Problem Statement – How to structure it?

CHALLENGE #1 DEVELOPMENT CHALLENGES – 2003-2005

• South Central LA• 1 mile from epicenter of 1992 Civil Unrest• Few mixed-use developments in the area in

2 generations• Few amenities, groceries, schools,

services• “A neighborhood in need of a pioneer”• GETTING TAX CREDITS - application filed

for NMTC in 2004 with an option to acquire the land

DEVELOPMENT PLAN

• Senior Affordable• Workforce housing• Retail + commercial• LEED target• Community + political support• $80+ mm project• ~$5 mm needed for

acquisition

NEW MARKETS TAX CREDITS• $11 million NMTC award (2005) to Bethany

Square, LLC• “… to provide a debt investment in a highly

distressed inner-city area in South Central Los Angeles…to support a 3.7-acre mixed-use development ...”

BETHANY SQUARE NMTC STRUCTURE

POST-ACQUISITION• NMTC funds function exactly as intended,

allowing a project in deeply underserved area to move forward –used acquisition financing for leverage which provided almost $2 million for pre development

• Urban funds some predevelopment costs - $1 million

• Needs additional predevelopment funds to continue – strategic considerations

• WE ARE NOT COMPLETED IN PREDEVELOPMENT – STILL DECISIONS TO BE MADE

CHALLENGE #2: PREDEVELOPMENT FINANCING -2006 -2008

• Predevelopment activities required for permits and construction financing – NMTC derived capital funds initial activities:• Market Feasibility and appraisals• Design development drawings and

environmental and LEED considerations• Entitlement• LIHTC AND GAP FUNDING APPLICATION

COSTS are next

• CHALLENGE #3: IN UNCERTAIN MARKET OF 2008, WHAT TYPE OF HOUSING TO BUILD? How do we approach LEED standards in LA?

• In 2004, Bethany Square was conceived as mixed- use with workforce condos over commercial and retail and LHTC Senior Housing.

• In 2008 market constraints forced reconsideration of workforce program leaving 100 units of senior affordable, 35% - 60% MFI and commercial for a total development of 137,648 square feet

2008 MULTIFAMILY MARKET RESEARCH

“…as a result of foreclosures on the single-family side, we are seeing an increase in the renter pool from 30.9 percent to 32.2 percent. That's 1.5 million new renters looking for an apartment…. Some of the forecasting at NMHC indicates that by 2011 we might even be facing rental shortages."

-Ric Campo, CEO Camden Property Trust, Houston, in Multifamily Executive Magazine

RESEARCH

“…With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced

momentum as the guiding force for housing prices" -NY Times, July 19, 2008

MULTIFAMILY STRATEGY• Demographic trends indicate senior and multifamily,

coming online in 2009/10, are well-timed• California markets fundamentally sound• Strong rent growth• Low vacancy rates• Moderate growth but large base• Generation-Y and Baby Boomers huge potential

CHALLENGE #4: WHY USE NMTC AND LIHTC IN ONE PROJECT IN UNCERTAIN TIMES?

• Tightened credit means multiple sources needed to finance large-scale projects• Lenders in their own swim lanes• Mixed-use addresses multiple needs and spreads

risks• Mixed-use is the seed of community

• NMTC + LIHTC can be utilized together in condo structure

DEMOGRAPHIC DEFINITIONS

Largest Demos are Boomers (age 43-62 today) and Gen-Y (8-27 today)

% OF RENTERS, BY AGE OF HOUSEHOLD

Source: US Census Bureau

Source: US Census Bureau

Apartments and Condos:Singles, Roommates; Entry‐

Level & First

Move‐Up Condos

Apartments & Condos: Move‐

Down, Down‐sizing, Lifestyle –

ALL QUALIFY FOR SENIOR 

HOUSING (55+)

PROJECTED POPULATION GROWTH RATE 2008-2018

OIL PRICES FORCING LONG-TERM CHANGES

TYPICAL HOUSEHOLD 

BUDGET IN 2006

2006‐2008 EFFECTS

HOUSING: 29%

TRANSPORTATION: 

14%

GAS PRICES +30% INCREASED GAS AND 

FOOD COSTS 

EQUIVALENT TO 7% 

OF HOUSING BUDGET 

FOOD & BEV: 11% FOOD PRICES + 20% MOVE CLOSER TO 

WORK

MOVE CLOSER TO 

TRANSIT

DOWNSIZE

THE URBAN GROUP’S GREEN BUILDING IMPERATIVE

• LEED or beyond• Create productive, healthy places

to live, work and play• Transit-oriented development• Improve air and water quality• Reduce solid waste• Conserve natural resources

ECONOMIC BENEFITS - OWNERSINCREASE PROPERTY VALUATION

• Efficient systems more valuable• Healthy, i.e. productive indoor environment – residents,

workers, visitors, shoppers• Enhanced rental margins, especially NNN

MARKETING/RESALE• Lease up faster• Decrease vacancy• Improve retention• Improve occupant performance• Higher visitor traffic• Improved sales

BENEFITS – RESIDENTS AND PROPERTY MANAGEMENT

$$ SAVINGS• Utilities cost savings – energy, water – 20% -

50%

HEALTH• Low VOC: improved indoor air quality• Daylighting: productivity, well being• Natural ventilation: more comfortable• Increased density: more interaction

ENERGY EFFICIENCY OPPORTUNITIES

SOLAR POWER• Southern California location• Silicon Valley intensely

focused on quality, output• Bethany: Rooftop or Sky

Bridge PV arrays• Can be economically neutral,

depending on structure

ADDITIONAL FUNDING RESOURCES

ENERGY TAX CREDITS• “Businesses are eligible for tax credits for buying hybrid

vehicles, for building energy- efficient buildings, and for improving the energy efficiency of commercial buildings (as outlined in the Energy Policy Act of 2005).”

– US Department of Energy

ADDITIONAL FUNDING RESOURCES

ENERGY CREDITS - EXTENSIONS• “By a vote of 25-12 the House Ways and Means Committee

today approved H.R. 6049, the Energy and Tax Extenders Act of 2008. The bill includes a six-year extension of the investment tax credit (ITC) for solar energy; three-year extensions of the production tax credit (PTC) for energy derived from biomass, geothermal, hydropower, landfill gas and solid waste; and a one-year extension of the PTC for energy derived from wind.” – Novogradac & Company

ADDITIONAL FUNDING RESOURCES

ENERGY CREDITS – MAINTAINING BASIS• “In PLR 200820011, the IRS ruled that no reduction in

investment credit basis was required for solar equipment placed in a tax-exempt bond-financed affordable housing project where:

• bond loan documentation prohibited the use of bond loan proceeds to finance the solar equipment;

• the bond proceeds were not actually used to finance the solar equipment;

• and the solar equipment did not serve as collateral for the bond loan.” – Novogradac & Company

ANSWER TO CHALLENGES # 3 and 4 – What to build and how to finance it

Seek additional gap financing resources to build LHTC Senior housing and commercial/retail built hitting LEED Standards for efficiency and to meet new City of Los Angels standards

TAX CREDITS TO UTILIZE• New Markets Tax Credits• LIHTC (4% credits) and Bonds or (9%)• Energy ITC

ADDITIONAL FUNDING RESOURCESLOW-INTEREST LOANS - CALIFORNIA

• LA/Community Redevelopment Agency• HCD - Transit-Oriented Development• HCD – Infill Grant Program• HCD -Multifamily Housing Program• Los Angeles Housing Department -AHTF• City of Industry Funds

ADDITIONAL FUNDING RESOURCES

MISCELLANEOUS• Infill Infrastructure Grant• Local Utility Equipment and Conservation funds• Federal Modified Accelerated Cost-Recovery System (MACRS)

(accelerated depreciation for solar equipment)• State of California: numerous programs• Utilities: numerous low-interest loans, rebates and credits for

energy efficient equipment and solar products

FINAL CHALLENGE-

STRUCTURING ADDITIONAL NMTC, LHTC, GRANTS, ENERGY (ITC) AND GAP FINANCING INTO EXISTING STRUCTURE- ADDITIONAL PREDEVELOPMENT TO CONSTURCTION

-Herb Stevens and Greg Doran

BETHANY SQUARE NMTC STRUCTURE- adding the new resources- Herb Stevens and Greg Doran on structure

URBAN DEVELOPMENT & FINANCE, LLC

CONTACT:Norris Lozano, CEO & President2719 Wilshire, Suite 200 Santa Monica, CA 90403norris@UrbanDF.com

(310) 315-7226 office(310) 740-7011 cell

Combining New Markets and

Solar Tax Credits

Herb Stevens July, 2008

Overview of ETCs

•Energy Tax Credits are generally 30% of “facility” cost (e.g., transmission lines and substations are not eligible for the ITC)

•Includes Photovoltaic (PV) Concentrated Solar Power (CSP) & fuel cells

•Must generate electricity, heating, cooling, hot water, or fiber-optic lighting. Sale of elec. is not required

Placed in Service

When is a facility placed in service?

• Usually when completed, with licenses and after pre-operational testing

• “Daily operation” can matter• Acquired property must be delivered and ready

to use; mere purchase is not enough

The Tax Benefits and Timing

30% ETC is usually taken in the year the facility is “placed in service”

Possible recapture for 5 years (100% in first year, 80% in second year, etc.)

• Mostly 5-year MACRS depreciation, but new rules permit 50% depreciation in first year (PIS in 2008).

Other Subsidies

• Bonds and “subsidized energy financing” generally reduce federal credits. (Full reduction)

• State programs usually don’t reduce solar credit, but may be taxable, e.g., state grants)

Technical Rules

• Almost all investors are corporations because of “At Risk” and “Passive Loss” Rules

• Basis reduction of 50% of ITC, meaning less depreciation

• Profit motive -- But compare Rev. Proc. 2007-65 (for wind) with Reg. 1.42-4 (for LIHTC)

Solar/New Markets Lease Pass Through Structure

NMTC and Solar/Investor Credit

CDE

Master Tenant

Project Owner

Solar Project

LenderLoan and 49%

Equity

Power Purchase

Agreement or Sublease

Credit Pass ThroughEnergy User

Lease

Developer 51% Equity

Lease

Equity

Loan

$10 million cost

$3.5 million

$6 million allocation

Solar $4.2 million NMTC $1.8 million

$6 million

Credit Equity $6.0 millionDebt $3.5 million Need $ .5 million REC or Rebate

Solar/New Markets Single Equity Structure

CDE

Fund

Project Owner

Solar Project

Leverage Lender

Energy User

NMTC Investor

Solar Credit Investor

Power Purchase Agreement or Lease

Developer .01%

Loan and Equity

Equity 99.99%

Equity

Equity

Loan

$10 million cost

Allocation of $5 million NMTCs

$1.5 million$3.5 million

$5million

$4.2 million

NMTC 5.0 million Solar 4.2 million Need .8 million

Thank you

Herb Stevens