how credits become capital: when and how to syndicate incentives for historic preservation in...
TRANSCRIPT
How Credits Become Capital: When and How to Syndicate
Incentives for Historic Preservation in Detroit
Thursday, June 5, 2008The Detroit Athletic Club
The Basic of Syndication:What? Why? How?
Rehabilitation Tax Credit SyndicationWhat is Syndication?
• “Syndication” is the process by which the owner of a building brings an investor into the ownership structure of the building so that the investor can claim the credits (and other economic and tax benefits), typically in exchange for providing equity to the project.
What is Syndication?
• Federal Historic Tax Credits are not sold directly to an investor.
• Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company.
• Some State Historic Tax Credits can be “certificated” and sold to investors.
What is Syndication?
• Federal Historic Tax Credits are not sold directly to an investor.
• Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company.
• Some State Historic Tax Credits can be “certificated” and sold to investors.
Single Entity Structure
End UserEnd User End UserEnd User
Owner(LP or LLC)
Owner(LP or LLC)
InvestorInvestorGP/ManagerGP/Manager
DeveloperDeveloper
PropertyProperty
0.1% Management Fees, etc.
DevelopmentFee
99.9% Tax Credits
Lease Lease
Fee Ownership
Master Lease/Credit Pass-ThroughLessee Claims Credit
DeveloperDeveloper
Master Lessee(LP or LLC)
Master Lessee(LP or LLC)
InvestorInvestorGP/ManagerGP/Manager
PropertyProperty
End UserEnd User End UserEnd User
0.1%
Development
Fee
99.9% Tax Credits
Lease Lease
Owner/Lessor(Affiliate of GP/Manager)
Owner/Lessor(Affiliate of GP/Manager)
MasterLease
Funds
Rehabilitation Tax Credit Syndication Calculating the Investor’s Contribution
Qualified Rehab Expenditures 2,000,000Credit Rate 20.00%
Total Calculated Credit 400,000Tax Credit Investor Allocation 99.99%
Total Credit to Investors 399,960
Credit Price Per Each $1 of Credit 0.95
Equity Contributions by Investors 379,962
Should the Owner/Developer Syndicate?
• Factors to Consider:
– Does the Developer have limitations on claiming the credit for itself?
• Is the Developer a tax exempt entity or have insufficient taxable income to be able to use tax credits?
• Business Tax Credit Limitations ($25K +75%)
• Passive Activity Rules Apply
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Net Economic Benefits
• Equity raise versus lost cash and (sometimes) lost depreciation.
• Transaction Costs (both closing and on-going).
Should the Owner/Developer Syndicate? (cont’d)
• Factors to Consider:
– Is additional equity needed during construction (i.e. prior to completion of the rehabilitation)?
Should the Owner/Developer Syndicate? (cont’d)
• Factors to Consider:
– Control: Are you willing to have a partner?
• Loss of control issues.
• Disclosure and Reporting.
• Unwind concerns.
Finding Investors
• Does your bank or its CDC make HTC investments?
• Referral sources:
– State Historic Preservation Office (SHPO)
– State and local preservation organizations
– Other developers
– Experienced accountants and lawyers
Soliciting Investment Proposals —Things Investors Want to Know
• Proposed Budget and Timing
• Financing Commitments
• Property Acquisition Status
• Real Estate issues including title and environmental issues, zoning, parking and other permitting
Soliciting Investment Proposals —Things Investors Want to Know cont’d
• Leasing Commitments/Market Study
• Part 1 and Part 2 Status
• Development Team—who they are, their experience and financial capacity
Key Syndication Business Issues — Picking The Best Offer
• Pricing
• Equity Pay-In Schedule
• Reserves
• Cash Flow, Fees, and other items that reduce the net economics to the developer
Key Syndication Business Issues — Picking The Best Offer cont’d
• Exit Strategy (Put and Call Options)
• Guarantees
• Structure
• Due Diligence Requirements
• Experience/Reputation and Closing Process
Successful Negotiation and Closing — Strengthening the Developer’s Position
• Reducing Risk of Recapture:
– favorable debt terms
– high debt coverage ratio
– significant developer equity
• Leasing Commitments/tenant strength
• Guarantor Strength/Scope
Successful Negotiation and Closing — Strengthening the Developer’s Position
• Reducing Construction Risk: delayed pay in
• Team Coordination and due diligence follow through
“We structured the deal so it won’t make any sense to you.”
