■ CDFI Fund Compliance File Audit — Are You Ready? 1

■ Ed Roberts Campus: An NMTC Investment Under the “Targeted Population”Provision 2

■ Changes to the Related Party Test: The Good and the Bad 5

■ NMTC Coalition Corner 7

■ About Reznick Group 8

In This Issue

Winter 2011

New Markets Tax Credit ConnectionHelpingYou Stay Connected

CDFI Fund Compliance File Audit — AreYou Ready?By: Debbie Rosier, Reznick Group

The CDFI Fund has been hitting thestreets, performing reviews of allocation-specific compliance files. These auditsare what are referred to as “fieldreviews,” as opposed to desk reviews,as a representative from the CDFI Fundwill come to the Community Develop-ment Entity’s (CDE’s) office to performthe audit by looking at its internallymaintained compliance files.

In general, an allocatee will be notifiedin writing that a specific allocation hasbeen selected for audit and will begiven a list of items to gather for theCDFI Fund representative to review.The list of items the reviewer will wantto see will be associated with a specificallocation agreement. For a CDE thatwas awarded multiple allocations, it isimportant for the allocatee to be awareof the differences in the compliance requirements of its various allocation

agreements. Timely compliance filemaintenance is essential as certainitems are time sensitive. For example,the required registration with the CDFIFund of each Qualified Equity Invest-ment (QEI) received must be completedby the CDE within 60 days of receipt ofthe QEI. While some items, such asthe annual audited financial statementsand tax returns for each CDE, are easilymanaged there are other items, though,that are more difficult.

Some of the requirements found in Schedule 1 of each allocation agree-ment, such as “flexible product,” are

easily documented on a deal-by-dealbasis. To comply with the flexible product requirements in section 3.2 (f)of the allocation agreement, at the timeeach Qualified Low-Income CommunityInvestment (QLICI) is closed, the CDE must document that the QLICIexhibits flexible, non-conventional, ornon-conforming traits, as defined in theallocation agreement. The CDFI Fundrequires that the CDE document howeach QLICI meets the flexible productrequirement. In other words, does the QLICI provide equity or equity-equivalent financing; if the QLICI is aloan, does it have an interest rate that

Continued on page 6

Reznick Group New Markets Tax Credit Connection2

Ed Roberts Campus: An NMTC Investment Under the “Targeted Population” ProvisionBy: Joe Caruso, National Development Council

Berkeley, CA:The Ed Roberts Campus(ERC), a facility created by a uniquecollaboration among seven disabilityrights organizations, opened its doorson November 1. An 80,000 square footnew facility located at the Ashby BARTtransit station in Berkeley, California,the ERC is a model of universal designand transit-oriented development forpeople with disabilities.

Founded by the region’s prominentdisability agencies and run by peoplewith disabilities, the mission of the ERCis to help people with disabilities liveindependently and without discrimina-tion. It is the world’s first center devotedto realizing the gains made by the dis-ability rights movement over the pastseveral decades.

In order to make this project a reality, the City of Berkeley and theERC pursued NMTC financing throughtwo CDEs — the National DevelopmentCouncil’s (NDC’s) HEDC New Markets,Inc. and the Northern California Com-munity Loan Fund (NCCLF) — andinvestor partner JPMorgan Chase.

While the ERC, with its myriad benefits to the disability community,the community-at-large and, throughits advocacy, the worldwide disabilitiescommunity, is an exemplary project, itis not located in a distressed or other-wise eligible census tract that qualifiesit for New Markets Tax Credits financing.It is surrounded by eligible census tracts,but due to the low population of itsown tract, most of which is taken up bythe BART transit station and adjacentparking lots, its site did not qualifyunder standard NMTC eligibility criteria.Instead, ERC had to pursue NMTC financ-ing under the “targeted population”

provision. IRS Notice 2006-06 spells outthe criteria for qualifying in the targetedpopulations category: ■ To qualify as a QALICB with

respect to a targeted population, a business must meet one of the following three tests: gross income,employees, or ownership.Dmitri Belser, Executive Director of

ERC partner Center for AccessibleTechnology (CforAT), is also Presidentof the ERC board and has been withthe project since its conception. Herecalls the challenges in the course ofthe six to seven years between con-sidering NMTC financing and closingon an NMTC strategy that would workfor ERC. “We’re nothing if not tena-cious,” joked Belser. “We tried to getsupport for a change in the regs thatwould make it possible for low popula-tion census tracts such as ours, sur-rounded by qualifying census tracts, to be eligible,” Belser explained. But

that attempt was not successful. Thencame news of the “targeted population”provision, but the tests for meeting eligibility based on low-income qualifi-cation of clients was not acceptable to the ERC consortium of agencies.“[Generally] the disability communityis not willing to provide that level ofinformation, and we want to be able toserve everyone,” Belser continued.

Belser and company were beginningto think that NMTC was not an optionfor them until Tom Nelson, an attorneywith Seattle-based law firm Kantor TaylorNelson Boyd & Evatt PC, said that itwas possible to do a targeted popula-tion deal based on employee income,requiring that 40% of employees mustbe low income at the time of hire. It’s atedious process to document becauseit’s based on determining that anemployee’s household income at thetime of hire is not more than 80% ofthe area median family income. Now,

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consider that some employees of theparticipating ERC agencies were hiredtwenty or more years ago. And con-sider that the new hire of twenty yearsago was a newly graduated studentstill living with roommates. This wouldmean hunting down and documentingincome from all presumably formerroommates in order to verify house-hold income.

NMTC regulations require that, for theseven-year period of NMTC financing,all seven agencies maintain a status inwhich at any given time, at least 40% oftheir employees must have been deemedlow income at the time of hire. TheNMTC team assembling the financing

— the Reznick Group accounting firm,the two CDEs, and the investor —increased the test, agreeing that itwould be better to require maintaininga 60% low-income threshold, so thatas employees come and go, it wouldn’tbe difficult to maintain the NMTC-required 40% low-income balance.

If employees qualify at the time theyare hired, any subsequent increases in the employees’ incomes are ignoredfor purposes of meeting this require-ment. Because the NMTC program isintended to produce jobs and increasewages for low-income persons, sub-sequent increases in employees’wages do not disqualify the business

from meeting NMTC compliancerequirements.

The ERC partners agreed to pursuethe targeted populations route to NMTC,

Continued on page 4

The Ed Roberts Campus

...benefits of the project to the disability ...challenges involved community and the community-at-large: in structuring financing:

■ Although surrounded by NMTC-eligible census tracts,the census tract in which ERC is located is not eligible(although low income, the tract is also low population,as most of the property is occupied by the transitstation and its parking lots).

■ The seven agencies that make up the ERC did notwant to use the client income test to qualify for the“targeted population” provision that would make possible NMTC funding.

■ This transaction will focus on the employees of theQALICB to meet the targeted populations threshold.To meet the employee requirement, at least 40% ofthe entity’s employees must be low-income persons(household income of not more than 80% of the areamedian family income). The determination of whetheran employee is a low-income person is made at thetime the employee is hired. If employees qualify atthe time they are hired, any subsequent increases inthe employees’ incomes are ignored for purposes ofmeeting this requirement.

■ As the NMTC program is intended to produce jobsand increase wages for low-income persons, it is logicalthat subsequent increases in employees’ wages shouldnot disqualify the business from QALICB status.

■ As home to leading organizations in the disabilityrights movement, the ERC provides a one-stop centeroffering many programs and services for people withdisabilities.

■ Located at a fully accessible transit hub, the develop-ment of the ERC included a number of significantaccess and safety improvements, including:

• Construction of a new public elevator from AdelineStreet to the station entrance, from which pointthe station was not previously accessible to peoplewith disabilities.

• Addition of accessible parking spaces on the easternparking lot, where none existed.

• Addition of many other site improvements includingnew benches, bike racks, lighting, planters, signage,and landscaping.

• Improvement of pedestrian access to BART fromthe neighborhoods to the east by creating anattractive, well-lit, and safe pedestrian path to thestation.

■ Retained 140 jobs, created 60 jobs, created 300 full-time-equivalent construction jobs, and developeda sustainable, energy-efficient structure.

Reznick Group New Markets Tax Credit Connection4

with the employee income verification.Reznick Group agreed to serve as theconfidential keeper of the data, verify-ing that the project met and continuesto meet the required low-income new hire threshold. And the largest($40.0 million QEI) targeted populationdeal to date under the NMTC programwas born.

ERC President Dmitri Belser creditsNDC field director Scott Rodde, whoprovided development assistance tothe City of Berkeley, with keeping theproject alive. “Scott went out of his wayto help figure out how to make thiswork,” noted Belser, adding: “He reallybelieved in this project. He would say,‘We have to make this work; this is whatthe NMTC program was meant for.’”

“The Ed Roberts Campus is a greatexample of how the diligence and per-sistence of the partners involved canmake the difference between successand failure, and the tax credit require-ments of this project tested the mettleof all interested parties,” said Liz Tracey,Vice President of the New Markets Tax Credit group at JPMorgan Chase.

“The Targeted Population provision of the NMTC program allowed the low-income community in Berkeley to realize significant economic benefit,”noted Robert W. Davenport, NDC

President. “We could not be moreproud to be a part of the Ed RobertsCampus project, which combines theseeconomic opportunities with greatbenefits to the disabilities communityin a project that can be a model for the rest of the nation.”

“It was inspiring to see how the creativity, collaboration, and tenacity ofall parties involved resulted in a structurethat fit within the NMTC targeted pop-ulations regulations and allowed thisremarkable project to come to fruition,”

noted Dutch R. Haarsma, Senior VicePresident/Director of Lending for theNorthern California Community LoanFund (NCCLF).

In addition to being home to leadingorganizations in the disability rightsmovement, the Ed Roberts Campusprovides a one-stop center offeringmany programs and services for peoplewith disabilities. Though the ownersdid not seek LEED certification, theproject is nonetheless designed to meetLEED-Silver equivalent specifications,incorporating a range of sustainabledesign strategies to serve the diverseneeds of the occupants as well as thelarger environment. These include daylighting, natural ventilation, energy-efficient building systems, enhancedindoor air quality, and recycled andnon-toxic materials. Also, the propertymanagement firm ensures that all prod-ucts and practices used to clean andmanage the property are green certified.

For more information on the EdRoberts Campus, visit www.edrobertscampus.org/. ■

. . .“Targeted Population” Provisioncontinued from page 3

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Changes to the Related PartyTest: The Good and the BadBy: Kevin Beattie, Reznick Group

By committing to make QualifiedLow-Income Community Investments(QLICI) in unrelated parties, CommunityDevelopment Entities (CDEs) are ableto score additional points on their NewMarkets Tax Credit (NMTC) application.The related party test, as it is known,looks at the ownership structure of theQualified Active Low-Income Commu-nity Business (QALICB) to determinewhether the person owning the majorityinterest in the QALICB is related to theCDE. As long as the majority intereststakeholder is unrelated to the CDEwithin the meaning of the related partyrules under Internal Revenue Code§267(b) and §707(b)(1), the CDE isconsidered to be making an invest-ment in an unrelated entity.

In response to industry feedback to allow NMTC applicants more flexi-bility to make equity investments, the Community Development FinancialInstitutions Fund (CDFI Fund) changedthe rules governing investments inrelated parties, which applies to allQLICIs made on or after April 15, 2010.Prior to this change, a CDE performedthe related party test after the QLICIwas made, which meant that at nopoint during the transaction could theCDE own the majority of the QALICB’scapital without failing the test. TheCDFI Fund change alters the timing ofthe test so that it is now performedimmediately after the CDE receives aQualified Equity Investment (QEI), butbefore the QLICI is made. By allowingthe test to be performed before the CDEtakes an equity interest in the QALICB,the CDE can effectively wind up with a majority equity interest in the QALICBwhile still complying with the relatedparty commitment in their allocationagreement with the CDFI Fund.

While the rule change appears to be a win for the NMTC industry, it hasnot increased the number of equityinvestments thus far. Risk of recaptureis at the heart of why investors are still unwilling to take advantage of theCDFI rule change.

One of the events that can triggerNMTC recapture is if substantially allof the QEI is not invested in a QLICI.Therefore, it is important that the QALICB achieve and maintain its statusas a QALICB in order to preserve theintegrity of the QLICI. Currently, investorsand CDEs are able to rely on a reason-able expectation standard, as set outin the Treasury regulation, that the entityreceiving the QLICI will satisfy therequirements to be a QALICB through-out the life of the QLICI. The CDE onlyneeds to substantiate this reasonableexpectation position at the time theQLICI is made, without the need tomonitor the QALICB’s status through-out the NMTC compliance period, provided the CDE does not control orobtain control of the QALICB at anytime during the seven-year complianceperiod. Under this standard, the QALICBcould cease to be a QALICB withoutcausing a recapture of the NMTC.

However, if the CDE is deemed tohave control of the QALICB, then theCDE is unable to rely on the reason-able expectations standard and, as aresult, is responsible for monitoring theQALICB to ensure that it complied,throughout the compliance period, withthe necessary guidelines to maintainits status as a QALICB. If the QALICBceased to be qualified while under theCDE’s control, then the QLICI wouldcease to be a QLICI, thereby increas-ing the likelihood that the CDE wouldnot meet the substantially all test. In

turn, the risk of recapture would beincreased dramatically.

Control, in the Treasury regulation, isdefined as direct or indirect ownership(based on value) or control (based onvoting or management rights) of morethan 50% of the QALICB. Given theregulatory definition of control, theconcern is that a CDE could own morethan 50% of the value of a QALICBafter the QLICI is made, still complywith the related party restriction in the allocation agreement due to thechange in the timing of the relatedparty test under the CDFI Fund rules,but be unable to rely on the reason-able expectation standard because anownership of more than 50% of theQALICB at any time during the compli-ance period causes the CDE to controlthe QALICB. While the CDFI Fund rule change makes it easier for a CDEto meet its allocation agreement commitment with respect to the relatedparty test, it can cause the CDE toassume the risk of ensuring the QALICBmeets the QALICB requirementsthroughout the compliance period.

Given the increased risk for investorscreated by the CDE having control ofthe QALICB and being forced to monitortheir status throughout the seven-yearcompliance period, investors, thus far,have not been willing to take advantageof the CDFI Fund rule change. Withoutnew legislation or clarification from the IRS, this lack of guidance leavesinvestors uncomfortable with a dealstructure involving an equity QLICI that would give the CDE an ownershipinterest in the QALICB of greater than 50%. ■

Reznick Group New Markets Tax Credit Connection6

allocation round, as a result of a sub-standard audit report.

These audits can be quite dauntingbut they are easily managed if thecompliance files are continuouslymaintained in an organized fashion.Reznick Group can perform a mockCDFI Fund audit, in the form of anagreed-upon procedure, to determineif the files are in order. Our agreed-upon procedures report will detail theresults of our review, as well as anyrecommendations for improvement.These reports can be used to demon-strate to investors, advisory or gov-erning board members the allocatee’sability to maintain files that supportcompliance with the CDFI Fund’s NewMarkets Tax Credit rules and regula-tions. Please give us a call if you needassistance with a CDFI Fund compli-ance audit or if you would like us toreview your files to ensure that youare ready for a CDFI Fund audit. ■

need to have documentation to showthat at least 85% of the QLICIs closedunder the allocation agreement arewithin the service area agreed to inthe allocation agreement.

Another requirement found in morerecent allocation agreements relates toQLICIs to QALICBs in non-metropolitancounties. Compliance with that require-ment will need to be documented onan overall allocation agreement basis.A simple excel schedule listing each of the QLICIs closed, the location ofthose QLICIs within a designated non-metropolitan census tract, and the percentage of the non-metropolitancensus tract QLICIs to all QLICIs closedshould be sufficient documentation.

While the results of CDFI Fund compliance audits cannot trigger taxcredit recapture to a CDE’s investors,the CDFI Fund does reserve the rightto “take back” any unused allocationand it can impact an allocatee’s abilityto be successful in a subsequent

. . . AreYou Ready?continued from page 1

is a prescribed percentage below

prevailing market rates for a particular

financing product; does the QLICI loan

satisfy the required number, as stipu-

lated in the allocation agreement, of

indicia of flexible or non-traditional rates

and terms listed within Section 3.2 (f)?

Documentation for loan financing can

be a challenge, but obtaining a list of

rates and terms from a banking institu-

tion in the same geographical area as

the Qualified Active Low-Income Com-

munity Business (QALICB) is a good

indicator that the QLICI falls within the

acceptable range of flexibility.

Other compliance points, such

as service area, will need to be docu-

mented on an overall allocation basis.

Because the service area restriction,

other than a national service area, per-

mits a 15% carve out, the CDE will

7

Austin Matthew Malcom 512-499-1406

Baltimore David Norton, Managing Editor 410-783-4900

Baltimore Gary Perlow 410-783-4900

Baltimore Ira Weinstein 410-783-4900

Bethesda Don Nimey 301-652-9100

Charlotte Tony Portal 704-332-9100

Sacramento Beth Mullen 916-930-5750

Reznick Group Editorial Board

NMTC Coalition Urges the Lame Duck Congress to Pass Tax Extender Legislation

More than 130 tax provisions —including the New Markets Tax Credit(NMTC) — expired at the end of 2009or are set to expire at the end of 2010unless a tax extender bill is passed bythe 111th Congress before it comesto an end in December.

Though it is not unusual for a tax bill, particularly a tax extender bill, tobe one of the final pieces of legislationpassed in a Congressional session, timeis running short for the 111th Congressand the NMTC Coalition is taking noth-ing for granted. The Coalition is urgingits members and all NMTC supportersto keep the pressure on Congress andremind Representatives and Senatorsabout NMTC impacts in their homestates — in terms of jobs and com-munity revitalization.

In September 2010, before Congressleft Washington to campaign for mid-term elections, the NMTC Coalitionsent a letter to Senate Majority LeaderReid and Minority Leader McConnellsigned by more than 400 CommunityDevelopment Entities, investors, busi-nesses, and communities calling for theimmediate extension of the NMTC.Unfortunately, the Senate adjourned in October without passing a tax bill,and so tax extender legislation was left as unfinished business to be dealtwith in the post-election lame ducksession.

On November 15th, members of the 111th Congress returned toWashington to complete work on“must pass” legislation including theFiscal 2011 appropriation bills, AMTextension, unemployment insurance,and tax extenders.

On November 16th, a letter was delivered to all representatives and

senators signed by the NMTC Coalitionand more than 1,300 trade associa-tions, businesses, and investors callingfor immediate passage of the taxextender bill. The letter was also postedin Roll Call newspaper, which is widelyread by Washington lawmakers. TheNMTC Coalition worked on this letterwith an ad hoc coalition of trade associ-ations and business interests includingsupporters of the Research & Develop-ment credit, renewable energy credits,education credits, and the Low-IncomeHousing Tax Credit — all committed to getting a tax extender bill throughCongress.

While a number of obstacles remainas this newsletter goes to press, weare hopeful that an extender bill will be passed by Congress and signed byPresident Obama by the end of theyear. However, all NMTC supportersare encouraged to send a copy of theNMTC Coalition sign-on letter as well as the larger tax extender sign-on letterto their Representatives and Senatorsto keep the pressure on.

The NMTC message is strong andtimely. The NMTC is a generator of jobgrowth and economic developmentopportunities in distressed areas.

Since the first credit allocations weremade in 2003, the NMTC has gener-ated $50 billion in private investment in our country’s poorest areas and theNMTC has been a remarkably effectivecatalyst, spurring an estimated 500,000good-paying, full-time jobs and con-struction jobs in communities markedby high unemployment, high rates ofpoverty, and low median income.Congress must act now to see that $5 billion in credit authority is avail-able for 2010.

Attend NMTC Coalition’s Annual Conference and Celebratethe 10-year Anniversary of the NMTC

The New Markets Tax Credit (NMTC) Coalition is hosting its annualconference in Washington, DC onDecember 8 and 9 at the Hotel Monaco.The NMTC Coalition will be releasing a10-year report highlighting the successof the program as a way to mark the10th anniversary of enactment of theNMTC. The NMTC Coalition will alsobrief participants on what to expect inthe coming year with a new Congressand leadership changes. Go towww.nmtccoalition.org and registertoday! ■

NMTC Coalition Corner

Reznick Group New Markets Tax Credit Connection

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About Reznick GroupFocusing on the community development and real estate industries for more

than 32 years, Reznick Group is recognized as one of the nation’s leading advisorsto developers, managers, lenders, owners, investors, public finance agencies andother participants in the field. As a national leader in providing public accountingand business advisory services, Reznick Group is committed to providing clientswith outstanding service.

With professional and staff members serving clients nationwide, Reznick Groupprovides value by exercising the highest levels of integrity, quality and respon-siveness in providing solutions to help our clients meet their business objectivesin the community development and real estate industries. To learn more about theservices we provide and our perspective on issues that impact your business,please visit www.reznickgroup.com. ■

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