tax credit financing for community and economic development projects july 24, 2009 paul m. jones,...

Tax Credit Financing for Community and Economic

Development Projects

Tax Credit Financing for Community and Economic

Development Projects

July 24, 2009 July 24, 2009

Paul M. Jones, Jr.Partner

Ice Miller LLP (317)236-5959

[email protected]

AICAIC

OverviewOverview Tax Credit Financing Impact of American Recovery and

Reinvestment Act of 2009 (“ARRA”) on Tax Credits and Project Finance

Renewable Energy Incentives

OverviewOverviewA tax loophole is "something that benefits the

other guy. If it benefits you, it is tax reform.''

Russell B. Long, U.S. Senator

OverviewOverviewTypes of financing?

1. Conventional (taxable) debt2. Tax-exempt debt3. Owner equity4. Private equity 5. Tax credit equity6. Grants

OverviewOverviewTax Credit Equity Historic rehabilitation tax credits New markets tax credits Other federal and state tax credit financing

Renewable energy tax credits New advanced energy property tax credit Low-income housing tax credits Indiana state tax credits such as community

revitalization enhancement district (CReED) credits and industrial recovery site credits

Tax Credit EquityTax Credit Equity

What is “equity”? “Equity” represents the funding gap

between the cost to acquire and develop or redevelop the project and the amount of other funding sources that the owner can secure. Amount of Debt on a Project is limited by:

Project’s fair market value (FMV) Project’s net operating income (NOI)


Where does equity come from? Project owner as own investment Investors secured by the Project owner

Motivated by economic return Put in $1, get back $2 in cash

Motivated by tax savings Put in $1, get $2 in tax benefits (losses/credits)

Motivated by both economic return and tax savings Put in $1, get $1 in cash and $1 in tax benefits


How does the investor get the tax losses and tax credits? Owner must be able to pass losses and credits

through to the investor Owner must be a “pass-through” entity for tax purposes,

NOT a tax paying entity “Partnership” for federal income tax purposes Partnership or Limited Liability Company (LLC) Cannot be a Corporation

Investor must have an ownership interest in the owner “Partner” in a partnership “Member” in an LLC

Historic Rehabilitation Tax CreditHistoric Rehabilitation Tax Credit

Federal Historic Rehabilitation Tax Credit Section 47 of the Internal Revenue Code of

1986 (the “Code”) Two Credit Rates

10% credit for pre-1936, non-certified historic structures

20% credit for “certified historic structures” Credit amount equals credit rate (10% or 20%)

multiplied by amount of “qualified rehabilitation expenditures”

Historic Rehabilitation Tax CreditHistoric Rehabilitation Tax Credit

20% Tax Credit for “Certified” Projects Must involve a “certified historic structure” Must result in “qualified rehabilitated

building” Must have “qualified rehabilitation

expenditures” Must be a “certified rehabilitation”

What are New Markets Tax Credits (NMTCs)?What are New Markets Tax Credits (NMTCs)?

Federal tax credits intended to encourage

private equity investment in qualified “low-

income” communities. Code Section 45D.

Why Businesses Use NMTC FinancingWhy Businesses Use NMTC Financing

Lower cost of financing

Flexible terms (i.e., interest only feature)

Provide needed equity or fill gaps in

financing.

Qualified BusinessQualified Business

LOCATION

LOCATION

LOCATION

Credit Amount and PeriodCredit Amount and Period

The NMTCs are equal to 39% of a qualified equity investment and are claimed over a seven year period starting on the date when the investment is made.

Investors may claim NMTCs equal to 5% of their investment in years one to three and 6% of their investment in years four to seven.

How Does the NMTC Program Work?How Does the NMTC Program Work?

NMTCs are awarded by the Community Development Financial Institutions Fund (“CDFI Fund”) to entities which qualify as Community Development Entities ("CDEs") and which apply for an allocation of credits.

How Does the NMTC Program Work?How Does the NMTC Program Work?

Once a CDE receives tax credits, investors (such as banks) invest in the CDE by contributing cash.

The CDE uses cash from the investment to invest in qualifying businesses.

Investment in qualifying business may be in the form of capital or equity investment or loans to qualifying businesses.

CDEsCDEs

A CDE can be owned or sponsored by either a for-profit or a nonprofit entity, or both. o Local governments increasingly forming CDEs and

seeking/obtaining their own allocation of NMTCs (e.g., Fort Wayne, IN, Indianapolis, IN, Philadelphia, PA, Los Angeles, CA, Phoenix,AZ, and Chicago, IL)

o Public-private partnerships

To qualify, the entity must have a primary mission of community development and must be accountable to the community.

Qualified BusinessesQualified Businesses

A wide range of businesses are eligible for assistance, including for-profit retail, manufacturing, service businesses and nonprofit businesses.

Residential rental housing is specifically excluded, along with certain other businesses such as golf courses, massage parlors and liquor stores.


In general, a qualifying business must meet the following criteria: At least 50% of its total gross income derived from

activities in a low income community; At least 40% of its tangible property is located in a

low income community; At least 40% of its services are performed in a low

income community. Presumably this would require that the business have employees, but the regulations provide a safe harbor: If 85% of tangible property is located in a low income

community, the business is deemed to have met the 40% services test.


In general, a qualifying business must meet the following criteria (cont.): Less than 5% of its property is attributable to

nonqualified financial property (e.g., debt, stock, partnership interests, and annuities) excluding reasonable amounts of working capital held in cash (or cash equivalents) and certain debt instruments.


In general, a qualifying business must meet the following criteria (cont.): Less than 5% of its property is attributable to

collectibles (e.g., art, antiques, stamps, and coins) other than collectibles held primarily for sale to customers in the ordinary course of business; and


A "low income community" is defined as a census tract where: the poverty rate exceeds 20%; or the median income is below 80% of the

greater of: Statewide median income; or Metropolitan area median income (for

metropolitan tracts only)

Investor’s IncentiveInvestor’s Incentive

The NMTCs are intended to enhance investor returns.

Leverage structure allows tax credit investor to generate most of its return from credits alone.

Combining the NMTCs With Other SubsidiesCombining the NMTCs With Other Subsidies

The NMTCs can be combined with other federal and state tax and nontax subsidies (e.g., historic rehabilitation tax credits).

The NMTCs generally cannot be combined with low-income housing tax credits.

Condominium structure. Definition of rental housing.

Typical NMTC DealsTypical NMTC Deals

Commercial real estate projects including nonprofit office space, community centers, commercial office/retail space

Offering below market rate loans as well as equity investments

Typically 7-year term Exit strategy after 7 years varies (e.g., put/call

exit payment, balloon payment, refinancing, or amortization of loan over a term of years)

New Markets Tax CreditsNew Markets Tax Credits

Examples of NMTC transactions closed in Indiana Charter schools Community center Office/retail space Parking garage Telecommunications center

Impact of ARRA Impact of ARRA

Additional $1.5B in NMTC volume for 2008 allocation

Additional $1.5B (for a total of $5B) in NMTC volume for 2009 allocation ($22.5B in applications received – awards expected in October 2009)

Impact of ARRAImpact of ARRA Renewable energy tax credits (e.g., solar,

wind, biomass, geothermal facilities, etc.) Code Section 48, 30% investment tax credit

(“ITC”) Code Section 45, production tax credit (“PTC”) Election to claim ITC in lieu of PTC Grants in lieu of credits (Treasury guidance

issued in July 2009) Careful tax analysis required to determine which

model works best for a particular project


New Code Section 48C Qualifying Advanced Energy Project Credit.

30% investment tax credit for manufacturers of advanced energy property. Application process for $2.3B in volume.

A qualifying advanced energy project is a project that reequips, expands, or establishes a manufacturing facility for the production of certain types of advanced energy property.

Treasury guidance is forthcoming, but no guidance yet on how this program will be interpreted or administered


Tax Credit Bond programs Clean Renewable Energy Bonds Qualified Energy Conservation Bonds

Grants and Loan Guarantees http://in.gov/gov/INvest.htm http://www.recovery.gov US DOE and USDA Indiana State Energy Program

SummarySummaryThink outside the box

Don’t overlook possible tax credit equity opportunities

Structures are complex, but useful when designed appropriately

C230 DisclosureC230 DisclosureThis information is provided for general

information purposes only, and is not tax or legal advice.

This presentation, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties that may be imposed by the federal government or for promoting, marketing or recommending to another party any tax-related matters addressed herein.

tax credit financing for community and economic development projects july 24, 2009 paul m. jones,...

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