How Credits Become Capital: When and How to Syndication

1. How Credits Become Capital: When and How to Syndication Incentives for Historic Preservation in Seattle Conference Thursday, July 12 Seattle, WA

2. How Credits Become Capital: When and How to Syndicate

3. What 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.

4. 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.

5. GP/Manager Investor 99.9% Tax Credits 0.1% Management Fees, etc. Owner (LP or LLC) Development Fee Developer Fee Ownership Property Lease Lease Single Entity Structure End User End User

6. Development Fee Developer Owner/Lessor (Affiliate of GP/Manager) GP/Manager Investor Master Lease Funds 0.1% 99.9% Tax Credits Master Lessee (LP or LLC) Property Lease Lease End User End User Master Lease/Credit Pass-ThroughLessee Claims Credit

7. 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

8. 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).

9. Should the Owner/Developer Syndicate? Cont’d • Factors to Consider: • Is additional equity needed during construction (i.e. prior to completion of the rehabilitation)?

10. 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.

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Successful Negotiation and Closing — Strengthening the Developer’s Position • Reducing Construction Risk: delayed pay in • Team Coordination and due diligence follow through

18. More Information? Andrew S. Potts, Esq. • (202) 585-8337; apotts@nixonpeabody.com David F. Schon, Esq. • (202) 585-8778; dschon@nixonpeabody.com