Integrating New Markets and Historic Tax Credits
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Integrating New Markets and Historic Tax Credits North Carolina Affordable Housing Conference September 16, 2010. Fundamentals of Federal Historic Tax Credits. HTC program has been in existence over 20 years.

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Integrating new markets and historic tax credits north carolina affordable housing conference september 16 2010

Integrating New Markets and Historic Tax Credits

North Carolina Affordable Housing Conference

September 16, 2010


Fundamentals of federal historic tax credits

Fundamentals of Federal Historic Tax Credits

  • HTC program has been in existence over 20 years.

  • Provides dollar for dollar federal income tax credit for rehabilitation of historic income producing properties (commercial, industrial, agricultural, or residential rental).

  • National Park Service and State Historic Preservation Officer approve and monitor (i) qualification of building for HTC and (ii) development of and compliance with plans and specs for rehabilitation to ensure historic character is maintained.

  • HTC is equal to 20% of “qualified rehabilitation expenditures.” Qualified rehabilitation expenditures must exceed the acquisition costs of the “Historic Building.”

  • HTC is not competitive, but National Park Service must certify that building qualifies for credit and that rehabilitation was completed in accordance with approved plans and specs.


Fundamentals of federal historic tax credits cont

Fundamentals of Federal Historic Tax Credits (cont.)

  • Building must be listed on the National Registry of Historic Places or be located in and add to the significance of a registered historic district.

  • HTC is taken all at one time when the project is placed in service.

  • Subject to recapture for 5 years.

  • Less technical than LIHTC, but requires substantial interaction with National Park Service on Plans and Specs.

  • As with LIHTCs, some states have state HTC programs, many of which “piggy-back” on Federal HTC programs.

  • Allocation of HTCs among partners follows profits.


Historic tax credit project single tier structure diagram

Historic Tax Credit Project – Single Tier Structure Diagram

  • Property must be located in a qualifying area or be listed on National Register of Historic Places. (Part 1)

  • Developer/GP work with National Park Service on satisfactory plans and specs for qualified rehabilitation of Historic Building. (Part 2)

  • HTC based on 20% of qualified rehabilitation expenditures.

  • HTC claimed on date project is placed in service.

  • No significant future monitoring by National Park Service after building receives certification that rehabilitation was completed in accordance with agreed upon plans and specs. (Part 3)

  • Five year compliance period during which Property Owner must remain owner of property and Investor must remain partner in Property Owner in order to avoid recapture.

  • Tax basis in historic building is reduced by amount of HTC.

General Partner

Developer

.01%

Services

Cash

Services

Developer

Fee

Cash

Property Owner

99.99%

Interest

(including 99.99% of HTCs Profits and Losses)

Investor

Lender(s)


Historic tax credit project lease pass through structure diagram

Historic Tax Credit Project – Lease Pass-Through Structure Diagram

General Partner

Developer

  • Substantially similar to single tier structure on technical points, with addition of Master Lease and Master Tenant between Investor and Property Owner.

  • HTCs are allowed to be passed through to Master Tenant upon Property Owner/Landlord and Master Tenant making valid Pass-Through Election.

  • Important to maintain integrity of Master Lease.

  • No reduction in tax basis of historic building, instead Master Tenant must include HTC amount in annual income pro rata over term of lease.

85% Interest

Services

Cash

Services

Developer

Fee

Cash & Services

.01% Interest

15% Interest

Cash

Property Owner / Landlord

Cash

Rent

99.99%

Interest

(including 99.99% of HTCs, Profits and Losses)

Master

Tenant

Investor

Lender(s)

Master Lease &

“Pass-Through”

of HTCs

Rent

Sub Tenants


Historic tax credit project structures comparing advantages and disadvantages

Historic Tax Credit Project StructuresComparing Advantages and Disadvantages


Diagram of combined lihtc and htc project with lease pass through structure

Diagram of Combined LIHTC and HTC Project with Lease Pass-Through Structure

Cash

Services

.01% Interest

General Partner

Developer

Developer

Fee

Property Owner/ Landlord

10% Interest

.01% Interest

Cash

Cash

Master Lease

and Pass-

Through of

HTCs

Rent

Cash

LIHTC

Investor

89.99% Interest

(Including 99.99% Special allocation of Depreciation & LIHTCs)

Master Tenant

HTC

Investor

Cash

(99.99%

Interest

Including

99.99% of HTCs)

Lenders


Combined lihtc and htc project with lease pass through structure

Combined LIHTC and HTC Project with Lease Pass-Through Structure

Comments

  • LIHTC Investor holds 89.99% limited partner interest in Property Owner receiving 99.99% special allocation of depreciation on property.

  • Lease Pass-Through Structure avoids reduction in basis of property and accordingly no reduction in LIHTC.

  • Can dismantle HTC Structure at end of 5 year HTC compliance period.

  • Can have different investors for LIHTCs and HTCs.


Fundamentals of new market tax credits

Fundamentals of New Market Tax Credits

  • NMTC program has been in existence for almost 10 years.

  • Provides dollar for dollar federal income tax credit for investments in community development entities (“CDEs”) that use substantially all the invested funds to make investments in qualifying low-income community businesses (“QALICBs”).

  • QALICBs must be located in low-income communities designated by census tract. Certain businesses are excluded (e.g. residential rental activities, golf courses, country clubs, horse tracks and other gambling businesses, massage parlors, stores where principal business is sale of alcohol for consumption off-premises).

  • The U.S. Treasury through the Community Development Financial Institutions Fund (“CDFI”) allocates to CDEs the dollar amounts on which NMTC can be claimed through highly competitive process.


Fundamentals of new market tax credits cont

Fundamentals of New Market Tax Credits (cont.)

  • CDEs are domestic corporations, limited liability companies or partnerships certified by the CDFI. They must demonstrate a primary mission of servicing or providing investment capital for low-income communities and maintain accountability to residents of low-income communities (representation on governing or advisory boards).

  • CDE must invest substantially all of the QEI in QALICBs through “Qualified Low-Income Community Investments” (“QLICIs”). Can be debt or equity (but not a “grant”). QLICIs must stay “invested” during 7 year compliance period to avoid recapture.

  • NMTC = 39% of QEI taken over 7 years (5% first 3 years and 6% last 4 years).

  • Requirements for qualification as QEI, CDE, QLICI and QALICB are very technical with primary burden on CDE.


Sample structure new markets tax credit structure

Sample StructureNew Markets Tax Credit Structure

  • QEI triggers credit delivery period. Total NMTC = 39% of QEI delivered over 7 years.

  • Loan A = Qualified Low Income Community Investment (QLICI) based on market rate interest. Interest-only with balloon payment at end of 7 year compliance period.

  • Loan B = Also a QLICI. Typically has below market interest rate (e.g. 2%) and, provided all other requirements are met (e.g. debt service on Loan A and Loan B paid, no violations of NMTC requirements by QALICB), final payment generally reduced to fraction of principal outstanding (but QLICI must be characterized as “bona fide debt” versus a “grant”).

Investor

$10M

QualifiedEquityInvestment(QEI)

100% Interest in CDE,NMTCs, Profits, Lossesand Cash Flow

Community Development Entity (CDE)

Loan A

Loan B

$7M

$3M

Qualified Low

Income Community

Business (QALICB)


The tax credit marketplace

The Tax Credit Marketplace

12


Which credits work well together

Which Credits Work Well Together?

Low Income and Historic

Low Income and Renewable Energy

New Markets and Historic

New Markets and Renewable Energy

13


Integrating new markets and historic tax credits north carolina affordable housing conference september 16 2010

HTC Funding

HTC Investor

NTCIC Investment Fund X, LLC

Managing

Member:

NOLA Manager, LLC

HTC

HTC Equity

Project Lender

Local/Regional Bank

Lessor (Landlord)

NOLA Operating Co., LLC

89% Man. Member: NOLA Mgr, LLC

10% Member: NOLA Operating Co., LLC

1% Member: State HTC Investor, LLC

Master Lease

Master Tenant

NOLA Operating Co., LLC

99.99% Man. Member: NTCIC IFX, LLC

.01% Member: NOLA Manager, LLC

HTC

Lease Payment

State HTC

Investor

LA State Credit Fund

HTC Equity

Tenants

Developer


Integrating new markets and historic tax credits north carolina affordable housing conference september 16 2010

HTC & NMTC Funding

Affiliated

Developer

Entity

Leveraged Lender

Local/Regional Bank

Equity

Repay SHTC Bridge Loan

Repay HTC Bridge Loan

HTC & NMTC Investor

NTCIC Investment Fund X, LLC

Equity Bridge Loans

Constr./Perm Loans

Project Investment Fund

NOLA Investment Fund, LLC

100% Member: NTCIC IFX, LLC

NMTC

State HTC

Investor

LA State Credit Fund

NMTC Equity

HTC

QEI

NMTC

QEI

NMTC

SHTC

NTCIC Sub-CDE

NTCIC Investment Fund X, LLC

Second Sub-CDE

NOLA Investment Fund III, LLC

HTC Equity

QLICI 1

QLICI 2

Master Lease

Lessor (Landlord)

NOLA Operating Co., LLC

89% Man. Member: NOLA Mgr, LLC

10% Member: NOLA Operating Co., LLC

1% Member: State HTC Investor, LLC

Master Tenant

NOLA Operating Co., LLC

100% Member: NTCIC IFX, LLC

HTC

SHTC Equity

Lease Payment

Managing

Member:

NOLA Manager, LLC

HTC Equity

Tenants

Developer


Combining the tax credits

Combining The Tax Credits

Federal Historic Tax Credits:

Total Qualified Costs:

QREs $12 M

Tax Credit Percentage 20%

Federal Credits $2.4 M

Federal Credit Price $1.00

Total Equity to Developer $2.4 M


Combining the tax credits1

Combining The Tax Credits

New Markets Tax Credits:

NTCIC CDE Allocation $ 11 M

2nd CDE Allocation $ 5 M

Total QEI $ 16 M

Tax Credit Percentage 39%

New Markets Credits $6.24 M

New Markets Credit Price $.70

NMTC Equity to Project $4.37 M


Combining the tax credits2

Combining The Tax Credits

Total Tax Credit Investment:

Federal Equity $2.40 M

NMTC Equity $4.37 M

TOTAL EQUITY $6.77 M


What makes a project attractive to investors

What Makes a Project Attractive to Investors

  • Tell a good story

    • Project Economics (low loan-to-value, strong debt service coverage ratios, pre-leasing)

      • Minimize risk of something going wrong

    • High level of Community Impact

      • Job creation

      • Grocery or other services

    • Developer Experience

  • Market (CRA)


Issues for lenders with nmtc

Issues for Lenders with NMTC

  • Lack of direct security interest

  • Forbearance

  • 7 years, interest-only

  • Limited reserve accruals


Sponsor as leveraged lender

Sponsor as Leveraged Lender

  • Sponsor receives grants, pledges or other funds and loans them through the new markets structure

  • Caveats

    • Understand the restrictions on the money being enhanced

      • Some grants only fund on a % of completion basis,

      • Some grants/loans need to be secured by mortgage on property (AHP)

    • Labor Intensive for Sponsor

      • Set up new entity to act as QALICB

      • Annual reporting requirements

      • Need to have cash at closing for leveraged loan


Legislative update current bills

Legislative Update & Current Bills

  • Codification of Economic Substance – impact on Tax Credit Transactions

  • HR 4213

    • Extend LIHTC 1602 for 9%, extend NMTC program, extend GO Zone Deadlines for LIHTC and GO Zone HTC

  • S 3326

    • 5 year carry-back provision for LIHTC investments, extend 1602 for a year and expand 1602 to 4% credits

  • HR 2628 / S 1583

    • Multi-year extension of NMTC program, increase the annual funding and exempt NMTC from AMT

  • HR 3715 / S 1743

    • Several enhancements to the HTC program

  • HR 2336

    • Energy retrofits for real estate owners

  • HR 4868

    • Affordable Housing preservation bill


Contact information

Contact Information

Marshall Phillips

704.295.9394

[email protected]

Robert L. Mendenhall

704.444.3520

[email protected]

Kirk Carrison

919.688.5600

[email protected]

Leigh Ann Smith

980.386.3855

[email protected]


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