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Combining Historic Tax Credits and New Markets Tax Credits

Combining Historic Tax Credits and New Markets Tax Credits. National Historic Tax Credit Conference - 2007 10:15-11:15 am Thursday, November 8, 2007. New Markets Tax Credit Fundamentals. NMTC Synopsis

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Combining Historic Tax Credits and New Markets Tax Credits

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  1. Combining Historic Tax Credits and New Markets Tax Credits National Historic Tax Credit Conference - 2007 10:15-11:15 am Thursday, November 8, 2007

  2. New Markets Tax Credit Fundamentals NMTC Synopsis A federal tax credit available to those that provide equity (QEIs) to certain certified community development entities (CDEs) that in turn lend or invest (QLICIs) in qualified businesses (QALICBs) located in low-income communities (LICs).

  3. New Markets Tax CreditsWhat is a Qualified Business? • Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business; must meet requirements regarding gross income, tangible property, services performed, collectibles, and nonqualified financial property • No financing of residential rental property • Mixed use okay • Restrictions on certain types of business operations and tenants • E.g. massage parlor, hot tub facility, liquor store, gambling facility

  4. New Markets Tax CreditsHow They Work Tax Credit Investor CDE (Allocatee) Tax Credits over 7 years ($39) and Cash Return QEI ($100) Suballocation of Tax Credit Authority CDE (Subsidiary) Loan/Equity QLICI (85%+ of QEI) Property Owner (QALICB)

  5. Typical HTC Structure (Single Entity) Tenants Tax Credit Investor LLC Tax Credit Investor Managing Member (Developer Affiliate) HistoricTax CreditEquity 99.99% Credits, Profits & Losses and Cash Flow .01% Credits, Profits & Losses, Fees andCash Flow DeveloperEquity Tax Credit, LLC (Property Owner) Developer Dev.Fee DebtServicePayments RentalPayments LoanProceeds Construction/Perm Lender

  6. Legal Considerations Pros • $$$$ • High percentage of historic buildings in Low-Income Communities • Similarity of basic structure • $$$$

  7. “Related Party” requirements limit equity Operational limitations Subtenant mix Mixed-use Additional guaranties Different compliance periods Lack of guidance on making equity QLICIs CDFI Fund IRS Increased complexity Legal Considerations Cons

  8. Master Tenant/NMTC Structure QEI QLICI QLICI Sub-Tenants/End Users CDE Tax Credit Investor LLC Tax Credit Investor Tax Credit Investor Managing Member (Developer Affiliate) Non-Member Manager 99.99% Credits, Profits & Losses, Fees and Cash Flow DeveloperEquity HistoricTax CreditEquity 100% Credits, Profits & Losses, and Cash Flow .01% Credits, Profits & Losses,Fees andCash Flow Landlord, LLC (Property Owner/Lessor) QALICB Pass-through of Historic Tax Credits & Share of Residual Single Member LLC (Disregarded Entity) Master Tenant, LLC (Master Tenant) Lease Payment &Equity Investment DebtServicePayments RentalPayments LoanProceeds Construction/Perm Lender

  9. Dia:BeaconBeacon, New York

  10. Thank you Merrill Hoopengardner, Esq. 401 9th Street, NWSuite 900Washington, DC 20004 202.585.8169202.585.8080 (Fax) mhoopengardner@nixonpeabody.com

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