Using NMTCs to Support Operating Business & Non-Real Estate Transactions

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Silvia Powers
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1 Using NMTCs to Support Operating Business & Non-Real Estate Transactions David Gibson, PNC Financial Services Group Seth Harrop, Baker Tilly Virchow Krause, LLP Randy Kahn, Greenline Community Ventures, LLC

2 Presentation Outline Industry Basics Key Operating Business Issues Hypothetical Example Real Estate SPE Execution Business SPE Execution Overall Business Execution Slide 1

3 Industry Basics - Diagram NMTC Equity Investor Fund Lender NMTC Equity (Net of CDE Fees & Expenses) $2,500,000 Fund Loan $7,500,000 Leverage Fund QEI $10,000,000 Allocatee Subsidiary CDE QLICI B Loan $2,500,000 QLICI A Loan $7,500,000 Project / QALICB Slide 2

4 Industry Basics - Interests Tax Credit Investors Avoid Recapture CDEs must maintain its status as a CDE Principal Employment- CDEs may not provide a return of capital to the Investment Fund during the 7- year compliance period. However a return on capital is allowed. Meet Substantially All Test Taxable Income Liquidity of Investment Risk Evaluation Fund Lender No direct lien on business through NMTC structure Able to obtain a synthetic first lien 7-year forbearance may be required Amortization difficult to implement Liquidity impaired by NMTC structure Understand risks and rights available through NMTC structure Asset management and servicing Foreclosure procedures Redeployment CDE Maintain Status Maintain requirements remaining a CDE Reporting Requirements of CDFI Fund Annual audit Portfolio reporting Comply with Allocation Agreement Slide 3

5 Key Operating Business Issues General Industry straddles Institutional Boundaries Industry is highly real estate oriented Precedents and regulations for real estate more developed CDE Control Requirements Operating Business Definition Recently Changed Predominant activity can NOT include development, management or leasing of real-estate Use of proceeds can NOT be connected to development, management or leasing QALICB Compliance Operating Businesses not Place-Based QALICB Structuring more complex Asset, Services, Income & NQFP Tests Expanded QALICB Indemnities Debt / True Debt Business Valuation Differences Asset / Collateral Duration vs. NMTC Compliance Period Liquidity of Leveraged Loan and/or QALICB Pre-defined loan guarantee programs can be difficult to implement (SBA, USDA, etc.) Slide 4

6 Hypothetical Example Blue Ocean Development, LLC (Fictional RE Development Company) Slide 5 Assets: $25MM Liabilities: $15MM Average historic earnings over past 3 years $1MM from developing for 3 rd parties $1MM from owned assets Average projected earnings over next 7 years $1MM from developing for 3 rd parties $2MM from owned assets Current Project Ownership 4 mixed use projects each with $5MM in project costs 3 in LIC and 1 is not in an LIC Pipeline of Projects to be Owned 3 mixed use projects each $10MM total uses over next 7 years 2 projects in LICs and 1 project is not in an LIC

7 Hypothetical Example (Cont) Blue Ocean Development, LLC Slide 6 LIC Business 3 Existing LIC Projects 2 Future LIC Projects Non LIC Business 1 Existing Non-LIC Project 1 Future Non-LIC Project Overall Business Execution: Blue Ocean Development (QALICB) Business SPE Execution: LIC Business (QALICB) Project SPE Execution: Each of 5 LIC Projects (QALICBs)

8 Project SPE Execution (Diagram) NMTC Equity Investor Fund Lender NMTC Equity (Net of CDE Fees & Expenses) $8,750,000 Fund Loan $26,250,000 $5,000,000 $5,000,000 $5,000,000 $10,000,000 $10,000,000 Leverage Fund 1 Leverage Fund 2 Leverage Fund 3 Leverage Fund 4 Leverage Fund 5 $5,000,000 QEI $5,000,000 QEI $5,000,000 QEI $10,000,000 QEI $10,000,000 QEI Allocatee Subsidiary CDE 1 Allocatee Subsidiary CDE 2 Allocatee Subsidiary CDE 3 Allocatee Subsidiary CDE 4 Allocatee Subsidiary CDE 5 $2,500,000 (B Loan) $2,500,000 (B Loan) $1,250,000 (B Loan) $1,250,000 (B Loan) $1,250,000 (B Loan) $7,500,000 (A Loan) $7,500,000 (A Loan) $3,750,000 (A Loan) $3,750,000 (A Loan) $3,750,000 (A Loan) Project / QALICB 1 (Existing LIC Project 1) Project / QALICB 2 (Existing LIC Project 2) Project / QALICB 3 (Existing LIC Project 3) Project / QALICB 4 (Future LIC Project 1) Project / QALICB 5 (Future LIC Project 2) Slide 7

9 Project SPE Execution (Each Project in an LIC is separate QALICB) Advantages Limited Balance Sheet Distortion Simplest Compliance and Monitoring Least Liquidity Limitation Disadvantages Significant Duplicative Costs for each Project Least Flexibility Delivering Subsidy to Projects Identification of Funding Sources Additional Comments Capacity to utilize Maximum Allocation Slide 8

10 Business SPE Execution (Diagram) NMTC Equity Investor Fund Lender NMTC Equity (Net of CDE Fees & Expenses) $8,750,000 Fund Loan $26,250,000 Leverage Fund QEI $35,000,000 Allocatee Subsidiary CDE QLICI B Loan $8,750,000 QLICI A Loan $26,250,000 Project / QALICB (LIC Business) Slide 9

11 Business SPE Execution (LIC Business = QALICB) Advantages Strong Flexibility Delivering Subsidy to Projects Can be combined with Project SPE Executions Pooled Costs over Multiple Projects Disadvantages Moderate Balance Sheet Distortion Moderate Liquidity Limitations Additional Compliance and Monitoring Additional Comments Comparable to Portions of a Business Execution Slide 10

12 Overall Business Execution (Diagram) NMTC Equity Investor Fund Lender NMTC Equity (Net of CDE Fees & Expenses) $2,500,000 Fund Loan $7,500,000 Leverage Fund QEI $10,000,000 Allocatee Subsidiary CDE QLICI B Loan $2,500,000 QLICI A Loan $7,500,000 Project / QALICB (Blue Ocean Development, LLC) Slide 11

13 Overall Business Execution (Blue Ocean Development = QALICB) Advantages Maximum Flexibility Delivering Subsidy to Projects Can be combined with SPE Executions Pooled Costs over Multiple Projects Disadvantages Broadest Balance Sheet Distortion Additional Compliance and Monitoring Broadest Liquidity Limitations Additional Comments Business Valuation Difficult Slide 12

NEW MARKETS TAX CREDIT PROGRAM: Subsidized Rate Model. 2008 National Interagency Community Reinvestment Conference April 2008

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