New Markets Tax Credits 101 Affordable Housing Finance Workshop February 14, 2013

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1 Affordable Housing Finance Workshop February 14, 2013 Al Shehadi Director, Originations Enterprise Community Investment, Inc.

2 Enterprise Community Investment, Inc. National community development financial intermediary Leading LIHTC syndicator BellwetherEnterprise (commercial mortgage finance) Enterprise Community Loan Fund (CDFI) Affordable housing developer One of largest NMTC allocatees ($672mm over 9 rounds) Closed >50 projects totaling $663mm in NMTC-enhanced financing

3 Enterprise NMTC Priorities New Markets Tax Credits 101 Focus on ten impact markets; key investor relationships 100% of projects in highly distressed census tracts Projects cannot proceed but for NMTC financing (efficient use of taxpayer dollars) High level of community benefit Corporate commitment to green Developer capacity and readiness to proceed

4 NMTC Background Created by Congress as part of the Community Renewal Tax Relief Act of 2000 Codified in Section 45D of the Internal Revenue Code Administered by CDFI Fund $33 bn total allocation to date (Note: allocation is not the same as tax credits) Reauthorized January 2013; 2 years, $3.5 bn each year.

5 NMTC Program Goals Encourage private investment in Low-Income Communities (LICs) Provide patient capital, at favorable rates and terms to projects that cannot proceed solely with market-rate financing Financing can be loans or equity Financing can be for operating businesses or real estate projects, taxable or tax-exempt entities

6 Basic Eligibility: Location Must be in a qualified census tract (low income): 20% or higher poverty rates Median family income < 80% AMI Preference given to projects in additionally distressed census tracts 30% or higher poverty rates Median family income < 60% AMI Unemployment 1.5x national ave Or two of additional criteria

7 Basic Eligibility: Location (con t) NMTC Mapping tools: Demographic data update Projects closing by 6/30 can use 2000 census data Thereafter, must use American Communities Survey (ACS) data

8 Basic Eligibility: Use Restrictions No sin businesses (liquor store, massage parlor, etc.) Substantial business activity in a LIC (not a P.O. box ) Must be an operating business (limits on cash reserves, collectibles, intangibles) Can t be certain farming businesses If real estate, must be non-residential Min 20% commercial income CDEs & investors usually want 30-50% commercial income

9 A Few Differences from LIHTC NMTC are allocated annually by the CDFI fund to Community Development Entities (CDEs) (not state HFAs) CDEs decide what projects to invest in Credits are generated by the amount of financing run through the CDE, not by investments in project-level basis Subsidy is shallow; does not drive project Business can be either a taxable or tax-exempt entity Full recapture risk!!!!

10 What is the NMTC Worth? Investors who invest in CDEs claim credit against federal income taxes (investment can t exceed available allocation) Credit is equal to 39% of QEI Credit claimed over 7 years (5%, 5%,5%, 6%, 6%, 6%, 6%) Credit not prorated take full first year credit regardless of when during year QEI is made Relatively shallow credit overall

11 A Little Fuzzy Math? $10 mm investment (requires $10mm allocation) $3.9 mm credit $0.78 price per NMTC $3.042 gross equity Fees & expenses, legal costs, consulting fees, bridge loan cost - $750k to $1.0mm $2.0 - $2.25 net equity

12 NMTC Strengths & Weaknesses Able to finance a broad range of commercial projects & businesses that provide community & economic benefits Provides a source of financing that generally does not have to be repaid at the end of the compliance period Scarcity Complexity & transaction costs Absence of replicable structures Regulatory & inter-creditor tensions

13 How the NMTC Works Credits are earned on a Qualified Equity Investment (QEI) in a Community Development Entity (CDE) which subsequently uses substantially all of the QEI proceeds to make Qualified Low-Income Community Investments (QLICIs) in Qualified Active Low-Income Community Businesses (QALICBs) located in Low-Income Communities (LICs) Everybody got that?

14 Leverage Structure Investor Leverage Lender $3 Equity $3.90 NMTC $7 Leverage Loan Leverage Investment Fund $10 QEI $3.90 NMTC CDE $7 QLICI A $3 QLICI B QALICB

15 Recommended NMTC Conferences NYC EDC Development Finance Conference (4/16/13; NYC) Reznick NMTC Summit (5/6-8/13; Miami) Novogradac NMTC Conference (6/5-7; Washington, DC) For the YouTube crowd: h?v=cjcpyrlwi74 h?v=q-tjuyfavow

16 Oxford Mills (Philadelphia) Adaptive reuse of 170,000 sf historic factory complex 114 units of mixed-income rental housing targeted to public school teachers (60% or 68 units below market) 40,202 sf office space for education/social service nonprofits 1,300 sf café & 39 surface parking spaces Co-developers: Seawall Development (Baltimore) D3 Development (Philadelphia)

17 Oxford Mills: Sources & Uses (in mm) Sources $17.80 TDB loan $10.21 TDB NMTC equity $ 6.36 TDB FHTC equity $ 0.51 Subordinate loan $ 1.50 Developer equity $ 3.60 Def d dev fee $39.98 NMTC Allocation $34 mm NMTC (3 CDEs) Uses $ 4.18 Acquisition $22.15 Construction $ 1.25 Contingency $ 1.64 Soft costs $ 2.30 Financing costs $ 2.36 NMTC fees/expense/legal $ 0.80 Reserves $ 5.30 Developer fee $39.98

18 Oxford Mills New Markets Tax Credits 101

19 1770 Tchoupitoulas St. (New Orleans) Adaptive reuse of 96,500 sf historic Lykes Steamship complex 52 units of mixed-income rental housing (25 market-rate; 80% AMI; 50% AMI) 12,634 sf food production space (including VOA program to train low-income persons to make healthy meals for public schools, nonprofit programs & others 41,000sf warehouse bldg (future development) Developer: RNDC (VOA affiliate)

20 1770 Tchoupitoulas: Sources & Uses (in mm) Sources $ 3.24 Iberia Bank loan $ 5.27 USB NMTC equity $ 2.63 USB FHTC equity $ 2.66 TCC SHTC equity $ 2.50 State loan $ 1.21 Grants $ 0.97 Developer equity $ 1.43 Def d dev fee $19.90 Uses $ 2.93 Acquisition $10.15 Construction $ 1.07 Contingency $ 1.28 Soft costs $ 0.30 Financing costs $ 1.33 NMTC fees/expense/legal $ 0.34 Reserves $ 2.50 Developer fee $19.90 NMTC Allocation $18.5 mm NMTC (2 CDEs)

21 1770 Tchoupitoulas New Markets Tax Credits 101

22 A Few Random Thoughts on NMTC Is one of the few broad commercial financing subsidies Demand far exceeds supply (10:1 or more) Subsidy is shallow But for test is and community benefits are important QALICB can be either a taxable or tax-exempt entity Transaction costs are expensive and not scalable Be prepared for time and complexity

23 Al Shehadi Director, Originations Enterprise Community Investment 27 Byram Shore Rd Greenwich, CT P: E: