New Markets Tax Credits An opportunity for your business
Agenda 8:30-9:00 Breakfast Registration and Mingling 9:00-9:10 Welcome and General Remarks 9:10-9:30 Legislative and Local/National NMTC Economic Update 9:30-11:00 NMTC Basics and Lender/Investor Perspective 11:00-11:15 Break 11:15-11:35 CHHS Medical Services Case Study 11:35-12:00 Community Needs: Questions and Answers
Legislative and Local/National NMTC Economic Update
Legislative Report: NMTC Status Expired December 31, 2014 2014 awards ($3.5 billion) will be announced in May or June If the tax reform effort fails this year, NMTC must be extended before the end of 2015 The next application round should open this summer, regardless of the status of an extension
President s FY2016 Budget Makes the NMTC permanent Provides $5 billion in annual allocation authority
Extension Legislation: Senate (S. 591) New Markets Tax Credit Extension Act of 2015 Increases allocation and makes the program permanent Introduced by Senators Blunt (R-MO), Schumer (D-NY), Daines (R-MT), and Cardin (D-MD) 6 cosponsors
Extension Legislation: House (H.R. 855) Introduced by Representatives Tiberi (R-OH), Neal (D-MA), and Reed (R-NY) 35 cosponsors Increases allocation and makes the program permanent
NMTC Awards to Local CDEs Community Development Entity City Year Amount Capital Trust Agency Community Development Entity, LLC Gulf Breeze 2008 $75,000,000 Community Hospitality Healthcare Services LLC Placida 2010 $63,000,000 Community Hospitality Healthcare Services LLC Placida 2012 $60,000,000 Community Hospitality Healthcare Services LLC Placida 2013 $60,000,000 Florida Community Loan Fund, Inc. Orlando 2003 $15,000,000 Florida Community Loan Fund, Inc. Orlando 2009 $45,000,000 Florida Community Loan Fund, Inc. Orlando 2010 $21,000,000 Florida Community Loan Fund, Inc. Orlando 2011 $30,000,000 Florida Community Loan Fund, Inc. Orlando 2012 $40,000,000
National Economic Impact (2003-2012) NMTC Coalition s December 2014 Economic Impact Report $31 billion in NMTC financing to 3,800 projects totaling $63 billion in project costs Nearly 750,000 jobs (457,487 construction jobs and 286,781 full-time equivalent jobs) Jobs and economic activity pay for the cost of the program
$664 million in NMTC financing went to 81 projects 10,804 construction jobs 7,017 full-time jobs Source: A Decade of the NMTC (2014, NMTC Coalition)
Florida Projects by Industry Sector (2003-2012) Mining 2% Science, Research & Technology 4% Restaurant 2% Office 10% Retail 5% Timberlands 1% Arts 1% Automotive 5% Community Services 20% Manufacturing 11% Education 7% Information Technology 1% Housing 7% Hotel 5% Health 9% Grocery 6% Energy 2%
Florida Statewide NMTC Eligibility Central
NMTC Projects Statewide Central
More Information Fact Sheets, target lists, co-sponsorship lists on the NMTC Coalition website: nmtccoalition.org
New Markets Tax Credits An opportunity for your business
Baker Tilly One of the top 12 accounting and advisory firms in the United States according to Accounting Today s 2014 list of Top 100 Firms One of nation s foremost experts in NMTCs We operate our own CDEs (The Valued Advisor Fund and the Business Valued Advisor Fund), which have received combined allocations totaling $188.4 million in NMTCs Assisted in closing 150+ NMTC transactions to date, bringing investment value of over $4.7 billion to distressed communities nationwide through the deployment of $2.4 billion of NMTC allocation Worked with more than 60 CDEs on successfully structuring and closing transactions Authored over 30 award winning allocation applications totaling more than $2 billion in NMTC awards Provide back office operations to 9 CDEs managing over $900 million in deployed NMTC Contact: Terri Preston at terri.preston@bakertilly.com or 608-240-2546
Overview What are New Markets Tax Credits? First tax credit program to stimulate commercial investment in lowincome communities The program is administered by the US Treasury Department through a division call the CDFI Fund, in a unique public/private partnership with Community Development Entities (CDEs)
Overview What is a low-income community? Based on census tract data median income and/or poverty rate Qualifying vs. Higher Distress Includes unemployment, rural areas, Brownfield areas, designated Hot Zones, medically underserved areas, food deserts, Colonias and HUB Zones Qualifying census tracts in non-metropolitan counties automatically qualify as higher distress Qualifying census tracts can be located using the mapping program located on the CDFI Fund website at www.cdfifund.gov
Overview What is a Community Development Entity? CDEs come in a variety of forms: An affiliate of a municipality to promote economic development An affiliate of a bank to help meet the bank s community reinvestment goal Non-profit and for-profit entities with a mission to serve low income communities CDEs have defined geographic service areas and are charged with evaluating each potential NMTC transaction for community impact CDEs can be found using a search engine on the CDFI Fund website at www.cdfifund.gov
Low-Income Community Investment Polk County Osceola County Okeechobee County Hardee County Highlands County
Overview How does the program work? Through a competitive application process, CDEs are annually delegated NMTC allocation authority from the CDFI Fund. CDEs are able to attract capital investments in their allocation, and the proceeds are used to fund low interest rate, convertible loans or investments in qualifying businesses or commercial real estate developments. CDEs will search for qualifying businesses and real estate developments to provide NMTC-subsidized financing, which is also a competitive process.
Overview How does the program work? The NMTC proceeds typically fund about 20-25% of a project and is paired (or leveraged ) with owner equity, borrowed funds, or other grant/public funds, which in total must equal or exceed the amount of NMTC allocated to a deal. The borrower benefits from obtaining 20-25% of their project funding from a CDE that will offer flexible terms (e.g. subordination to other lenders), a low rate of interest (around 2%), interest-only terms for 7-years and may convert substantially all of the principal at maturity.
NMTC Program Benefits Economic benefit to recipient Capital to fund projects, business expansion or debt refinancing Tax credits are monetized to bring additional capital to the capital structure Low cost of capital Flexible loan terms including longer amortization and higher LTV ratios Debt Conversion At the end of the 7-year compliance period a significant portion of the NMTC benefit may be converted to equity or carried as debt by an affiliate of the borrower or the borrower itself, depending on the circumstances of the transaction.
NMTC Program Benefits Community benefit Create additional economic development for the local community Attract and retain skilled workforce Bring new goods or services to underserved communities Capital investment to underserved, qualified Low-Income Communities (LIC)
Community Development Entity CDEs have a primary mission of providing investment capital for low-income communities and are accountable to the residents of that community through a governing or advisory board Responsibility for ongoing monitoring and maintenance of Sub- CDE CDEs earn fees from deploying and managing the allocation, and those affiliated with banks are commonly eligible for Community Reinvestment Act (CRA) credit
2 6 Allocation authority history Amount ($ bil) $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 NMTC allocation authority history Through 2014, a total of $40 billion of authority has been allocated, averaging $40.2 million in the last round *2009 includes an additional $1.5 billion round of authority from the American Recovery and Reinvestment Act
Allocation authority history 120.0 100.0 Average NMTC Award Amount ($ mil) 80.0 60.0 40.0 20.0 0.0
Critical distinctions Unlike other tax credit programs, the NMTC does not belong to the qualified borrower. It was awarded to the CDE, to be monetized, with the proceeds invested in (or loaned to) a business that qualifies for the subsidy. A NMTC Allocation Cash
Players in a leverage model structure WORKING WITH 3RD PARTY ALLOCATEES - LEVERAGE MODEL STRUCTURE Leverage Lender $ Loan $ Equity NMTC Equity Investor N E W M A R K E T S T A X C R E D I T S Provides leverage into NMTC structure. Leverage loan sources include traditional providers like a National or a regional bank, capital campaign funds, or monies from state or federal grant programs. The parent entity of the QALICB. Project Sponsor Creates SPE Investment Fund $ QEI $ QLICI Sub CDE. Allocation Credit Invests capital to obtain tax credit benefit via equity contribution to investment fund, which flows through the sub CDE to support project financing needs. Parent CDE Receives NMTC allocation or authority from Treasury which it suballocates to sub CDEs, and makes loans (QLICIs) to borrower. CDE = Community Development Entity QEI = Qualified Equity Investment QLICI = Qualified Low Income Community Investment QALICB = Qualified Active Low Income Community Business QALICB/Borrower Typically a single purpose entity (SPE) created to act as the borrower for the NMTC funding as a Qualified Active Low-Income Community Business, per Treasury regulation.
The Math Here s how it works: The Math (estimated) NMTC allocation $10,000,000 NMTC rate 39% Tax credits $3,900,000 Investor monetization ($0.82 per credit example) $3,198,000 Less estimated closing costs & fees $775,000 Net NMTC cash to the project: $2,423,000 *Numbers above are intended for purposes of an example only
NMTC Investor Tax credit buyer, typically a financial institution, receives the benefit of the NMTCs and community reinvestment act credit Credits purchased from a CDE and realized over a 7 year period Years 1-3: 5% Years 4-7: 6% Total benefit of 39% Investor currently pays about $0.80-0.84 in this market for NMTCs May act as leverage lender No economic interest in the QALICB Main concern is to avoid recapture
Why Do Investors choose specific deals? Generate strong returns on acceptable risk profile Achieve Community Reinvestment Goals Make beneficial impacts on the communities served make these investments? McDonogh 42 Elementary School New Orleans, LA
Lender/Investor at a Glance Checklist for NMTC Financing Business or real estate development is located in a designated low-income community that s considered higher distress Google Baker Tilly NMTC Mapping Tool or email us to ask A substantial portion of tangible assets, revenue and employees are located in low-income community Business is not engaged in, or leasing to, a sin business Project creates tangible community and economic outcomes Total project financing meets $5 million threshold Project sponsor has secured other necessary sources of financing
Qualifying Business or Development the QALICB Geographic restrictions Business located in a Low-Income Community Determined by census tract (see www.cdfifund.gov) Or Google: Baker Tilly NMTC Mapping Tool Technical requirements Over 50% of gross income is derived from the business activity located within a Low-Income Community Over 40% of the tangible property of the business is located in a Low-Income Community Over 40% of the services are performed by the employees are in a Low-Income Community Must not have more than 5% in either collectibles or non-qualified financial assets
Qualifying Business or Development Ineligible activities Residential rental property Mixed use is permitted so long as over 20% of the rental income is derived from commercial tenants Straight acquisition or refinance of rental property must have substantial rehab (25% of acquisition basis) or be owner occupied Certain businesses: Race tracks & gambling facilities Golf courses & country clubs Liquor Stores Farming Massage & tanning businesses Undeveloped land holding
What makes a good QALICB candidate? Located in a highly distressed census tract any one of the following: Poverty > 30% Median Income < 60% of statewide Unemployment > 1.5 times national average Non-metropolitan county Two of any secondary criteria Community impact Tangible community benefit measured by quality job creation, providing unmet goods & services to low income communities (grocery stores), environmentally sustainable construction, etc. Part of an existing plan for economic revitalization But for test NMTC fills a real funding gap that would otherwise not happen Ready to go Other sources of funding are committed Approvals all in place
Community Hospitality Healthcare Services
3 8 CHHS Community Hospitality Healthcare Services (CHHS) is a national CDE that has received 3 allocations ($183 MM). The CDE provides financing for development, modernization, and operations of community facilities serving Low-Income Persons (LIP) and Low-Income Community (LIC) residents in severely distressed and Medically Underserved Areas nationwide. Project funding provides for: Expansion of services Construction and improvement of new and/or existing space Job training Workforce development Computer systems and medical equipment
3 9 CHHS - Impact Community Impacts provided: 1771 FTE jobs created 762 LIP accessible jobs 779 LIC resident accessible jobs 1214 construction jobs created Annual services to 210,860 LIP
4 0 CHHS Spectrum Health Services The project involved the new construction of a 34,570 square foot building whose primary tenant is a Federally Qualified Health Center focused on serving the indigent and underinsured. 5201 Haverford Ave, Philadelphia, PA
4 1 CHHS Spectrum Health Services Distress Criteria 37.5% Poverty 47.8% of the AMI 3.5 x National Unemployment Rate Medically Underserved Area
4 2 CHHS Spectrum Health Services Community Alignment In developing the new comprehensive plan for the City of Philadelphia, the City Council paid significant interest relative to stabilization and long-term growth of its neighborhoods. The plan calls for eight primary areas of focus, including areas such as preservation in such a historic city, increasing public green space, and providing for housing growth. In addition to citing economic development and growth in net jobs, the city council also cited the following which specifically supports the project under review: Public services and utilities are customer service oriented and service delivery is equitable as a key to long-term neighborhood success. The project as designed conforms to and is in alignment with these goals and objectives.
4 3 CHHS Spectrum Health Services Community Impacts Impacts Sustained Jobs 60 Created Jobs 68 Construction Jobs 58 Services 82,000
Q & A
Thank you for your interest in serving our nation s distressed communities Please feel free to contact: Emily@actimpact.org Terri.preston@bakertilly.com tpreston@valuedadvisorfund.com bcircka@communityhealthcde.com paul@rapoza.org To distress your project, please use the following link: http://www.bakertilly.com/insights/new-markets-tax-credit-and-low-income-housingtax-credit-mapping-tool/