New Market Tax Credits Presentation Tax Exempt Sponsors Seminar – September 14, 2010

Panelists:

Steven Paul, Partner, Tax Nicholas Romanos, Partner Tax

Moderator:

Andrew Grumet – Tax-Exempt Organizations

New Market Tax Credits

  Summary of Benefits NMTC’s can account for more than 20% of project costs.

This presentation will focus on a project with a cost of $9.5m of which $2.2m is derived from the sale of NMTC.

 NMTC investors typically derive their return solely from the NMTC effectively making their investments like grants which the sponsor need not repay.

Principal Constraints   Project must be in a qualified census tract The Non-Profit Sponsor of the Project must raise the balance of the funds, $7.3m in our example, and if it does so by borrowing, the Project generally cannot be mortgaged to secure such borrowing.

What are New Market Tax Credits (NMTCs)? - Introduction

 Historical  Community Renewal Tax Relief Act of 2000  Are they still available?

 What is the forecast for 2010/2011?

 NMTC provides investors (individuals, financial institutions, other corporations, etc.) with a tax credit for investing in communities that are economically distressed or consist of low-income populations.

Boston, MA NTMC Qualifying Census Tracts

New York City, NY NTMC Qualifying Census Tracts

How do they work?

 Terminology –  Community Development Financial Institutions Fund (CDFI Fund) Part of U.S. Treasury  Community Development Entities (CDEs)   Qualified Equity Investments (QEIs) Qualified Active Low Income Community Business (QALICBs)  Qualified Low Income Community Investments (QLICIs)   NMTC Investor/Leverage Fund Leverage Lender (can be project sponsor but not QALICB)  CDFI Fund Application/Approval Process

NMTC Financing Structure:

Overview

Lender (Sponsor)

NMTC Financing Structure:

Community Development Entities (CDEs)

 NMTC Allocatees, typically banks and other for-profit entities, nonprofits and state agencies, create these vehicles through which NMTCs investments are made.  Must apply for certification by the CDFI Fund in order to receive tax credit allocations.  Must show that their primary mission is to serve the needs of, or provide investment capital via equity or loans to, low-income communities or individuals.  Must be either partnerships or corporations for tax purposes.

NMTC Financing Structure:

Qualified Equity Investments (QEIs)

 Investors’ equity investment in the CDE  CDE sells NMTCs for cash to investors in exchange for investors’ equity investment in the CDE  Includes proceeds from the Leverage Loan  New Markets Tax Credit amount equals 39% of the QEI and is claimed over 7 years, beginning in the year the QEI is made: 5% of the QEI in each of the first three years and 6% of the QEI in each of the next four years  Current pricing of the NMTC is in the range of $.65-$.70 for each $1 of credit  In our example, $10m of QEI generates $3.9m of NMTC which, in turn, generates $2.7m of NMTC investment.

NMTC Financing Structure:

Qualified Active Low Income Community Business (QALICBs)

 Real Estate Owner. May be either a for-profit or nonprofit entity. Nonprofits often create 501(c)(3) supporting organizations to hold real estate for lease to sponsor.

 QALICB must:  generate at least 50% of its annual gross income by conducting business in a low-income community  use at least 40% of its tangible property within a low income community and perform at least 40% of their services in a low-income community (if no employees, 85% of its assets are located in such a community.)  not more than 5% of the assets of a Qualified Business can consist of “collectibles” or “nonqualified financial property”  be either a partnership or corporation for tax purposes.

NMTC Financing Structure:

Qualified Low Income Community Investments (QLICIs)

 Capital or equity investment in, or loan to, a QALICB from CDE  Includes proceeds from the NMTC Equity  Includes proceeds from the Leverage Loan  Must be either partnerships or corporations for tax purposes.

NMTC Financing Structure:

NMTC Investor/Leverage Fund

 Purchaser of New Market Tax Credit  Typically banks, insurance companies or other financial/investment institutions  Invests equity and proceeds of Leverage Loan into CDE through an entity created by NMTC Investor as funding vehicle for QEIs (“Leverage Fund”).

 Leverage Fund is Borrower of Leverage Loan  Equity investment of NMTC Investor in exchange for Leverage Fund interest  Combines both NMTC equity investment and Leverage Loan into one or more QEIs, which is the equity investment in the CDE.

NMTC Financing Structure:

Leverage Lender

 Sponsor makes one or more Leverage Loans to Leverage Fund.

 Increases amount of QEI, which increases the amount of NMTC available to be sold.

NMTC Financing Structure:

Lease to Sponsor

 Nonprofits often create 501(c)(3) supporting organizations to hold real estate for lease to sponsor.

 Leasehold Mortgage may be available because leasehold is not a QALICB asset.

3

rd

Party Lenders

3P Lender Secured by Sponsor’s assets but not QALICB’s assets Project Sponsor / 501(c)(3)  QALICB New 501(c)(3) (Property Owner) Project Sponsor / 501(c)(3) Alternative structure may have 3 rd party lender lending directly to the leverage fund with Sponsor as guarantor of loans.

NMTC Financing Structure:

Exit

 Step 1 – Investor Exits through an exercise of a Put/Call – Sponsor acquires ownership of the Leverage Fund or its interest in the CDE.

 Step 2 – Structure collapsed through the cancellation of QLICI and QEI financing – Sponsor dissolves CDE and acquires QLICI loan in satisfaction of Leverage Loan.

EAPD Contacts

Steven L. Paul, Partner Boston

617 239 0442 [email protected]

Nicholas V. Romanos, Partner Boston

617 239 0379 [email protected]

Andrew M. Grumet, Partner New York

212.912.2753

[email protected]