Transcript New Market Tax Credit

New Market Tax Credit
Investment
By the
Michigan Magnet Fund
Prepared by Albert A. Bogdan
Friday, July 17, 2015
MMF Board of Directors
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Ted Rozeboom *, Chair, MSHDA
Mark McDaniel *, Vice Chair, Great Lakes
Capital Fund
Mark Morante*, Sec’y/Treasurer
MEDC
David Blaszkiewicz*, Exec. Comm.
Detroit Investment Fund
Tony Lentych*, Exec. Comm., CEDAM
Richard M. Buss*, National City Bank
JoAnn Crary, Saginaw Future, Inc.
William D. Johnston*,
The Greenleaf Companies
Donna Kelce, Key Bank
Tony McGhee*, Cornerstone Alliance
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Greg Nicholas,
Flint Genesee Econ. Growth Alliance
Dan Oegema, City of Grand Rapids
K. Michael Skytta
Wells Fargo Bank Michigan, N.A.
Donna Badgett*, Charter One Bank
Dennis J. West*,
Northern Initiatives
Annette Williams,
Fifth Third Bank CDC
James Bernacki,
Comerica Bank
Dick Tresize, EDC of Lansing
Investment Committee
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Ted Rozeboom Chair
* = Investment Comm. members
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NMTC History
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Bill Signed 12/21/2000
Purpose - Attract $15 Billion in Investment to LowIncome Communities
$2.5 Billion Allocated for 2001 and 2002
$3.5 Billion Allocated for 2003 and 2004
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Value of Total Investment Targeted to Michigan
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One In Michigan ($27 Million - Wayne County – Detroit CDE Inc.)
MI – 4 for $157.5 Million
$2.0 Billion Targeted for 2005
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Michigan Magnet Fund Gets $60 Million Allocation
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NMTC - How it Works
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39% Investment Tax Credits to Investor for Over 7 Years
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First Three Years = 5%/Year
Next Four Years = 6%/Year
Total = 39%
Funds Used to Invest Almost Any Businesses Located in a
Low Income Census Tract
Tax Credits Allocated to a Community Development Entity
(CDE) by US Treasury
Cash Flows to CDE as Qualified Equity Investment
 Must Stay in Deal For 7 Years
 Flows In as Equity, Flows Out as Equity, Loan or Loan Purchase
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Deals May Be Pooled or Pass-Through Investments
Tax Credit Goes to Investor Regardless of Investment
Success or Failure
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New Market Tax Credit Flow Chart
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Criteria for Eligible Location
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Census Tract with
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Poverty Rate > 20% or
Greater of the Following Two:
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Median Family Income < 80% of MSA Median Income or
Median Family Income < 80% of Statewide Median Family
Income
95% of Financing Must Have Additional Levels of
Distress, Poverty Rate > 30%, Median Family Income
< 70%, Brownfield, Urban Renewal Area, Enterprise
Zone, etc.
Go to AABDS.com / Michigan Magnet Fund to Verify
Census Tract
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What Type of Business Can Receive
NMTC Financing?
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Almost Any Business Units
Located In Low To
Moderate Income Areas
Can Qualify
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Definition Of Business Unit
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May Be Branch Or Division
Investment Must Be Traced To
The Facility
Typical Businesses
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No Liquor Stores
No Gambling Establishments
No Golf Courses
No Collectibles
No Rental Residential –
However, Residential Defined as
Project Where More Than 80%
of Income Comes from
Residential Portion
Shopping Center, LLC
Small Technology Firm
Hotel
Manufacturer
Retail Store
Micro Entrepreneur
Single Family Home Developer
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MMF Investment Guidelines
Finance Projects That
 Real Estate Projects In Targeted Cities & Rural Areas
 Create Job Opportunities in Low-income
Communities,
 Are Located In Traditional Downtowns And/Or
Significant Development “Nodes”,
 Are Needed To Support Low-income Community &
Neighborhood Development Initiatives
 Support GLCF and MSHDA Development Initiatives
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MMF Investment Guidelines
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Must Have Sufficient Financing Commitments Acceptable To MMF.
Must Have Site Control
An Acceptable Environmental Remediation Plan.
Minimum MMF Financing is $2 Million. Maximum is $10 Million.
Other NMTC Allocatees May Be Invited To Partner
A Long-term, Comprehensive Economic Develop. Strategy in Place.
Demonstrate Construction to Begin Within 6 Mos. of Commitment.
The Project Must Meet One of The Following “But For” Tests:
 Costs Exceeding Value (Residuals putted to Owner);
 Insufficient Equity (Residuals Loaned to Owner @ Zero interest);
 Inadequate Cash Flow To Debt Service Coverage;
 Need Low Income Community Vs. Non-low Income Community
Location Incentive.
Preference Given To Financial Institutions And Investors Committed To
Invest In The MMF As Evidenced In Its NMTC Application.
All Other NMTC Program Requirements Must Be Met.
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MMF Contract Requirements
MMF Subsidiaries Must Invest:
 100% of Its Investment In Real Estate Projects.
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New Building For A Business Is Not Considered As A Real Estate
Project, i.e., Factory For A Manufacturer, Building For Nonprofit To
Conduct Its Own Business.
100% of Its Aggregate Investment In Unrelated Entities
60% of Its Qualified Equity Investment Invested By
9/30/08.
95% As Flexible, Non-conventional, Or Non-conforming
To Standard Practice In The Marketplace.
90% of the MMF Investments Must Be Made In Targeted
Distressed Areas Which Have More Than Just 20%
Poverty Or 80% Median Family Income,
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i.e., Brownfield, Redevelopment Area, 30% Poverty, 70% Median
Family Income, HOPE VI Area, Empowerment Zone, etc.
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The Procedures
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Developers Invited to Submit Pre-application
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Investment Committee Reviews
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Based on Its Guidelines
Best Projects Invited to Submit Full Application
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Need Interest Letter from Investor
Need Commitment Letter from Investor
$5,000 Fee Charged
MMF Makes Firm Offer
Deal Closed
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MMF Fee Structure
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Origination Fee = 2.5%
Annual Service Fee = 50 Basis Points (0.4%)
Exit Fee = Zero
Total Fees = 6.0%
Plus Transactional Cost
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Legal,
Accounting, &
Consulting Costs
Typical $150,000 to $300,000
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Leveraged Real Estate Investment
Bank, Pension,
HUD 108
or Other Loan
Owner’s Entity
0.01%
Investment Entity
Equity
$3,000,000
$7,000,000
NMTC
$1,190
NMTC
$3,899,810
Interest Only
7 Years
Investment LLC
(99.99%)
QEI
$10,000,000
NMTC
$3,900,000
Michigan Magnet
Fund
(Sponsor)
(.01%)
Debt
Service
MMF A, LLC
A Certified Subordinated
CDE (99.99%)
Debt
$9,600,000
Debt
Service
Origination Costs, Legal,
Consulting Fees
$400,000
Origination, Legal,
& Consulting Services
In Some Cases the Origination Costs,
Legal & Consulting costs may be
Paid by the Developer After
Receiving $10,000,000 in Debt
Owner
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Doing the Deal
No Repayment for 7 Years
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Assumptions
 Lender Lends $7,000,000 to “Investment LLC”
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CDE Provides Tax Credit Allocation to ILLC
ILLC Sells Tax Credit for $3,000,000
CDE Invests $9.6 Million in Firm
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7 Years
Interest only
20 Year Amortization
Balloon Repayment in Year 8
Results
 Firm Repays CDE $9,600,000
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No National Consistency in Product
– Each CDE Can Do Own Thing
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The Tax Credit Portion is Easiest Part of the Deal
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Leveraged Real Estate Investment
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Commodity Market for NMTC Slowly Taking Shape
Tax Credit May Not Go to Principal Funder
Have Used HUD 108, HOME Funds as Debt – Can Use Pension Funds
CDE is Facilitator
– Need Debt & Equity
– Price & Deal Negotiable
– Tax Credit Value Can Vary $100,000/Million
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Who Can be an Eligible Equity Investor?
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Any Taxable Investor
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Individual
Company
Investment Fund
Debt Investor Can Be Anyone – HUD, Bank, Pension Fund
Debt Investor Receives No Collateral – Nonrecourse Loan
MMF Investors are:
 James Bernacki, Comerica Bank
 Richard M. Buss, National City Bank
 William D. Johnston, The Greenleaf Companies
 Donna Kelce, Key CDC
 K. Michael Skytta, Wells Fargo Bank Michigan, N.A.
 Vince Tilford, Charter One CDC
 Annette Williams, Fifth Third Bank CDC
 Ashley Zwick, Standard Federal Bank
 Janet Oller, Irwin Union Bank
 Don Davis, First Independence National Bank
 Joseph P. Molnar The Huntington Bank CDC
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Negotiating the Deal
Points of Negotiation
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Terms & Conditions of Debt to Investment LLC
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Internal Rate of Return for Tax Credit to Equity Investor
Term & Conditions of Qualified Equity Investment
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No Collateral
7 year Balloon Principal Repayment
Fees & Professional Charges
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No Collateral
Size of Interest Only (7 Year Balloon)
Try to Keep it Simple – Costs Add Up Quickly
MMF are Real Estate Deals – Prepare Application – Complete It
MMF Loan – Must Cover Above Commitments
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Collateral
Interest on $9.6 Million Loan = Interest on $7.0 Million Loan + 50 Basis Pts
7 Year Balloon Principal Repayment
May Include Up to 15% Principal Repayment (20+ Year Amortization)
Negotiate Residuals – Based on “But for” Need
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Example - Principal Balloon Repayment Range = $9.6 Million to $7.0 Million
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Contact Info
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Mr.. Albert A. Bogdan
Michigan Magnet Fund
300 North Washington Square
Lansing, MI 48913
Phone (313) 445-1843
E-Mail [email protected]
Web page: http://www.aabds.com
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