Transcript New Markets Tax Credit Presentation

Indiana Redevelopment Corporation
New Markets Tax Credits
Indiana Statewide Conference
on Housing and Community
Economic Development
September 14, 2005
Julian Rodgers
House Investments
317.580.2546
[email protected]
Paul Jones
Ice Miller
317.236-5959
[email protected]
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New Markets Tax Credits
• The New Markets Tax Credit ("NMTC"),
provided in Section 45D of the Internal
Revenue Code, provides federal tax
credits with respect to $15 billion in
qualified investments made from 2001
to 2007.
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New Markets Tax Credits
• Annual qualified investment pool which
generates NMTCs:
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–
–
–
–
2002 - $2.5 billion (combined 2001 and 2002)
2003 - $3.5 billion (combined 2003 and 2004)
2005 - $2 billion
2006 - $3.5 billion
2007 - $3.5 billion
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New Markets Tax Credits
•
•
NMTC allocations are awarded by the
Community Development Financial
Institutions (“CDFI Fund”) to Community
Development Entities (CDE’s). The CDE’s will
make loans and capital investments in
businesses in underserved geographic areas.
Investors (such as local corporations, banks,
insurance companies or individuals) invest
cash in the entity that is awarded tax credits.
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New Markets Tax Credits
• The capital from investors is in turn
invested in qualifying businesses
located in the qualified areas.
• This may be in the form of equity
investments or loans to qualifying
businesses.
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Qualifying Businesses
• A wide range of businesses are eligible
for assistance, including for-profit retail,
manufacturing, service businesses and
nonprofit businesses.
• Exclusions include: residential rental
housing, country clubs, golf courses,
gaming venues, liquor stores, massage
parlors, tanning establishments, and
hot-tub parlors.
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Qualifying Businesses (cont.)
• In general, a qualifying business must
meet the following criteria:
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–
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At least 50% of its total gross income derived
from activities in a low income community;
At least 40% of its tangible personal property is
used in a low income community; and
At least 40% of its services are performed in a
low income community.
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Low Income Communities
• A "low income community" is defined
as a census tract where:
–
–
the poverty rate exceeds 20%; or
the median income is below 80% of the
greater of:
•
•
Statewide median income; or
Metropolitan area median income (for
metropolitan tracts only)
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Qualified Equity Investment
• The NMTC is equal to 39% of a qualified
investment and is claimed over a seven
year period starting on the date when
the investment is made.
• Investors may claim NMTCs equal to 5%
of their investment in years one to three
and 6% of their investment in years four
to seven.
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Qualified Equity Investment (cont.)
• Example: A $1 million qualified
investment would generate NMTCs as
follows:
–
–
–
–
$50,000 in 1st Year – $60,000 in 5th Year
$50,000 in 2nd Year – $60,000 in 6th Year
$50,000 in 3rd Year – $60,000 in 7th Year
$60,000 in 4th Year
• Total of $390,000 in NMTCs, with a
present value of about $300,000.
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Investment Structure
• IACED and House Investments formed
Indiana Redevelopment Corporation
(IRC), a nonprofit CDE that is certified
by the CDFI Fund.
• IRC formed Indiana Redevelopment
Fund (IRF), a limited liability company to
serve as an investment pool.
• IRF makes loans to qualifying businesses.
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Layering with Other Subsidies
• The NMTC can be combined with
other federal and state tax and
nontax subsidies (e.g., historic
rehabilitation tax credits).
• The NMTC cannot be combined with:
–
Low-income housing tax credits
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NMTC Structures
•
•
•
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Below-market senior debt;
Subordinated debt;
Equity or equity-like investments;
Financial counseling and technical
assistance; and
• More flexible underwriting.
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A Leverage Structure
INVESTING MEMBER
Investment
DEBT MEMBER
NMTC
Loan
Interest and final payoff
INVESTMENT FUND, LLC
99.99% Investor Partner in Sub of CDE
Investment
Interest and final payoff
NMTC
SUB of CDE
IRC FUNDING LLC
Loan
NMTC
CDE
IRC
NMTC CDFI Fund
Interest and final payoff
PROJECT ENTITY
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General Benefits
• Increased interest in areas once
perceived as marginal.
• Adds boost to make the deal work.
• Possibility of increased property values.
• Possibility of increased employment.
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Incentives of NMTC’s for the Lender
An opportunity for increased :
-Business
-Fee Income
-Deposits
-Community involvement
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Investor’s Incentive

Attractive after-tax returns.
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NMTC Process
•
•
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•
Preliminary Discussion and Review
Meetings and Detailed information
IRC loan approval
Closing
Timing: 30-90 days
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Information Required
• Preliminary Discussion
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Project/Investment Description
Location
Community impact (jobs created or
retained)
Principals involved
Estimated financial needs
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Example of NMTC Transaction
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•
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•
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New Construction
Two single use buildings
Different Locations
A non-profit ownership
Approximately $6,500,000 in combined
development costs
• Loan guaranteed and collaterized
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The Loan Structure
INVESTING MEMBER
CDC
Investment
DEBT LENDER
Bank Lender
Return
NMTC's
99.99%
Equity/ Loan Investment
(NMTC Basis)
Loan
Return
Interest Payments
Final Loan Payment
LEVERAGE PARTNER
Investing LLC
Investor Partner in Sub of CDE
Return
Interest Payments
Loan Repayment
NMTC's
SUB of CDE
Indiana Redevelopment Fund Entity
NMTC
FEE/ RSVE
Loan
Note A
CDE
IRC
Allocates NMTC's
for Investment
CDFI Fund
Return
Interest Payments
Loan Repayment
Note B
PROJECT ENTITY
DEVELOPER
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Example (cont.)
Traditional
Bank Loan
First Mortgage Bank Loan
$6,500,000
Interest Rate
(Say an average of 6%)
Term
Amortization
LIBOR + 150
Annual Debt Service Amortized
Loan Balance end of Term
$558,816
$5,035,880
5 Years
20 Years
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First Mortgage IRC Loan
Interest Rate
Example (cont.)
Traditional
NMTC
Bank Loan Structure
6,500,000
LIBOR + 150
7,000,000
LIBOR + 150
5 Years
20 Years
7 Years
(Say an average of 6%)
Term
Amortization
Annual Debt Service Amortized
Loan Bal. End of 5 year term
558,816
5,518,500
NMTC Investment
2,101,890
Bank Loan Investment 4,898,110
7,000,000
Less NMTC Costs
Net to Project
264,930
293,886
558,816
445,000
6,555,000
Principal Deposited in savings account
Interest Payments
Annual Costs
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The Benefits of NMTC
Increased Loan Term
Reduced Guarantee by reduced required annual payments.
Reduced loan balance
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