Transcript www.indianacounties.org

AIC
Tax Credit Financing for
Community and Economic
Development Projects
July 24, 2009
Paul M. Jones, Jr.
Partner
Ice Miller LLP
(317)236-5959
[email protected]
Overview
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Tax Credit Financing
Impact of American Recovery and
Reinvestment Act of 2009 (“ARRA”) on Tax
Credits and Project Finance
Renewable Energy Incentives
Overview
A tax loophole is "something that benefits the
other guy. If it benefits you, it is tax reform.''
Russell B. Long, U.S. Senator
Overview
Types of financing?
1. Conventional (taxable) debt
2. Tax-exempt debt
3. Owner equity
4. Private equity
5. Tax credit equity
6. Grants
Overview
Tax Credit Equity
 Historic rehabilitation tax credits
 New markets tax credits
 Other federal and state tax credit financing
 Renewable energy tax credits
 New advanced energy property tax credit
 Low-income housing tax credits
 Indiana state tax credits such as community
revitalization enhancement district (CReED)
credits and industrial recovery site credits
Tax Credit Equity
 What is “equity”?
 “Equity” represents the funding gap
between the cost to acquire and develop or
redevelop the project and the amount of
other funding sources that the owner can
secure.
 Amount of Debt on a Project is limited by:
 Project’s fair market value (FMV)
 Project’s net operating income (NOI)
Tax Credit Equity
 Where does equity come from?
 Project owner as own investment
 Investors secured by the Project owner
 Motivated by economic return
 Put in $1, get back $2 in cash
 Motivated by tax savings
 Put in $1, get $2 in tax benefits (losses/credits)
 Motivated by both economic return and tax
savings
 Put in $1, get $1 in cash and $1 in tax benefits
Tax Credit Equity
 How does the investor get the tax losses and
tax credits?
 Owner must be able to pass losses and credits
through to the investor
 Owner must be a “pass-through” entity for tax purposes,
NOT a tax paying entity
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“Partnership” for federal income tax purposes
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Partnership or Limited Liability Company (LLC)
Cannot be a Corporation
 Investor must have an ownership interest in the owner
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“Partner” in a partnership
“Member” in an LLC
Historic Rehabilitation Tax Credit
 Federal Historic Rehabilitation Tax
Credit
 Section 47 of the Internal Revenue Code of
1986 (the “Code”)
 Two Credit Rates
 10% credit for pre-1936, non-certified historic
structures
 20% credit for “certified historic structures”
 Credit amount equals credit rate (10% or 20%)
multiplied by amount of “qualified rehabilitation
expenditures”
Historic Rehabilitation Tax Credit
 20% Tax Credit for “Certified” Projects
 Must involve a “certified historic structure”
 Must result in “qualified rehabilitated
building”
 Must have “qualified rehabilitation
expenditures”
 Must be a “certified rehabilitation”
What are New Markets Tax Credits (NMTCs)?
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Federal tax credits intended to encourage
private equity investment in qualified “lowincome” communities. Code Section 45D.
Why Businesses Use NMTC Financing
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Lower cost of financing
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Flexible terms (i.e., interest only feature)
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Provide needed equity or fill gaps in
financing.
Qualified Business
LOCATION
LOCATION
LOCATION
Credit Amount and Period
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The NMTCs are equal to 39% of a qualified
equity investment and are 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.
How Does the NMTC Program Work?
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NMTCs are awarded by the Community
Development Financial Institutions Fund (“CDFI
Fund”) to entities which qualify as Community
Development Entities ("CDEs") and which apply
for an allocation of credits.
How Does the NMTC Program Work?
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Once a CDE receives tax credits, investors
(such as banks) invest in the CDE by
contributing cash.
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The CDE uses cash from the investment to
invest in qualifying businesses.
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Investment in qualifying business may be in the
form of capital or equity investment or loans to
qualifying businesses.
CDEs
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A CDE can be owned or sponsored by either a
for-profit or a nonprofit entity, or both.
o
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Local governments increasingly forming CDEs and
seeking/obtaining their own allocation of NMTCs (e.g.,
Fort Wayne, IN, Indianapolis, IN, Philadelphia, PA,
Los Angeles, CA, Phoenix,AZ, and Chicago, IL)
Public-private partnerships
To qualify, the entity must have a primary mission
of community development and must be
accountable to the community.
Qualified Businesses
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A wide range of businesses are eligible for
assistance, including for-profit retail,
manufacturing, service businesses and
nonprofit businesses.
Residential rental housing is specifically
excluded, along with certain other
businesses such as golf courses,
massage parlors and liquor stores.
Qualified Businesses
 In general, a qualifying business must meet the
following criteria:
 At least 50% of its total gross income derived from
activities in a low income community;
 At least 40% of its tangible property is located in a
low income community;
 At least 40% of its services are performed in a low
income community. Presumably this would require
that the business have employees, but the
regulations provide a safe harbor:
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If 85% of tangible property is located in a low income
community, the business is deemed to have met the 40%
services test.
Qualified Businesses
 In general, a qualifying business must
meet the following criteria (cont.):
 Less than 5% of its property is attributable to
nonqualified financial property (e.g., debt,
stock, partnership interests, and annuities)
excluding reasonable amounts of working
capital held in cash (or cash equivalents)
and certain debt instruments.
Qualified Businesses
 In general, a qualifying business must
meet the following criteria (cont.):
 Less than 5% of its property is attributable to
collectibles (e.g., art, antiques, stamps, and
coins) other than collectibles held primarily
for sale to customers in the ordinary course
of business; and
Qualified Businesses
 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)
Investor’s Incentive
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The NMTCs are intended to enhance
investor returns.
Leverage structure allows tax credit
investor to generate most of its return from
credits alone.
Combining the NMTCs With Other Subsidies
 The NMTCs can be combined with other
federal and state tax and nontax subsidies
(e.g., historic rehabilitation tax credits).
 The NMTCs generally cannot be
combined with low-income housing tax
credits.
 Condominium structure.
 Definition of rental housing.
Typical NMTC Deals
 Commercial real estate projects including
nonprofit office space, community centers,
commercial office/retail space
 Offering below market rate loans as well as
equity investments
 Typically 7-year term
 Exit strategy after 7 years varies (e.g., put/call
exit payment, balloon payment, refinancing, or
amortization of loan over a term of years)
New Markets Tax Credits
 Examples of NMTC transactions closed in
Indiana
 Charter schools
 Community center
 Office/retail space
 Parking garage
 Telecommunications center
Impact of ARRA
 Additional $1.5B in NMTC volume for 2008
allocation
 Additional $1.5B (for a total of $5B) in
NMTC volume for 2009 allocation ($22.5B
in applications received – awards expected
in October 2009)
Impact of ARRA
 Renewable energy tax credits (e.g., solar,
wind, biomass, geothermal facilities, etc.)
 Code Section 48, 30% investment tax credit
(“ITC”)
 Code Section 45, production tax credit (“PTC”)
 Election to claim ITC in lieu of PTC
 Grants in lieu of credits (Treasury guidance
issued in July 2009)
 Careful tax analysis required to determine which
model works best for a particular project
Impact of ARRA
 New Code Section 48C Qualifying Advanced Energy
Project Credit.
 30% investment tax credit for manufacturers of advanced
energy property. Application process for $2.3B in
volume.
 A qualifying advanced energy project is a project that
reequips, expands, or establishes a manufacturing facility
for the production of certain types of advanced energy
property.
 Treasury guidance is forthcoming, but no guidance yet on
how this program will be interpreted or administered
Impact of ARRA
 Tax Credit Bond programs
 Clean Renewable Energy Bonds
 Qualified Energy Conservation Bonds
 Grants and Loan Guarantees
 http://in.gov/gov/INvest.htm
 http://www.recovery.gov
 US DOE and USDA
 Indiana State Energy Program
Summary
Think outside the box
Don’t overlook possible tax credit equity
opportunities
Structures are complex, but useful when
designed appropriately
C230 Disclosure
This information is provided for general
information purposes only, and is not tax
or legal advice.
This presentation, including any
attachments, is not intended or written by
us to be used, and cannot be used, by
anyone for the purpose of avoiding
federal tax penalties that may be imposed
by the federal government or for
promoting, marketing or recommending
to another party any tax-related matters
addressed herein.