BOARD OF REGENTS BRIEFING PAPER - Nevada System of …system.nevada.edu/tasks/sites/Nshe/assets/File/... · BOARD OF REGENTS . BRIEFING PAPER. 1. Agenda Item Title: New Markets Tax

BOARD OF REGENTS BRIEFING PAPER

1. Agenda Item Title: New Markets Tax Credit Program

Meeting Date: June 11 - 12, 2015

2. BACKGROUND & POLICY CONTEXT OF ISSUE:

UNLV wanted to investigate the option of using the New Market Tax Credit (NMTC) Program as part of our capital development plans. The NMTC Program is complex and in order to execute a transaction specialized consultants are required, UNLV looked to bring in an experienced consultant to assist us with the evaluation of the NMTC Program. The JABarrett Company was engaged by UNLV to research the possibility of utilizing the NMTC Program to fund capital projects, and they put together a team that included Snell & Wilmer, Attorneys, and CohnReznick LLP, Certified Public Accountants. After evaluation of the NMTC Program, UNLV believes it is a viable option that should be considered to help fund UNLV and NSHE capital needs in the future; however, the program has many requirements that are unique and therefore, UNLV proposes to present the requirements to the Board of Regents. UNLV seeks to gain a sense of Board support to bring forward specific projects in the future using NMTC as a part of the financing program. UNLV will provide the Board with a general overview of the Federal and State of Nevada NMTC Programs and discuss how NSHE can utilize the program as a capital source. Critical points that will be addressed and explained include the following:

• The Program does not represent business as usual and unique features must be supported. • The site for any capital project needs to be in a designated census tract area qualified for

the NMTC Program. • The capital project must also address how it improves employment and income levels in

the census tract area. • A special purpose entity (Qualifed Active Low-Income Community Business- QALICB)

is created and maintained as the “owner” of the capital improvement, subject to a ground lease. The QALICB would have a separate Board of Directors and its purpose would be to meet the NMTC criteria focused not only on the capital project, but also improving employment and income levels in the census tract area.

• The beginning “Financing” provided by the NMTC program starts as a traditional loan yet essentially ends after 7 years (when the tax credits are fully earned), pursuant to an upfront agreement between the project and the investor.

• Overall fees for NMTC programs are not insignificant; however, even accounting for these fees the net benefit to the project can be substantial.

3. SPECIFIC ACTIONS BEING RECOMMENDED OR REQUESTED: UNLV President Len Jessup and will present for information the Federal and State New Market Tax Credit program and its unique opportunities for providing funding for capital projects. The goal of this presentation is to provide information for the Board on the requirements for the NMTC program, and to gain a sense of Board support if specific projects were brought forward in the future, for individual Board action at that time, that used the NMTC Programs (federal and/or state). 4. IMPETUS (WHY NOW?): Nevada has become an area that is now designated by NMTC Community Development Entity’s as an attractive market for quality investment opportunities, especially the Nevada System of Higher Education. Further, the State of Nevada in the 2013 Legislative Session authorized a State New Markets Tax Credit program with a similar goal of stimulating investment.

(BUSINESS & FINANCE COMMITTEE 06/11/15) Ref. BF-5, Page 1 of 20

5. BULLET POINTS TO SUPPORT REQUEST/RECOMMENDATION: N/A – Information only 6. POTENTIAL ARGUMENTS AGAINST THE REQUEST/RECOMMENDATION: N/A – Information only 7. ALTERNATIVE(S) TO WHAT IS BEING REQUESTED/RECOMMENDED: N/A – Information only 8. COMPLIANCE WITH BOARD POLICY: Consistent With Current Board Policy: Title #_____ Chapter #_____ Section #_______ Amends Current Board Policy: Title #_____ Chapter #_____ Section #_______ Amends Current Procedures & Guidelines Manual: Chapter #_____ Section #_______ Other:________________________________________________________________________ Fiscal Impact: Yes_____ No X Explain:____________________________________________________________


The New Markets Tax Credit Program A Source of Capital Funds for the Nevada System of Higher Education to Build and Expand Facilities and Programs

April, 17 2015 (BUSINESS & FINANCE COMMITTEE 06/11/15) Ref. BF-5, Page 3 of 20

Purpose of Meeting

Introduction NMTC Program – Federal State Project Examples Closing

1. To provide a general overview of the Federal and State of Nevada New Markets Tax Credits (NMTC) Programs

2. Discuss how Nevada System of Higher Education (NSHE) can utilize the program as a capital source

3. Receive Board Support to bring forward specific projects using NMTC’s as a part of the financing program


Key Insights on NMTCs for NSHE


*Properly structured, NMTCs are effectively grants and can be viewed as equity in the project • The Program does not represent business as usual, and unique features must be

supported. • The site for any capital project needs to be in a designated census tract area

qualified for the NMTC program. • The capital project must also address how it improves employment and income

levels in the census tract area. • A special purpose entity (Qualified Active Low-Income Community Business -

QALICB) is created and maintained as the “owner” of the capital improvement, subject to a ground lease. The QALICB would have a separate Board of Directors and its purpose would be not only the capital project purpose, but also the NMTC criteria of improving employment and income levels in the census tract.

• The beginning “Financing” provided by the NMTC program starts as a traditional loan yet essentially ends after 7 years (when the tax credits are fully earned), pursuant to an upfront agreement between the project and the investor

• Overall fees for NMTC programs are not insignificant; however, even accounting for these fees the net benefit to the project can be substantial.


Sample of Universities Using NMTCs Institution Use Capital Investment

University of Massachusetts Super Computer Facility $25m University of Cumberland Health & Sciences Building $16m Rutgers University Business School $38m Boricua College Academic & Administrative Building $11m Xavier University University Station Development $5m

Kent State University Hotel & Conference Center $7m Federal/$2.5m State

University of Lousiville Nucleus Innovation Center Life-Sciences Park $20m

University of Miami Life Science Research Park $5.7m Carolinas Campus of the Edward Via College of Osteopathic Medicine Osteopathic Medical School $2.6m

Spartanburg Community College Rehabilitation of Downtown Campus $9m

University of Massachusetts et al Green High Performance Computing Center In process

Wake Forest University Health Services/ Forsyth Technicial Community College Wake Forest Innovation Quarter $8.2m

University of Maryland Biopark $10.3m

Introduction NMTC Program – Federal State Project Examples Closing (BUSINESS & FINANCE COMMITTEE 06/11/15) Ref. BF-5, Page 6 of 20

Federal NMTC Summary


Authorized in the Community Renewal Tax Relief Act of 2000, first allocations made in 2003

Administered by the U.S. Dept. of Treasury’s Community Development Financial Institutions Fund (CDFI Fund)

Policy Objective: Increase flow and availability of capital in traditionally under-served (low-income) communities

Mechanism: Federal income tax credits in exchange for equity investments in Community Development Entities


Federal NMTC Results


$31.1B invested in qualified projects through FY 2012

Thus far has been renewed with bipartisan support Strong competition to receive an allocation and for project to receive

investment

Here in Nevada… • As of FY 2012 only $1.98M of the $31.1B had been invested here • In 2012 Nevada was identified as a priority target for NMTC • In 2014 City of Las Vegas’ Las Vegas Community Development

Investment Corporation received a $28M allocation


Federal NMTC Process


Key Participants

U.S. Treasury Dept. CDFI Fund

Community

Development Entities (CDE’s)

Investors Low-Income Community

Projects


Federal NMTC Key Participants – Investors and Community Development Entities (CDE)


First, Investors make an equity investment in a CDE Second, Investors are provided a tax credit (to reduce their federal

income taxes) over a seven year period Third, CDEs place capital into low-income community projects Finally, Investors bare the risk of project’s non-compliance for seven

years and CDEs ensure compliance Examples of CDEs and Investors: Wells Fargo, JP Morgan Chase, US

Bank, Bank of America, etc.


Federal NMTC Key Participants – Low-Income Community Projects


First, Project must be in a qualified location • Must be in a census tract that meets “distressed” or “severely distressed”

criterion; OR needs to meet at least two alternative requirements • To be competitive for NMTCs, location must be “severely distressed”

Second, Project must have demonstrated community impact to increase employment and income

Third, Project must have primary funds secured, in the form of donations, traditional or affiliate loans or other sources, so that it is demonstrated that without the NMTC funds the project would not proceed

Fourth, Project receives funds for development Finally, Project must maintain compliance


Nevada NMTC Summary


Authorized by the Nevada New Markets Job Act in 2013 Legislature

Administered by the Nevada Department of Business and Industry Requirements: Generally follow federal NMTC requirements (notably adds

small business requirement) Policy Objective: Provide access to capital for Nevada small businesses,

attract additional investment into distressed areas, and attract private capital investment in areas in need of job growth and economic development

Mechanism: $200M in tax credits against premium tax imposed on insurance companies in exchange for investing in qualified CDEs (BUSINESS & FINANCE COMMITTEE 06/11/15) Ref. BF-5, Page 12 of 20

Nevada NMTC Results


All Nevada NMTCs were to be placed by Dec. 23, 2014; a six month cure period was issued, starting in mid January and concluding around mid July to have deals assembled

Approximately 10 deals finalized as of now; numerous other deals rumored to be in process and expected to close by mid July

• 501(c)(3) nonprofits are most common beneficiaries thus far Currently there is no legislation to renew Nevada NMTC Program

• Some legislators have indicated an openness to consider renewal • SB317 has been introduced to modify existing wording to expand the

use of the state NMTC Program


Fina

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Source and Use of Funds – For a Hypothetical $58m project

Source and Use of Funds – On the Books of the QALICB -For a Hypothetical $58m project

Sources From State Fund and Pledges $40,276,767 To be Raised $7,000,000

Federal NMTC Gross Proceeds (Less CDE Fees) $14,075,000 NMTC Proceeds Net of

Fees: $10.8m

Total Sources $61,351,767

Uses Building Costs $58,051,767 Federal CDE Reserves (Asset Management Fees) $1,750,000

Total NMTC Fees: $3.3m Federal CDE Reserves (Operating Expenses) $400,000

NMTC Transaction Costs $1,150,000

Total Uses $61,351,767

Sources CDE Loan A - University $33,425,000 CDE Loan B - Investor $14,075,000 Equity Funding to Project from University $13,851,767


Uses Building Costs $58,051,767 Federal CDE Reserves (Asset Management Fees) $1,750,000 Federal CDE Reserves (Operating Expenses) $400,000 NMTC Transaction Costs $1,150,000



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University Lender

$58m University Project

University Equity

Federal Sub CDEs (5)

Federal Investment Fund (99.99%)

Federal NMTC Investor (100%)

CDEs (.01%)


Exam

ple

Fede

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Sta

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Source and Use of Funds – For a Hypothetical $58m project using Federal & State NMTC

Source and Use of Funds -On the books of the QALICB– For a Hypothetical $58m project using Federal & State NMTC

Sources From State Funds and Pledges $39,434,850 To be Raised $0 Federal NMTC Gross Proceeds (Less CDE Fees) $14,075,000 NMTC Proceeds Net of

Fees: $18.6m State NMTC Gross Proceeds $10,080,980


Uses Building Costs $58,051,767 Federal CDE Reserves (Asset Management Fees) $1,750,000

Total NMTC Fees: $5.54m

Federal CDE Reserves (Operating Expenses) $400,000 State CDE Reserves (Asset Management Fees) $1,754,813 State CDE Upfront Fees $334,250 NMTC Transaction Costs $1,300,000


Sources CDE Loan A - University $33,425,000 CDE Loan B - Investor $14,075,000 Equity Funding to Project from University $16,090,830


Uses Building Costs $58,051,767

Federal CDE Reserves (Asset Management Fees) $1,750,000 Federal CDE Reserves (Operating Expenses) $400,000 State CDE Reserves (Asset Management Fees) $1,754,813 State CDE Upfront Fees $334,250 NMTC Transaction Costs $1,300,000

Total Uses $63,590,830 (BUSINESS & FINANCE COMMITTEE 06/11/15) Ref. BF-5, Page 16 of 20

Fina

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Fede

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University Lender

$58m University Project University Equity

State NMTC Investor

(100%)

Federal NMTC

Investor (100%)

CDEs

(.01%)

Federal Sub CDEs (5)

Federal Investment Fund (99.99%)

State Sub CDEs

State Investment Fund (99.99%)

(5)


Closing Remarks

Introduction NMTC Program – Federal State Where UNLV Fits Closing

NMTCs are a powerful financing tool, and essentially are grants The NMTC Federal Program has been used extensively across

the United States at many higher education institutions- accepted and best practices have been established to serve as guidelines Board support to bring forward specific NMTC projects will

provide an opportunity to raise significant funds for capital projects from a new source for Nevada.


New Markets Tax Credit Advisory Team


The JABarrett Company Business Advisors

Snell & Wilmer Attorneys

CohnReznick Certified Public Accountants


References


NMTC Program Evaluation: http://www.cdfifund.gov/docs/2013/bea/NMTC%20Program%20Evaluation%20Executive%20Summary.pdf CDFI Fact Sheet http://www.cdfifund.gov/docs/factsheets/CDFI_NMTC.pdf NMTC Award Book 2013 http://www.cdfifund.gov/docs/nmtc/2013/2013_NMTC_Program_Award_Book_06052014.pdf NMTC Coalition http://nmtccoalition.org/wp-content/uploads/NMTC-Progress-Report-2014.pdf NMTC Coalition Fact Sheet http://nmtccoalition.org/fact-sheet/ CDFI Fund Awardees Profiles http://www.cdfifund.gov/awardees/db/profile.asp?controlNumber=178SOXSPUB20RLFRDK77IOJLXR169OWVHRE135FLN89FGKPNBJ194DMJETX108XASPSIPO238XAUIPMEU238GTWEJSA163&programName=NMTC


Documents

BOARD OF REGENTS BRIEFING PAPER - Nevada System of …system.nevada.edu/tasks/sites/Nshe/assets/File/... · BOARD OF REGENTS . BRIEFING PAPER. 1. Agenda Item Title: New Markets Tax