Indiana Redevelopment Corporation

Indiana Redevelopment Corporation

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New Markets Tax Credits

Indiana Statewide Conference on Housing and Community

Economic Development

September 14, 2005

Paul JonesIce Miller

[email protected]

Julian RodgersHouse Investments

[email protected]

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• 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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• Annual qualified investment pool which generates NMTCs: – 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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• 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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• 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: – 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

• 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 DEBT MEMBER

Investment NMTCLoan Interest and final payoff

INVESTMENT FUND, LLC99.99% Investor Partner in Sub of CDE

Investment Interest and final payoffNMTC

SUB of CDE NMTC CDE NMTC CDFI FundIRC FUNDING LLC IRC

Loan 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

• Preliminary Discussion and Review• Meetings and Detailed information• IRC loan approval• Closing

Timing: 30-90 days

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Information Required

• Preliminary Discussion– Project/Investment Description– Location– Community impact (jobs created or

retained)– Principals involved– Estimated financial needs

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Example of NMTC Transaction

• 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 DEBT LENDER

CDC Bank Lender

Investment Return Loan Return NMTC's Interest Payments

Final Loan Payment

LEVERAGE PARTNERInvesting LLC

99.99% Investor Partner in Sub of CDE

Equity/ Loan Investment Return(NMTC Basis) Interest Payments

Loan RepaymentNMTC's

SUB of CDE NMTC CDEIndiana Redevelopment Fund Entity IRC Allocates NMTC's CDFI Fund

FEE/ RSVE for Investment

Loan ReturnInterest PaymentsLoan Repayment

Note A Note B

PROJECT ENTITY DEVELOPER

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Example (cont.)

Traditional

Bank Loan

First Mortgage Bank Loan $6,500,000

Interest Rate LIBOR + 150

(Say an average of 6%)

Term 5 Years

Amortization 20 Years

Annual Debt Service Amortized $558,816

Loan Balance end of Term $5,035,880

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Example (cont.)

Traditional NMTC

Bank LoanStructure

First Mortgage IRC Loan 6,500,000 7,000,000 NMTC Investment 2,101,890

Interest Rate LIBOR + 150 LIBOR + 150 Bank Loan Investment 4,898,110

(Say an average of 6%) 7,000,000

Term 5 Years 7 Years

Amortization 20 Years Less NMTC Costs 445,000

Net to Project 6,555,000

264,930 Principal Deposited in savings account

293,886 Interest PaymentsAnnual Debt Service Amortized 558,816 558,816 Annual CostsLoan Bal. End of 5 year term 5,518,500

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The Benefits of NMTC

Increased Loan Term

Reduced Guarantee by reduced required annual payments.

Reduced loan balance

Documents

Indiana Redevelopment Corporation