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New Markets Tax Credits An opportunity for your business
Agenda
1:00-1:30 Registration and Mingling
1:30-1:40 Welcome and General Remarks
1:40-2:00 Legislative and Local/National NMTC Economic Update
2:00-3:10 NMTC Basics and Lender/Investor Perspective
3:10-3:20 Break
3:20-3:35 Florida Community Loan Fund
3:35-3:50 Community Hospitality Healthcare Services
3:50-4:05 Raza Development Fund
4:10-4:30 Community Needs: Questions and Answers
Legislative and Local/National NMTC Economic Update
Legislative Report: NMTC Status
Expired December 31, 2014
2014 awards ($3.5 billion) will be announced in May or June
If the tax reform effort fails this year, NMTC must be
extended before the end of 2015
The next application round should open this summer, regardless of the status of an extension
President’s FY2016 Budget
Makes the NMTC permanent
Provides $5 billion in annual allocation authority
Extension Legislation: Senate (S. 591)
New Markets Tax Credit Extension Act of 2015
Increases allocation and makes the program permanent
Introduced by Senators Blunt (R-MO), Schumer (D-NY), Daines (R-MT), and Cardin (D-MD)
6 cosponsors
Extension Legislation: House (H.R. 855)
Introduced by Representatives Tiberi (R-OH), Neal (D-MA), and Reed (R-NY) 35 cosponsors Increases allocation and makes the program permanent
NMTC Awards to Local CDEs Community Development Entity City Year Amount
Capital Trust Agency Community Development Entity, LLC
Gulf Breeze 2008 $75,000,000
Community Hospitality Healthcare Services LLC Placida 2010 $63,000,000
Community Hospitality Healthcare Services LLC Placida 2012 $60,000,000
Community Hospitality Healthcare Services LLC Placida 2013 $60,000,000
Florida Community Loan Fund, Inc. Orlando 2003 $15,000,000
Florida Community Loan Fund, Inc. Orlando 2009 $45,000,000
Florida Community Loan Fund, Inc. Orlando 2010 $21,000,000
Florida Community Loan Fund, Inc. Orlando 2011 $30,000,000
Florida Community Loan Fund, Inc. Orlando 2012 $40,000,000
National Economic Impact (2003-2012)
NMTC Coalition’s December 2014 Economic Impact Report
$31 billion in NMTC financing to 3,800 projects totaling $63 billion in project costs
Nearly 750,000 jobs (457,487 construction jobs and 286,781 full-time equivalent jobs)
Jobs and economic activity pay for the cost of the program
$664 million in NMTC financing went to 81 projects
10,804 construction jobs 7,017 full-time jobs Source: A Decade of
the NMTC (2014, NMTC Coalition)
Arts 1%
Automotive 5%
Community Services 20%
Education 7%
Energy 2%
Grocery 6% Health
9% Hotel
5%
Housing 7%
Information Technology
1%
Manufacturing 11%
Mining 2%
Office 10%
Restaurant 2% Retail
5%
Science, Research & Technology
4%
Timberlands 1%
Florida Projects by Industry Sector (2003-2012)
NMTC Eligibility Statewide Tallahassee
NMTC Projects
Statewide Tallahassee
More Information
Fact Sheets, target lists, co-sponsorship lists on the NMTC Coalition website:
nmtccoalition.org
New Markets Tax Credits An opportunity for your business
Baker Tilly One of the top 12 accounting and advisory firms in the United
States according to Accounting Today’s 2014 list of “Top 100 Firms” One of nation’s foremost experts in NMTCs
• We operate our own CDEs (The Valued Advisor Fund and the Business Valued Advisor Fund), which have received combined allocations totaling $188.4 million in NMTCs
• Assisted in closing 150+ NMTC transactions to date, bringing investment value of over $4.7 billion to distressed communities nationwide through the deployment of $2.4 billion of NMTC allocation
• Worked with more than 60 CDEs on successfully structuring and closing transactions
• Authored over 30 award winning allocation applications totaling more than $2 billion in NMTC awards
• Provide back office operations to 9 CDEs managing over $900 million in deployed NMTC
Contact: • Terri Preston at [email protected] or 608-240-2546
Overview
What are New Markets Tax Credits? • First tax credit program to stimulate commercial investment in “low-
income communities” • The program is administered by the US Treasury Department
through a division call the CDFI Fund, in a unique public/private partnership with Community Development Entities (CDEs)
Overview
What is a “low-income community”? • Based on census tract data – median income and/or poverty rate • Qualifying vs. “Higher Distress”
― Includes unemployment, rural areas, Brownfield areas, designated Hot Zones, medically underserved areas, food deserts, Colonias and HUB Zones
• Qualifying census tracts in non-metropolitan counties automatically qualify as “higher distress”
• Qualifying census tracts can be located using the mapping program located on the CDFI Fund website at www.cdfifund.gov
Low-Income Community Investment
Overview
What is a “Community Development Entity”? • CDEs come in a variety of forms:
― An affiliate of a municipality to promote economic development ― An affiliate of a bank to help meet the bank’s community
reinvestment goal ― Non-profit and for-profit entities with a mission to serve low
income communities • CDEs have defined geographic service areas and are charged with
evaluating each potential NMTC transaction for community impact • CDEs can be found using a search engine on the CDFI Fund
website at www.cdfifund.gov
Overview
How does the program work? • Through a competitive application process, CDEs are annually
delegated NMTC allocation authority from the CDFI Fund. • CDEs are able to attract capital investments in their allocation, and
the proceeds are used to fund low interest rate, convertible loans or investments in qualifying businesses or commercial real estate developments.
• CDEs will search for qualifying businesses and real estate developments to provide NMTC-subsidized financing, which is also a competitive process.
Overview
How does the program work? • The NMTC proceeds typically fund about 20-25% of a project and
is paired (or “leveraged”) with owner equity, borrowed funds, or other grant/public funds, which in total must equal or exceed the amount of NMTC allocated to a deal.
• The borrower benefits from obtaining 20-25% of their project funding from a CDE that will offer flexible terms (e.g. subordination to other lenders), a low rate of interest (around 2%), interest-only terms for 7-years and may convert substantially all of the principal at maturity.
NMTC Program Benefits
Economic benefit to recipient • Capital to fund projects, business expansion or debt refinancing
― Tax credits are monetized to bring additional capital to the capital structure
• Low cost of capital • Flexible loan terms including longer amortization and higher LTV
ratios • Debt Conversion
― At the end of the 7-year compliance period a significant portion of the NMTC benefit may be converted to equity or carried as debt by an affiliate of the borrower or the borrower itself, depending on the circumstances of the transaction.
NMTC Program Benefits
Community benefit • Create additional economic development for the local community • Attract and retain skilled workforce • Bring new goods or services to underserved communities • Capital investment to underserved, qualified Low-Income
Communities (LIC)
Community Development Entity
CDEs have a primary mission of providing investment capital for low-income communities and are accountable to the residents of that community through a governing or advisory board
Responsibility for ongoing monitoring and maintenance of Sub-CDE
CDEs earn fees from deploying and managing the allocation, and those affiliated with banks are commonly eligible for Community Reinvestment Act (CRA) credit
Allocation authority history
$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0
Amou
nt ($
bil)
NMTC allocation authority history
*2009 includes an additional $1.5 billion round of authority from the American Recovery and Reinvestment Act
Through 2014, a total of $40 billion of authority has been allocated, averaging $40.2 million in the last round
26
Allocation authority history
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Amou
nt ($
mil)
Average NMTC Award
Critical distinctions
Unlike other tax credit programs, the NMTC does not “belong to” the qualified borrower. It was awarded to the CDE, to be monetized, with the proceeds invested in (or loaned to) a
business that qualifies for the subsidy.
A NMTC Allocation Cash
N E
W
M A
R K
E T
S
T A
X
C R
E D
I T
S
WORKING WITH 3RD PARTY ALLOCATEES - LEVERAGE MODEL STRUCTURE
Investment Fund
QALICB/Borrower
Sub CDE
CDE = Community Development Entity QEI = Qualified Equity Investment QLICI = Qualified Low Income Community Investment QALICB = Qualified Active Low Income Community Business
NMTC Equity Investor
Project Sponsor
Leverage Lender
Provides leverage into NMTC structure. Leverage loan sources include traditional providers like Chase or a regional bank, capital campaign funds, or monies from state or federal grant programs.
Invests capital to obtain tax credit benefit via equity contribution to investment fund, which flows through the sub CDE to support project financing needs.
.
Parent CDE
Receives NMTC allocation or authority from Treasury which it sub-allocates to sub CDEs, and makes loans (QLICIs) to borrower.
Allocation Credit
Typically a single purpose entity (SPE) created to act as the borrower for the NMTC funding as a Qualified Active Low-Income Community Business, per Treasury regulation.
The parent entity of the QALICB.
$ Loan
$ Equity
$ QEI
$ QLICI Creates SPE
Players in a leverage model structure
QEI
The Math
Here’s how it works:
The Math (estimated)
NMTC allocation $10,000,000
NMTC rate 39%
Tax credits $3,900,000
Investor monetization ($0.82 per credit example)
$3,198,000
Less estimated closing costs & fees $775,000
Net NMTC cash to the project: $2,423,000
*Numbers above are intended for purposes of an example only
NMTC Investor
Tax credit buyer, typically a financial institution, receives the benefit of the NMTCs and community reinvestment act credit
Credits purchased from a CDE and realized over a 7 year period • Years 1-3: 5% • Years 4-7: 6% • Total benefit of 39%
Investor currently pays about $0.80-0.84 in this market for NMTCs
May act as leverage lender No economic interest in the QALICB Main concern is to avoid recapture
McDonogh 42 Elementary School New Orleans, LA
• Generate strong returns on acceptable risk profile
• Achieve Community Reinvestment Goals • Make beneficial impacts on the communities
served • make these investments?
Why Do Investors choose specific deals?
Lender/Investor at a Glance Checklist for NMTC Financing
Business or real estate development is located in a designated
low-income community that’s considered higher distress ― Google Baker Tilly NMTC Mapping Tool or email us to ask
A substantial portion of tangible assets, revenue and employees are located in low-income community
Business is not engaged in, or leasing to, a “sin” business Project creates tangible community and economic outcomes Total project financing meets $5 million threshold Project sponsor has secured other necessary sources of
financing Confirm client interest and next steps
Qualifying Business or Development—the “QALICB”
Geographic restrictions • Business located in a Low-Income Community • Determined by census tract (see www.cdfifund.gov)
― Or Google: Baker Tilly NMTC Mapping Tool
Technical requirements • Over 50% of gross income is derived from the business activity
located within a Low-Income Community • Over 40% of the tangible property of the business is located in a
Low-Income Community • Over 40% of the services are performed by the employees are in a
Low-Income Community • Must not have more than 5% in either collectibles or non-qualified
financial assets
Qualifying Business or Development Ineligible activities
• Residential rental property ― Mixed use is permitted so long as over 20% of the rental income is
derived from commercial tenants
• Straight acquisition or refinance of rental property – must have “substantial rehab” (25% of acquisition basis) or be owner occupied
• Certain businesses:
― Race tracks & gambling facilities ― Golf courses & country clubs ― Liquor Stores ― Farming ― Massage & tanning businesses ― Undeveloped land holding
What makes a good QALICB candidate? Located in a “highly distressed” census tract – any one of the
following: • Poverty > 30% • Median Income < 60% of statewide • Unemployment > 1.5 times national average • Non-metropolitan county • Two of any secondary criteria
Community impact • Tangible community benefit – measured by quality job creation,
providing unmet goods & services to low income communities (grocery stores), environmentally sustainable construction, etc.
• Part of an existing plan for economic revitalization • “But for” test – NMTC fills a real funding gap that would otherwise not
happen Ready to go
• Other sources of funding are committed • Approvals all in place
Raza Development Fund
Raza Development Fund
• About Raza Development Fund
― Established 15 yrs ago as a 501 (c) 3 CDFI under the US Dept of Treasury
― National Service Area – Headquartered in Phoenix, AZ
― Lender
• Education & Childcare • Healthcare • Community Facilities • Affordable Housing
38
Raza Development Fund
• About Raza Development Fund
― Invest in Leaders – Not Simply Projects
― Track Record
― Community Impact
39
• RDF NMTC Program
― Community Development Financing Augmented by NMTCs
― Community Development Entity • 3 Awards - $103,000,000 • 11 Projects in 9 states
― Community Impact • 3,100+ low-income student quality education • 10,200 individuals access dignified health care options • 1,600,0000+ individuals utilize benefits from community facilities • Leveraged $150,000,000 private capital into severely distressed
communities
40
Raza Development Fund
Raza Development Fund • RDF NMTC Applicant Criteria
― Must Meet NMTC Program Eligibility Requirements ― Must Be Aligned with RDF’s Allocation Application Agreement and Business
Strategy
― Timing ― Sources of Funds
― Completed RDF NMTC Intake Form ― “But For Test” ― Expectation of Community Benefits ― Commitment to Compliance Requirements ― Priority Given to NCLR Affiliates
41
Raza Development Fund • Contacts
Carlos de Quesada, VeraCruz Advisory (RDF SE Region Representative) (954) 829-2561 [email protected] Melissa McDonald, RDF Investment Associate (602) 417-1421
42
Community Hospitality Healthcare Services
CHHS
Community Hospitality Healthcare Services (CHHS) is a national CDE that has received 3 allocations ($183 MM). The CDE provides financing for development, modernization, and operations of community facilities serving Low-Income Persons (LIP) and Low-Income Community (LIC) residents in severely distressed and Medically Underserved Areas nationwide.
Project funding provides for:
• Expansion of services • Construction and improvement of new and/or existing space • Job training • Workforce development • Computer systems and medical equipment
44
CHHS - Impact
Community Impacts provided: 1771 FTE jobs created
• 762 LIP accessible jobs • 779 LIC resident accessible jobs
1214 construction jobs created Annual services to 210,860 LIP
45
CHHS – Spectrum Health Services
The project involved the new construction of a 34,570 square foot building whose primary tenant is a Federally Qualified Health Center focused on serving the indigent and underinsured. 5201 Haverford Ave, Philadelphia, PA
46
CHHS – Spectrum Health Services
Distress Criteria 37.5% Poverty 47.8% of the AMI 3.5 x National Unemployment Rate Medically Underserved Area
47
CHHS – Spectrum Health Services
48
Community Alignment In developing the new comprehensive plan for the City of
Philadelphia, the City Council paid significant interest relative to stabilization and long-term growth of its neighborhoods. The plan calls for eight primary areas of focus, including areas such as preservation in such a historic city, increasing public green space, and providing for housing growth. In addition to citing economic development and growth in net jobs, the city council also cited the following which specifically supports the project under review: “Public services and utilities are customer service oriented and service delivery is equitable” as a key to long-term neighborhood success.” The project as designed conforms to and is in alignment with these goals and objectives.
CHHS – Spectrum Health Services
49
Community Impacts
Impacts
Sustained Jobs 60
Created Jobs 68
Construction Jobs 58
Services 82,000
Florida Community Loan Fund
FCLF is a statewide CDFI Founded in 1994 to provide a statewide source of flexible financing for non-profits working in community development. 3 Lending Programs
Through June 30, 2014:
Lending
188 loans and 14 NMTC Transactions
Over $195 million
Projects totaling over $670 million.
Impact
3,482 housing units
1.3 million sf of facility space
6,424 jobs created or retained
33,614 clients served annually
NMTC projects that FCLF looks for:
Community facilities Community health centers or health care related projects serving low income clients
Charter schools serving exclusively low-income students
Green-driven projects Solar
Renewable energy
High impact economic development projects Job creation (substantially from within the community)
Part of community redevelopment master plan
LEED-certified
Bringing new services to a low-income community a grocery store in a neighborhood that hasn't seen one in 20 years
a new or renovated building in a high distress CT that brings new business, services and jobs to the neighborhood.
Some of the projects that are qualified but FCLF will not do: museums;
hotels;
fast food restaurants
N E
W
M A
R K
E T
S
T A
X
C R
E D
I T
S
Investment Fund
QALICB/Borrower
Sub CDE
CDE = Community Development Entity QEI = Qualified Equity Investment QLICI = Qualified Low Income Community Investment QALICB = Qualified Active Low Income Community Business
NMTC Equity Investor
Project Sponsor
Leverage Lender
Parent CDE Allocation Credit
$ Loan
$ Equity
$ QEI
$ QLICI Creates SPE
Players in a leverage model structure
QEI
The Math in Action
Here’s how it worked:
The Math (actual transaction)
NMTC allocation (2 CDEs) $16,000,000
NMTC rate 39%
Tax credits $6,240,000
Investor monetization (avg. $0.78 per credit) $4,860,700
Less estimated closing costs & fees $1,098,858
Net NMTC cash to the project: $3,761,842
*Numbers above are intended for purposes of an example only
Borrower saw these benefits:
EQUITY Lower loan amount Construction interest costs lower due to significant project funding from
cash rather than debt Capital campaign focus for non-profit shifted to future phases rather than
focusing on completion of initial phase, building substantial momentum and community support
Begin project now, instead of waiting 2-4 years Jump starting the work on Phase II expansion of school and into another
county Broader exposure in local community and state and in business world for
project Exposed to completely new financial partners
Miracle Place before/after construction:
Community saw these benefits:
158 construction or permanent jobs 94 units of homeless housing created or renovated 172 daycare spaces New commercial kitchen assisting the borrowers provision of 20,000 meals annually Jump-starting Phase II
Expansion of public school to 192 students Creation of multi-use building on campus Expansion of food and client services into Pasco County Jump starting Phase III – housing services in Pasco County
Q & A
Thank you for your interest in serving our nation’s distressed communities
Please feel free to contact: [email protected]
To distress your project, please use the following link:
http://www.bakertilly.com/insights/new-markets-tax-credit-and-low-income-housing-
tax-credit-mapping-tool/
