New Market Tax Credits Presentation
Tax Exempt Sponsors
Seminar – September 14, 2010
Panelists:
Steven Paul, Partner, Tax
Nicholas Romanos, Partner Tax
Moderator:
Andrew Grumet – Tax-Exempt Organizations
New Market Tax Credits
Summary of Benefits
 NMTC’s can account for more than 20% of project costs.
 This presentation will focus on a project with a cost of $9.5m
of which $2.2m is derived from the sale of NMTC.
 NMTC investors typically derive their return solely from the
NMTC effectively making their investments like grants which
the sponsor need not repay.
Principal Constraints
 Project must be in a qualified census tract
 The Non-Profit Sponsor of the Project must raise the balance
of the funds, $7.3m in our example, and if it does so by
borrowing, the Project generally cannot be mortgaged to
secure such borrowing.
What are New Market Tax Credits
(NMTCs)? - Introduction
 Historical
 Community Renewal Tax Relief Act of 2000
 Are they still available?
 What is the forecast for 2010/2011?
 NMTC provides investors (individuals, financial
institutions, other corporations, etc.) with a tax credit for
investing in communities that are economically
distressed or consist of low-income populations.
Boston, MA NTMC Qualifying
Census Tracts
New York City, NY NTMC Qualifying
Census Tracts
How do they work?
 Terminology –
 Community Development Financial Institutions Fund
(CDFI Fund) Part of U.S. Treasury
 Community Development Entities (CDEs)
 Qualified Equity Investments (QEIs)
 Qualified Active Low Income Community Business
(QALICBs)
 Qualified Low Income Community Investments
(QLICIs)
 NMTC Investor/Leverage Fund
 Leverage Lender (can be project sponsor but not
QALICB)
 CDFI Fund Application/Approval Process
NMTC Financing Structure: Overview
Lender
(Sponsor)
NMTC Financing Structure:
Community Development Entities (CDEs)
 NMTC Allocatees, typically banks and other for-profit
entities, nonprofits and state agencies, create these
vehicles through which NMTCs investments are made.
 Must apply for certification by the CDFI Fund in order to
receive tax credit allocations.
 Must show that their primary mission is to serve the
needs of, or provide investment capital via equity or
loans to, low-income communities or individuals.
 Must be either partnerships or corporations for tax
purposes.
NMTC Financing Structure: Qualified
Equity Investments (QEIs)
 Investors’ equity investment in the CDE
 CDE sells NMTCs for cash to investors in exchange for
investors’ equity investment in the CDE
 Includes proceeds from the Leverage Loan
 New Markets Tax Credit amount equals 39% of the QEI
and is claimed over 7 years, beginning in the year the
QEI is made: 5% of the QEI in each of the first three
years and 6% of the QEI in each of the next four years
 Current pricing of the NMTC is in the range of $.65-$.70
for each $1 of credit
 In our example, $10m of QEI generates $3.9m of
NMTC which, in turn, generates $2.7m of NMTC
investment.
NMTC Financing Structure: Qualified Active
Low Income Community Business (QALICBs)
 Real Estate Owner. May be either a for-profit or
nonprofit entity. Nonprofits often create 501(c)(3)
supporting organizations to hold real estate for lease to
sponsor.
 QALICB must:
 generate at least 50% of its annual gross income by
conducting business in a low-income community
 use at least 40% of its tangible property within a lowincome community and perform at least 40% of their
services in a low-income community (if no employees,
85% of its assets are located in such a community.)
 not more than 5% of the assets of a Qualified Business
can consist of “collectibles” or “nonqualified financial
property”
 be either a partnership or corporation for tax purposes.
NMTC Financing Structure: Qualified
Low Income Community Investments (QLICIs)
 Capital or equity investment in, or loan to, a QALICB
from CDE
 Includes proceeds from the NMTC Equity
 Includes proceeds from the Leverage Loan
 Must be either partnerships or corporations for tax
purposes.
NMTC Financing Structure: NMTC
Investor/Leverage Fund
 Purchaser of New Market Tax Credit
 Typically banks, insurance companies or other
financial/investment institutions
 Invests equity and proceeds of Leverage Loan into CDE
through an entity created by NMTC Investor as funding
vehicle for QEIs (“Leverage Fund”).
 Leverage Fund is Borrower of Leverage Loan
 Equity investment of NMTC Investor in exchange for
Leverage Fund interest
 Combines both NMTC equity investment and Leverage
Loan into one or more QEIs, which is the equity
investment in the CDE.
NMTC Financing Structure: Leverage
Lender
 Sponsor makes one or more Leverage Loans to
Leverage Fund.
 Increases amount of QEI, which increases the amount
of NMTC available to be sold.
NMTC Financing Structure: Lease to
Sponsor
 Nonprofits often create 501(c)(3) supporting
organizations to hold real estate for lease to sponsor.
 Leasehold Mortgage may be available because
leasehold is not a QALICB asset.
3rd Party Lenders
3P Lender
Secured by Sponsor’s
assets but not
QALICB’s assets
Project Sponsor /
501(c)(3)
Project Sponsor /
501(c)(3)
QALICB
New 501(c)(3) (Property Owner)
 Alternative structure may have 3rd party lender lending directly to
the leverage fund with Sponsor as guarantor of loans.
NMTC Financing Structure: Exit
 Step 1 – Investor Exits through an exercise of a Put/Call
– Sponsor acquires ownership of the Leverage Fund or
its interest in the CDE.
 Step 2 – Structure collapsed through the cancellation of
QLICI and QEI financing – Sponsor dissolves CDE and
acquires QLICI loan in satisfaction of Leverage Loan.
EAPD Contacts
Steven L. Paul, Partner
Boston
617 239 0442
spaul@eapdlaw.com
Nicholas V. Romanos, Partner
Boston
617 239 0379
nromanos@eapdlaw.com
Andrew M. Grumet, Partner
New York
212.912.2753
agrumet@eapdlaw.com