How to Make the Most of $12 Billion in New Market Tax Credits. ULI 2006 Fall Meeting Denver, Colorado

Transcription

1 How to Make the Most of $12 Billion in New Market Tax Credits ULI 2006 Fall Meeting Denver, Colorado

2 Today s Panelists Linda Davenport, Deputy Director for Policy and Programs, CDFI Fund, Dept. of Treasury Charles Werhane, COO, Enterprise Community Investment Gwen Knight, Vice President Development, The DESCO Group Charles Loveman, Executive Director, Heritage Housing Partners

3 Community Development Financial Institutions (CDFI) Fund New Markets Tax Credit Program Urban Land Institute October 2007

4 CDFI Fund Mission and Background Created in 1994 Mission: To expand the capacity of financial institutions to provide credit, capital, and financial services to underserved populations and economically distressed communities in the United States. 4 4

5 CDFI Fund Initiatives CDFI Program: Provides assistance to CDFIs and emerging CDFIs Native Initiatives: Supports development and growth of Native American CDFIs. Bank Enterprise Award (BEA) Program: Provides awards to insured depository institutions for increasing investments in CDFIs and/or activities in distressed communities New Markets Tax Credit (NMTC) Program 5 5

6 Overview of NMTC Program Enacted on December 21, 2000 Part of the Community Renewal Tax Relief Act of 2000 Creates a tax credit for equity investments in Community Development Entities (CDEs) 6 6

7 Credit Amount Credit taken over a 7-year period Credit rate: 5% in each of the first 3 years 6% in each of the final 4 years Equals 39% of amount of original investment 7 7

8 Qualified Low-Income Community Investments Eligible Investments: Any capital or equity investment in, or loan to, any Qualified Active Low-Income Community Business (QALICB) Any equity investment in, or loan to, any CDE Purchase of a loan from another CDE if the loan is a QLICI Financial Counseling and Other Services (FCOS) to businesses located in, or residents of, LICs 8 8

9 1: Investing in QALICBs Eligible QALICB activities may include: Loans or investments to businesses located in low income census tracts Development of commercial, industrial and retail real estate projects (including community facilities) in low income census tracts Development of for-sale housing in low income census tracts 9 9

10 Ineligible Activities Residential rental property: Buildings which derive 80% or more of income from residential dwelling units Certain types of businesses: Golf courses Race tracks Gambling facilities Certain farming businesses Stores where the principal business is the sale of alcoholic beverages Refer to IRS regulations for additional details 10 10

11 Summary Graphic CDFI Fund CDE must offer credits to investors within 5 years Community Development Entity (For-profit only) CDEs must make QLICIs within 12 months of receipt of Investor QEIs Investing in or Lending to QALICBs Financial Counseling Investing in or Lending to CDEs Private Investors QEI must stay invested in CDE for 7 years Purchasing Loans from CDEs 11 11

12 2007 Round Deadlines (Anticipated) Deadline Anticipated release of NOAA and application materials CDE Certification Applications must be postmarked on or before Notification of intent to submit a paper Alloc. App. Date by which prior-year allocatees must issue the requisite percentage of QEIs Submission of Allocation Application (online or paper version) Attachments and signature page must be postmarked on or before Date December 1, 2006 January 12, 2007 February 14, 2007 February 15, 2007 February 28, 2007 March 5, 2007 Additional details to be addressed in NOAA 12 12

13 Awards to Date The Fund has certified over 2,200 entities as CDEs. In the first four allocation rounds, the Fund received over 1,070 applications for allocations of NMTCs. These entities collectively requested over $107 billion in allocation authority. The Fund has made 233 awards totaling $12.1 billion in allocation authority

14 2006 (Fourth Round) Awardees 63 allocatees were selected to receive a total of $4.1 billion in allocation authority 50 CDEs received general allocation authority totaling $3.5 billion 13 additional CDEs were provided with a total of $600 million in special allocation authority authorized by the Gulf Opportunity Act of 2005 for specific use in the recovery and redevelopment of the Hurricane Katrina Gulf Opportunity Zone (GO Zone)

15 Fourth Round Allocatees* Award Profile by Entity Type $ in Millions $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- 0 $ $1, $269 4 $1,258 CDFIs Non-Profits Gov't Entities Banks/Public Cos # Allocatees Award Amt Allocatees *Please note that the allocation amount represented in this chart does not total $4.1 billion awarded, since some allocatees are classified in more than one entity type category (e.g. some CDFIs are also counted as non-profits; some banks are also counted as publicly traded entities) and some allocatees do not fall under any of the categories identified

16 Market Served (4 th round allocatees) Estimated Use of NMTC Fourth Round Minor Urban 23% $732 Rural 18% Major Urban 59% $937 $2,431 Major Urban Minor Urban Rural ($ in Millions) 16 16

17 Estimated Activities (4 th round allocatees) Loans/Investments Other CDEs Non-Real Estate 7% Businesses 32% $305 $106 Loan Purchase 3% Real Estate 58% $1,310 $2,370 Real Estate Non-Real Estate Bus. Loans/Invsts other CDEs Loan Purchase ($ in Millions) 17 17

18 Investor Activity to Date Over $4.82 billion in QEIs have been made into CDEs since the program s inception. This represents over sixty percent of the $8 billion allocated under the first three allocation rounds

19 Sample Activities The development of a high-tech business incubator in inner city Detroit that will provide opportunities for minority and women business owners. Development of a cultural and community center in San Diego, CA on the site of an abandoned factory. Investment in a sustainable forest project in rural Maine that will restore operations to a formerly closed mill, creating 650 new jobs. Development of a grocery-anchored retail center in Washington, DC on the site of a closed military facility. Investment in a commercial airplane parts manufacturer to expand operations and open a new plant, creating 500 new jobs in rural Oklahoma

20 CDFI Fund Contact Information Visit the Fund s website at Contact the Fund directly: Program Support Ph: (202) Fax: (202) cdfihelp@cdfi.treas.gov IT Support Ph: (202) ithelpdesk@cdfi.treas.gov 20 20

21 Leading America s Investment in Communities ULI Fall Meeting Denver, CO October 2006 Charles R. Werhane Vice Chairman and Chief Operating Officer

22 Leading America s Investment In Communities NMTC Simple Model Investor CDFI Fund Tax Credit Yield & Return on Capital Equity (QEI) Community Development Entity (CDE) (For Profit Only) Loan Interest Business/Project (QALICB)

23 Leading America s Investment In Communities How NMTC Benefits Projects Designed to enhance projects that have some positive economic return, but which may not be strong enough to support the market-rate returns required. Gap Financing Subsidized Debt NMTC can be used to create additional gap equity Example Assume $10M construction loan invested through a CDE along with $10M NMTC Allocation Generates $3.9M in tax credits, which would attract approximately $2.8M in tax credit equity Tax credit equity places no additional burden on project, and is paid back (principal and returns) entirely from the $3.9M in tax credits A lender can pass on a portion of its NMTC benefit to the borrower, through a reduction in the interest rate A project with lower cash flow can support a debt burden that is lower than what market-rate debt would require

24 Leading America s Investment In Communities NMTC Investment Distribution Funded as of 9/30/ to be Funded 2007 to be Funded

25 Leading America s Investment In Communities NMTC Investment Allocation by Type: Closed Deals (% of $) Industrial 3% Business 12% Other 14% Mixed Use 35% Retail/Office 36%

26 Leading America s Investment In Communities 2007 Pipeline Highlights $10.5 Million Mixed-Use commercial and residential $12.5 Million Mixed-Use commercial and residential $5 Million Mixed-Use commercial and residential $19.5 Million Mixed-Use commercial and residential $10.5 Million Retail Court Square Memphis, TN 17 th and Jackson Seattle, WA Jubilee Housing Washington, D.C. American Tobacco Durham, NC Milwaukee Grocery Milwaukee, WI

27 Leading America s Investment In Communities Asset South Campus Gateway East Baltimore Development Inc. National Affordable Home Builder Belvedere Square Retail Old Post Office Purpose 190 Residential Units 1200 space parking garage 250,000 sf. retail, 88,000 sf. Office Urban Redevelopment 80 acre site Financing for low income housing developer, Working Capital Retail services to low-income neighborhood 100,000 sf. Retail Rehab of significant historic office building in downtown St. Louis 242,000 sf. Target Census Tract Poverty Rate 46% Area Median Income 29% Poverty Rate 41% Area Median Income 35% Poverty Rate 24% Area Median Income 45% Poverty Rate 14% Area Median Income 64% Designated Redevelopment Area Enterprise Partners Growth Fund Community Redevelopment, Lines of Credit Community Redevelopment in Low-Income Census Tracts

28 Leading America s Investment In Communities Asset Maronda Manufacturing Purpose New Manufactured Housing Plant 240,000 sf. Industrial Facility Target Census Tract Poverty Rate 41% Area Median Income 51% Shaker Square Urban Redevelopment 160,000 sf. Retail Poverty Rate 14% Area Median Income 70% Fashion Square 33 East Main Model T Urban Redevelopment 47,000 sf. Commercial/Retail 96 residential units Urban Redevelopment Office 133,000 sf. Urban Redevelopment 35,000 sf. Commercial, 96 loft residential units Poverty Rate 23% Area Median Income 45% Poverty Rate 36% Area Median Income 82% Poverty Rate 34% Area Median Income 35%

29 Leading America s Investment In Communities Asset Ellicott Commons Purpose Urban Redevelopment 30,000 sf. Commercial, 59 Apartments Target Census Tract Poverty Rate 60% Redevelopment Area Portland School Other School Hope VI Poverty Rate 18% Area Median Income 75% E. 11 th Street Urban Redevelopment 57,000 sf. Poverty Rate 40% Area Median Income 37% Drury Hotel Fox Theater Urban Redevelopment Mixed-Use Hotel 305 Room Hotel Urban Redevelopment Theater Poverty Rate 38% Area Median Income 60% Poverty Rate 46.8% Area Median Income 45.1%

30 MONESSEN RIVERFRONT DEVELOPMENT Monessen, PA

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33 OVERVIEW OVERVIEW Farnham & Pfile Company, Inc., to construct two buildings totaling approximately 241,420 square feet in Monessen, PA Project costs of $7,421,500 Building to be leased to Maronda Manufacturing to house their truss operations.

34 PROJECT COSTS PROJECT COSTS Sources Uses Loan Borrower Land Costs 100, ,000 Construction Costs 6,785,000 6,785,000 Soft Costs 429,000 25, ,000 Financing Costs 17, ,5000 Totals 7,421,500 7,000,00 421,500

35 Farnham to borrow $7,000,000 from the CDE for development of the project. Farnham will own and lease the facility for at least 7 years. The interest rate on the loan would be 1.00%. At least 85% of CDE investment must be outstanding for 7 years. No prepayment until the end of the 7 th year. TERMS TERMS

36 BENEFITS Financial Return to the Investor Low Interest Rate Loan to the Developer Economic Impact to the Community

37 COMMUNITY IMPACT 100 new permanent jobs at the plant (75% local) 150 construction jobs Spurs additional development on adjacent sites New food pantry was built serving 600 local families Regional benefits boost jobs to 334 temp and 223 permanent

38 Urban Land Institute October 20, 2006 New Markets Tax Credits Gwen Knight

39 New Markets Tax Credits Three Developments Loughborough Commons University of Arizona Medical School Old Post Office

40 Loughborough Commons Retail Center St. Louis, Missouri

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44 Loughborough Commons St. Louis, Missouri Sources of Funds: Qualified Equity Investments: Construction Loan $8,045,000 Supplemental Loan 2,892,000 Funding of Fees and Costs 823,000 Total QEI $11,760,000 TIF and Community Improvement District 14,000,000 Owner s Equity + Net Proceeds of Property Sales 10,222,000 Total $35,982,000

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49 University of Arizona Medical School Phoenix, Arizona Sources of Funds: Qualified Equity Investment: Construction Loan $17,103,000 Supplemental Loan 6,097,000 Funding of Fees and Costs 1,800,000 Total QEI $25,000,000 Grant from City of Phoenix 2,700,000 Total Sources $27,700,000

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56 Old Post Office St. Louis, Missouri ATTY GEN. & SECY OF STATE Gallery TEACH FOR AMER., MO ARTS COUNCIL, MO DHSS

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87 New Markets Tax Credits Three Developments The DESCO Group New Markets Tax Credits QEIs: Loughborough Commons $11,760,000 University of Arizona Medical School 25,000,000 Old Post Office 22,500,000 Total $59,260,000

88 Using New Markets Tax Credits for Affordable For-Sale Housing ULI Denver Meeting October, 2006 Charles Loveman

89 HHP: Who We Are Affordable housing non-profit founded in 1998 HHP: Mission Affordable housing in (primarily) historic buildings Emphasis on homeownership Focus on preservation of traditional neighborhoods (not individual resources), especially in low income communities Especially concerned with historic properties threatened with demolition

90 Initial Business Model Acquire a vacant (usually foreclosed) property Perform minor to moderate rehab Sell rehabbed home to moderate-income first-time homebuyer

91 Typical Example: Merrill House Greene & Greene (circa 1910) Vacant and abandoned property purchased from Washington Mutual on a short pay Proposed to be demolished for small apartment project

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96 Typical Example: Magnolia Project Two historic houses (circa 1890) threatened with demolition Purchased nearby vacant lot zoned for 2 units; historic houses donated to HHP Moved historic houses to vacant lot; performed rehab

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101 Green Property one-half block (1.76 acres) of (mostly) historic houses threatened with demolition Opportunity to save historic resources and a large part of a traditional neighborhood Opportunity to turn renters into homeowners or otherwise provide relocation benefits Opportunity to develop a larger project economy of scale

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106 Fair Oaks Court property 14 existing structures; 11 are contributors to potential local historic district Was rented to 28 low- and moderate-income households Site fronts on a major boulevard (Fair Oaks Avenue) and abuts a traditional neighborhood undergoing gentrification

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113 How to develop for this project, given: Political Issues Neighborhood Issues Existing Tenants Cost and timing for acquisition (in a rising market) Overall cost of project

114 How to develop this project, given: Expensive site acquisition ($2.7 million) Expensive site development (underground parking) Expensive soft costs (wrap insurance; A&E) Expensive relocation (over $1.0 million) Expensive project

115 Total project cost was $15.75 million Total cost per unit was $358,000 Average sales price per unit is $225,000 ($101,300 low and $234,000 moderate) for 41 units at average size of 2.73 BR per unit Needed at least $128,000 per unit subsidy (grant; silent second mortgage; mortgage rate subsidy; etc.) to break even

116 How to pay for it Predevelopment & Construction Phase: Enterprise Acquisition Loan ($1.73 million) City of Pasadena CDC funds ($4.17 million) Construction Loan ($10.32 million) Net Proceeds from project phasing Take-out Phase State of California BEGIN Program ($930,000 approved) Additional Pasadena CDC funds ($630,000 approved) HACOLA Industry program ($1.25 million approved) Homebuyer First Mortgages & Downpayments (CalHFA)

117 Budget balanced Purchased site in April, 2004 Then watched construction commodity prices (lumber, concrete, steel) go through the roof Project costs increased by over $2.35 million; project revenues decreased by $800,000; total financial gap was $3.14 million Knew we needed additional funding Started chasing New Markets Tax Credits

118 To use NMTC s, we had to be in the right census tract, and we had to overcome 4 problems (at least) First, do we qualify (yes, Fair Oaks project is in a low income census tract with a 31% poverty rate)? Second, how to overcome the problem that investment dollars must be invested for at least 7 years? Third, need to have a solution for what to do with NMTC proceeds after sale of units (keep in the deal or re-deploy into another deal)? Fourth, how to overcome the problem that no more than 5% of our assets are in financial instruments (IRS exception for financing inventory)

119 We knew we could create credits if we ran the City of Pasadena s subsidy through an NMTC tax credit structure Credits from free City funds plus investor funds means we can borrow money from the NMTC investor, and repay investor with cents on the dollar

120 But first we needed an allocation Started chasing NMTC allocatees in summer, 2004 Got contingent commitments from 2 past allocatees, including Clearinghouse CDFI Clearinghouse received allocation in May, 2005, and committed $13.68 million to the deal

121 From May thru September, 2005, we looked for an investor No investor would do the project, because of the perceived redeployment risk Finally, in late September, Commercial Capital Bank committed to be NMTC investor, provided we closed in calendar year 2005 (and they would feel more comfortable if we could demonstrate a pipeline of eligible projects)

122 HHP was in negotiations with the City of Glendale, CA to acquire a 1-acre site with 3 historic houses, to be redeveloped for mixedincome homeownership housing HHP and Clearinghouse met with Glendale City Manager; explained benefits of NMTC program Glendale agreed to be the 2nd project in the 7-year cycle; Glendale committed $3.2 million into the deal

123 The $4.17 million from City of Pasadena plus $3.24 million from City of Glendale created $2.88 million of credits Commercial Capital invested $6.27 million, which created another $2.44 million in credits In total, tax credit raise was $5.33 million, against total investment of $6.27 million Commercial Capital gets the credits plus a cash-oncash return plus a partial return on equity after 7 years

124 Amount of Year Tax Credit % Tax Credit $ Investment $13,680, % $684, % $684, % $684, % $820, % $820, % $820, % $820,800 39% $5,335,200

125 Mortgage Subsidy Funds - City of Pasadena $4.2M Loan 2d Mortgages $3.2M Loan Mortgage Subsidy Funds - City of Glendale Investment LLC 2d Mortgages $6.3M Equity NMTC + $ Commercial Capital Bank 2d Mortgages $13.7 M Qualified Equity Investment Clearinghouse Repay with 2d Mortgages in year 7 $13.7 M Loans (3 loans) HHP Homeowner Subordinate Mortgages

126 What to do with the proceeds? Keep in the deal or re-deploy? Re-deployment is best outcome, but few NMTC investors will take the risk Could re-invest the proceeds by providing first mortgages to affordable buyers Could right-size the allocation so that no $ come out after all sales are completed

127 Reinvestment Option: Advantages Can use net proceeds from one deal to provide capital for a subsequent deal HHP could undertake (at least) 3 affordable homeownership projects during 7-year term The same amount of allocation ($13.68 million) helps produce 100 affordable units instead of 40 units Meets the intent of NMTC program; recycling allocation and investment dollars to create multiple projects within a 7-year investment horizon

128 Reinvestment Option: Disadvantages Reinvestment risk: must reinvest proceeds from one deal into another NMTC-eligible deal within 12 months Few investors willing to take the risk; most prefer a commercial project in a qualified census tract financed with a 7-year NMTC mini-perm; benefit of NMTC becomes lower interest rate only; and full repayment of principal at the end of the term For-sale housing doesn t fit the typical investment horizon

129 But Benefits of Reinvestment far outweigh Risks Clearinghouse CDFI & Commercial Capital Bank were willing to take reinvestment risk Creates opportunity for HHP to do multiple projects under one allocation NMTC investment becomes a revolving subsidy HHP designed the subsidy to draw down as each project is completed: subsidy to 1st (Pasadena) project is $2.96 million ($80,000 per affordable unit); subsidy to 2nd (Glendale) project is $1.05 million ($44,000 per affordable unit), and subsidy to 3rd project (new Glendale project) is $1.32 million ($55,000 per affordable unit)

130 From HHP s standpoint, the NMTC transaction becomes a very cheap loan 7-year term Repay city loans with 2nd mortgages of same face value Borrow $6.26 million in equity; repay investor with only $930,000 at the end of 7 years (because investor received $5.33 million in credits) HHP determines how to utilize the $5.3 million in free equity across a number of affordable forsale projects

131 NMTC s allow HHP to bring its own subsidy to a project: The total $13.68 million NMTC allocation provides a $12.75 million in total subsidy dollars (including city loans) to the transaction NMTC subsidy averages $62,300 per affordable unit over 3 separate for-sale projects!!!!!

132 Conclusions NMTC s are a great funding source for affordable homeownership, especially with public sector second mortgages If only HHP had more allocation...

133 Website Resources of Panelists * Today s powerpoint available from this website.