NMTC Legal, Tax & Structuring Issues Roundtable. Jerry Breed Bryan Cave LLP Washington, DC

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1 NMTC Legal, Tax & Structuring Issues Roundtable Jerry Breed Bryan Cave LLP Washington, DC

2 REVENUE PROCEDURE ISSUES UNDER COMBINED NMTC/HTC TRANSACTIONS Applicable Sections of Revenue Procedure ( Guidance ): Section 4.01 provides: If the Investor receives an allocation of 47 rehabilitation credits from a Master Tenant Partnership, the Investor cannot also invest in the Developer Partnership other than through an indirect interest in the Developer Partnership held through the Master Tenant Partnership. This prohibition does not apply to a separately negotiated, distinct economic arrangement (e.g., a separate arm s length investment into the Developer Partnership to share in allocations of federal new markets tax credits or low income housing credits). Section 4.05(3), provides: A Developer Partnership, a Master Tenant Partnership, or the Principal of either the Developer Partnership or the Master Tenant Partnership may not lend any Investor the funds to acquire any part of the Investor s interest in the Partnership or guarantee or otherwise insure any indebtedness incurred or created in connection with the Investor s acquisition of its Partnership Interest.

3 Diagram 1: 2-Investor, No HTC Leverage Structure for Federal HTC/NMTC Transaction* Diagram #1: 2-Investor, No HTC Leverage Structure for Federal HTC/NMTC Transaction* Leverage Loan LEVERAGE LOAN Sources: Developer Equity XYZ Bank Leverage Loan HTC Bridge Loan INVESTMENT FUND, LLC 100% - owned NMTC Investor New Markets Equity Federal NMTC Investor NMTCs CDE Fee Qualified Equity Investments NMTCs Credits and Interest Payments Federal HTC Ivestor Community Development Entity (CDE) NMTC Sub-Allocation Subsidiary CDE (.01% CDE) (99.99% Investment Fund) HTC Equity HTCs QLICI Loans QLICI Debt Service Developer's Managing Member DEVELOPER PARTNERSHIP (LESSOR & QALICB) (80% - Developers Managing Member 20% Master Tenant Partnership) * No leverage of HTC equity. * Allow for developer equity leverage. * QLICI equity rather than debt allowed if reasonable expectations test can be met. "Separate and distinct" (Sec satisfied). Master Lease HTC Equity Master Lease Payments MASTER TENANT PARTNERSHIP (1% owned by Developer's Managing Member) (99% owned by HTC Investor)

4 Diagram #2: One-Investor, One-CDE, Two-SubCDE Structure for Federal HTC/NMTC Transaction* Diagram 2: One-Investor, One-CDE, Two-SubCDE Structure for Federal HTC/NMTC Transaction* Provides for HTC leverage. Allows leverage of developer equity. Also could be done with two investors or two allocatees. Satisfies separate and distinct criteria of Section 4.01 of Revenue Procedure HTC equity may need to be split between equity, debt or Section 467 rental payments to meet Reasonable Expectations Test. ISSUE: Not compliant with Revenue Procedure

5 Diagram 3: One-Investor, One-Allocatee, Two-SubCDE (Developer owning 1% of SubCDE #2) Structure for Federal HTC/NMTC Transaction* Diagram #3: One-Investor, One-Allocatee, Two-SubCDE (Developer owning 1% of SubCDE #2) Structure for Federal HTC/NMTC Transaction* Qualified Equity Investment ( QEI ) NMTCs Credits and Interest Payments 98.99% HTCs & 100% NMTCs HTC/NMTC Equity (1 or more QEIs) A Developer's Managing Member * Developer makes non-qei capital contribution of 1% to Subsidiary CDE #2. * 100% of NMTC/HTC investor contribution to Subsidiary CDE #2 designated as QEI(s). * Provides for NMTC enhancement of HTC equity. * Allows for NMTC leverage of developer equity. * Also could be done with two investors. Equity QLICIs possible if sufficient sponsor equity into Lessor to meet Reasonable Expectation Safeharbor. Satisfies "separate and distinct" criteria of Section 4.01 of Revenue Procedure * HTC equity may need to be split between equity, debt and Section 467 rental payments to meet Reasonable Expectations Test. * Subsidiary CDE #2 treated as Partnership for purposes of Revenue Procedure I. ISSUE: Bridge financing for subsequent installments

6 Diagram 4: NMTC/HTC Twin Structure NMTC Investor $37 equity QEI $137 Fund $100 loan Affiliate Leverage Lender QLICI Loan $137 Sub-CDE $100 loan Funded in initial $20 installment plus $80 subsequent installments $80 loan repayment Bridge Lender For subsequent HTC equity installments QALICB Master lease payments Master Tenant $100 equity installments HTC Investor rent Sub-Tenants Note: NMTC and HTC Investors are identical or in the same corporate group. Issues: 1. Indirect investment under Developer Financing Code 4.05(3) 3. Cash Return to Investor and reasonableness opinion