Michael I. Sanders and Megan Christensen. September 20, 2013 ABA Tax Section Exempt Organizations Meeting San Francisco, CA

Transcription

1 Use of the New Markets Tax Credit by Tax-Exempt Entities Michael I. Sanders and Megan Christensen Blank Rome LLP September 20, 2013 ABA Tax Section Exempt Organizations Meeting San Francisco, CA

2 NMTC Overview: Opportunity to subsidize or provide gap financing in a qualified census tract. Benefits to developers, businesses and charities. Major investors such as Goldman Sachs, US Bank, JPMorgan Chase, or PNC buy the credits and provide cash infusion to the development which may not be paid back at the end of the 7-year compliance period.

3 New Markets Tax Credit A Government Sponsored Joint Venture Vehicle -- $36.5 billion in NMTC allocated through 2013; subject to renewal by Congress. Purpose: The new markets tax credit (NMTC) serves as a way to provide subsidy or gap financing to real estate developments, business activities, or charitable operations planned in qualified census tracts (high poverty rate or low median family income). What does it provide? 39% tax credit on the capital invested in a community development entity (CDE), over 7 years (5% in yrs 1-3; 6% in yrs 4-7). Who benefits from the credit? The investor (typically national banks, insurance companies) making an investment in a CDE gets a tax credit of $0.39 for every $1 invested and CRA credit, which under a leveraged structure yields in excess of a 10% after-tax return. The CDE directs capital into qualified projects or businesses. The investor is not repaid its equity investment. Eligible Investments: Community businesses, including e.g. hospitals, charter schools. Commercial or mixed-use real estate projects (at least 20% of gross income from commercial component).

4 Basic Structure Leveraged Lender 8 Fund 2 Investor QEI NMTCs Treasury CDFI Fund Allocation Authority CDE Community Development Entity (CDE) 10 Equity or Loan QLICI QALICB Qualified Active Low-Income Community Business

5 NMTC Basics - Requirements Low-Income Community - 45D(e) Qualified Census Tract: Poverty rate 20%; or Median Family Income ( MFI ) 80% of applicable area MFI. Preferred if severely distressed (Poverty rate > 30%, MFI 60% of applicable area MFI, or unemployment 1.5x national average) or otherwise underserved communities (15 potential criteria) (NMTC Application Q.24) Targeted Population (Treas. Reg. 1.45D-1(d)(9)) Qualified Business - 45D(d)(3); 1397C(d); 1.45D-1(d)(5) Generally any business, except no Sin businesses, no farming, no intangibles. If business is rental of real property, must have gross rental income from commercial rents 20% (i.e., < 80% residential rental income).

6 NMTC Basics - Allocations Congress authorizes Treasury to allocate the credits to entities certified as Community Development Entities ( CDEs ) ( 45D(c)(1)): Partnership or corporation; Primary mission to serve low-income communities/persons; Maintain accountability to residents of low-income communities Competitive process through CDFI Fund to receive an allocation.

7 NMTC Basics - Investor Investor makes equity investment ( QEI )incde (QEI) CDE. ( 45D(b); 1.45D-1(c)) 1(c)) Investor receives tax credits = 39% of investment t over 7 years (5% in first 3 years; 6% in last 4 years). ( 45D(a); 1.45D-1(b)) 1(b)) QEI may not be redeemed in 7 year period. ( 45D(g)(1), (3)(C); 1.45D-1(e)) 1( Typically uses a leveraged structure.

8 NMTC Basics - CDE CDE receives QEI, which triggers tax credit to Investor. ( 45D(a); 1.45D-1(b)) CDE uses at least 85% of QEI to make loans or equity investments ( QLICIs ) in qualified project. ( 45D(b)(1)(B); 1.45D- 1(c)(1),(5)) (5)) At least 85% of QEI must remain outstanding for 7 years. ( 45D(g)(3); (g)( ) 1.45D-1(c)(5)(i); ()()() 1.45D- 1(e)(2)(ii)) Only receives payments of interest or distributions of income.

9 NMTC Basics - QALICB Project developer = Qualified Active Low-Income Community Business ( QALICB ). ( 45D(d)(2); 1.45D- 1(d)(4)) QALICB uses proceeds of QLICIs to operate business or construct property for rent (non-residential). ( 45D(d)(3), 1397C(d), 168(e)(2); 1.45D-1(d)(5)(ii)) Interest-only/income-only payments made. ( 1.45D-1(d)(2)) 5 requirements for QALICB: 50% Gross Income ( 45D(2)(A)(i); 1.45D-1(d)(4)(i)(A)); 1(d)(4)(i)(A)); 40% Use of Tangible Property ( 45D(2)(A)(ii); 1.45D- 1(d)(4)(i)(B)); 40% Employee Services Performed ( 45D(2)(A)(iii); ( ); 1.45D- 1(d)(4)(i)(C)); <5% Collectibles ( 45D(2)(A)(iv); 1.45D-1(d)(4)(i)(D)); and <5% Nonqualified Financial Property ( 45D(2)(A)(v); 1.45D- 1(d)(4)(i)(E)).

10 NMTC - Recapture Recapture events ( 45D(g); 1.45D-1(e)): 1(e)): No longer CDE; Less than 85% of QEI used in QLICI; or QEI is redeemed. d All i l l i d dit All previously claimed credits recaptured plus interest.

11 Opportunities for Nonprofits A Section 501(c)(3) organization (consistent with its charitable purpose), or other nonprofit, may play various roles in NMTC transactions: As CDE As QALICB As Leverage Lender

12 The Bradford

13 The Bradford Mixed-Use, Mixed-Income 105 Units in Bedford-Stuyvesant, Brooklyn. Ground floor retail of 9,700 s.f. for small businesses 21 units: families with 30% AMI ($23,760 for family of 4) 32 units: rents set at 125% AMI ($99,000 for family of 4) 51 units: rents set at 130% AMI ($102,960 for family of 4) affordable, sustainable and transit-oriented development Green elements On-site co-generation plant LEED Silver certification

14 The Bradford Bedford-Stuyvesant Restoration Corporation BRP Development Goldman Sachs (NMTC equity) 2 CDEs

15 The Bradford Condition Prior to Closing and Demo: Fully vacant retail and under-improved residential

16 The Bradford Work in Progress

17 KIPP NYC College Prep High School

18 KIPP NYC College Prep High School School forced to move twice in 2 years and lacking a permanent home. 125,000 s.f. school facility Annual education of 1,000 students in grades % expected to come from low-income communities 245 construction jobs 90 permanent faculty and staff jobs LEED Certified

19 KIPP NYC College Prep High School NYC Department t of Education JPMorgan Chase Robin Hood Foundation Multiple CDEs

20 CURRENT HOT ISSUES Construction Safe Harbor (NQFP) Issuance of Tax Opinion Planning Opportunities to Mitigate COD income tax consequences at exit (less of an issue for tax-exempt QALICBs) Exit Strategies & Use of Put-Call Options Workouts of Old Transactions

21 NMTCs & Tax-Exempt Entities QUESTIONS

22 Contact Us Blank Rome LLP 600 New Hampshire Ave., NW Washington, DC Michael I. Sanders Megan Christensen