New Markets Tax Credits. How to close a gap in a project s financing and add a layer of tax credit equity to the capital stack

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1 New Markets Tax Credits How to close a gap in a project s financing and add a layer of tax credit equity to the capital stack

CONNECT WITH US Presenter Michael Ross President, Principal +1

com Michael Ross, president and principal of Baker Tilly Capital,

Baker Tilly Virchow Krause, LLP, and partner with Baker Tilly, has

He specializes in real estate and comprehensive project finance for

2 CONNECT WITH US Presenter Michael Ross President, Principal +1 (512) Michael Ross, president and principal of Baker Tilly Capital, LLC, the wholly-owned private investment banking subsidiary of Baker Tilly Virchow Krause, LLP, and partner with Baker Tilly, has been with the firm since He specializes in real estate and comprehensive project finance for development projects. Additionally, Mike is a licensed investment banker and CPA. bakertilly.com Baker Tilly Virchow Krause,

3 INTRODUCTION About Baker Tilly

4 Today s discussion Program overview and benefits Leverage transaction structure About Baker Tilly: services, experience and timeline

5 1 Program overview and benefits

PROGRAM OVERVIEW What are New Markets Tax Credits? Congress passed the Community Renewal Tax Relief Act of 2000.

6 PROGRAM OVERVIEW What are New Markets Tax Credits? Congress passed the Community Renewal Tax Relief Act of This created the New Markets Tax Credit (NMTC) program which encourages investment in low-income communities. The program was extended in 2015 for five years and the most recent round of allocation was awarded in early 2018.

7 NEW MARKETS TAX CREDITS Program overview

NEW MARKETS TAX CREDITS Program overview CDEs have authority to sell the federal tax credits to third party investors, where the proceeds are used to fund investments in qualifying not-for-profits,

8 NEW MARKETS TAX CREDITS Program overview CDEs have authority to sell the federal tax credits to third party investors, where the proceeds are used to fund investments in qualifying not-for-profits, operating businesses and real estate projects located in low-income communities CDEs use a competitive process to search for and identify qualifying businesses and real estate developments The proceeds can fund up to 25 percent of a project cost

9 NEW MARKETS TAX CREDITS Critical distinction 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.

10 THE MATH How it works NMTC allocation $10,000,000 NMTC rate 39% Tax credits $3,900,000 Investor discounts and costs 55% Net NMTC cash to the project $2,415,000 Important: an allocation does not equal cash

11 IS MY PROJECT ELIGIBLE? Minimum project qualifications and mapping tool Must be a Qualified Active Low-Income community Business (QALICB) Geographic requirements Business located in a low-income community Poverty rate for census tract is at least 20 percent Median family income does not exceed 80 percent of the surrounding area Other factors, such as: Brownfield HUD TIF Medical

12 IS MY PROJECT ELIGIBLE? Baker Tilly s mapping tool Find eligible areas at bakertilly.com/nmtc-lihtc-tax-credit-mapping-tool

13 IS MY PROJECT ELIGIBLE? Strong QALICB candidate and project profile Located in a highly distressed census tract, defined as one of the following: Poverty > 30 percent Medium income < 60 percent of statewide Unemployment > 1.5 times national average Non-metropolitan county Community impact Job creation, unmet goods or services, etc. Part of an existing plan for economic revitalization Readiness Other sources of funding committed Approvals all in place

14 IS MY PROJECT ELIGIBLE? Attractive project characteristics overview Creation of direct and indirect permanent jobs Increased tax base Environmental remediation Creation of construction jobs Blight removal Attract and/or retain skilled work Green oriented and/or technology development Addition of new goods and services to underserved area

15 Program benefits Economic benefits to recipient Additional capital to fund projects, including: new facilities, expansions or equipment Low cost of capital Below-market interest rates Flexible loan terms NMTC benefit does not typically need to be repaid Community benefits 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 lowincome communities

16 2 Leverage transaction structure

17 NEW MARKETS TAX CREDITS Transaction diagram NMTC equity investor $ Equity Investment fund $ Loan Leverage lender $ Qualified Equity Investment Sub-community development entity NMTC allocation CDE allocatee $ Qualified Active Low Income Community Investment (QLICI Project sponsor Creates SPE QALICB/borrower

18 TRANSACTION DIAGRAM NMTC equity investor, leverage lender and investment fund NMTC equity investor $ Equity Investment fund $ Loan Leverage lender $ Qualified Equity Investment Sub-community development entity NMTC allocation CDE allocatee $ Qualified Active Low Income Community Investment (QLICI Project sponsor Creates SPE QALICB/borrower

19 TRANSACTION DIAGRAM NMTC equity investor and leverage lender NMTC equity investor Tax credit buyer, typically a financial institution, receives the benefit of the NMTCs and community reinvestment act credit Credits received over a seven year period Year 1-3 = 5 percent Year 4-7 = 6 percent Total benefit = 39 percent Investor typically pays $0.80 to $0.84 for NMTCs Ongoing management and monitoring of the investment fund required Investor frequently acts as leverage lender Leverage lender Typically new or existing senior leader subordinate noteholder, or equity investor (can be a combination of multiple sources Needs to execute forbearance agreement indicating will not foreclose for the length of the NMTC investment No amortization of loan for length of NMTC investment During compliance period, agrees to lend funds to another QALICB if existing QALICB ceases to exist Collateral consists of an assignment of LLC member interests versus direct assignment of collateral

20 TRANSACTION DIAGRAM Investment fund Combination of an equity investment from a NMTC investor and a loan from a leverage lender Funds used to make an equity investment in the sub-cde Investment fund is owned by the NMTC investor

21 TRANSACTION DIAGRAM CDE allocatee and sub-community development entity NMTC equity investor $ Equity Investment fund $ Loan Leverage lender $ Qualified Equity Investment Sub-community development entity NMTC allocation CDE allocatee $ Qualified Active Low Income Community Investment (QLICI Project sponsor Creates SPE QALICB/borrower

TRANSACTION DIAGRAM CDE allocatee and sub-community development entity Community Development Entity (CDE) CDEs have a primary mission of providing investment capital for low-income communities

22 TRANSACTION DIAGRAM CDE allocatee and sub-community development entity Community Development Entity (CDE) CDEs have a primary mission of providing investment capital for low-income communities Allocated authority by CDFI to issue to investors NMTCs in exchange for equity investment in the sub-cde Responsibility for ongoing monitoring and maintenance of sub-cde Typically paid a placement fee, an annual management fee and possibly an exit fee Sub-community development entity A sub-cde is a special purpose entity set up specifically for each NMTC project Substantially all of Qualified Equity Investment (QEI) received by the sub-cde must be invest in a QALICB Owned by investment fund (99.99%) and CDE (00.01%) with management and compliance responsibility of the CDE Placement fee paid to CDE typically ranging from 2 to 10 percent prior to investing in QALICB

23 TRANSACTION DIAGRAM Qualified Active Low-Income Community Business/borrower NMTC equity investor $ Equity Investment fund $ Loan Leverage lender $ Qualified Equity Investment Sub-community development entity NMTC allocation CDE allocatee $ Qualified Active Low Income Community Investment (QLICI Project sponsor Creates SPE QALICB/borrower

24 TRANSACTION DIAGRAM Qualified Active Low-Income Community Business/borrower Geographic restrictions Qualified businesses >50 percent of gross income is derived from business in a low-income community >40 percent of the tangible property is located in a low-income community >40 percent of the services are performed by the employees in a low-income community <5 percent of property is collectibles not held primarily for sale <5 percent of property is non-qualified financing property Ineligible activities Residential rental property (80 percent) or more of income from residential dwelling units Certain businesses Race tracks Golf course Gambling facilities Liquor stores Certain farming businesses Massage business

Program obstacles Seven year forbearance agreement (the compliance

the event of a default, required to re-lend funds to another QALICB

seven years with QALICB requirements Personal guarantee on QALICB

25 Program obstacles Seven year forbearance agreement (the compliance period) No principal amortization for length of NMTC investment In the event of a default, required to re-lend funds to another QALICB for the duration of the compliance period Must be compliant for seven years with QALICB requirements Personal guarantee on QALICB status often required Additional reporting requirements AVAILABILITY OF CREDITS

26 STRENGTHENING COMMUNITIES NMTC program summary Enhance economy Create jobs Improve low-income communities

27 3 About Baker Tilly: services, experience and timeline

28 About Baker Tilly Advisory, tax and assurance 3,150 talented and passionate individuals strong, Baker Tilly is a leading advisory, tax and assurance firm whose specialized professionals guide clients through an ever-changing business world, helping them win now and anticipate tomorrow. We have grown to become one of the 15 largest accounting and advisory firms in the U.S. by broadening our service offerings and expanding our geographic presence to meet the evolving needs of clients. Headquartered in Chicago, IL with more than 30 office locations coast to coast Top 15 largest accounting and advisory firm in the U.S. by Accounting Today s 2018 list of Top 100 Firms 2018 Great Place to Work by Best Workplaces Member of Baker Tilly International, a worldwide network of independent accounting and business advisory firms in 147 territories, with 33,600 professionals

A WORLD OF RESOURCES About Baker Tilly Capital Baker Tilly Capital is a boutique investment bank specializing in merger and acquisition (M&A), capital sourcing, project finance and corporate finance

29 A WORLD OF RESOURCES About Baker Tilly Capital Baker Tilly Capital is a boutique investment bank specializing in merger and acquisition (M&A), capital sourcing, project finance and corporate finance advisory services. Baker Tilly Capital is a registered broker-dealer, member FINRA and SIPC. Comprehensive credits and incentives solutions Our team of 80 professionals has experience in municipal, state, federal and international incentives programs and negotiations. Our value of closed transactions is in excess of $10 billion. We can help you navigate your options, including: New Markets Tax Credits (NMTC) State and local credits and incentives Job creation and retention credits Tax Increment Financing (TIF) Property Assessed Clean Energy (PACE) Historic Tax Credits Opportunity Zones

30 ABOUT BAKER TILLY NMTC experience

Services for borrowers Determine NMTC eligibility Design transaction structure Analyze community impact Prepare executive summary for CDEs Identify

31 Services for borrowers Determine NMTC eligibility Design transaction structure Analyze community impact Prepare executive summary for CDEs Identify CDEs Obtain term sheets and negotiate terms Discuss MTC structure implications Source the NMTC investor Prepare financial model Assist with closing

32 A WORLD OF RESOURCES Estimated project timeline PHASE 1: EDUCATION AND DOCUMENT PREPARATION PHASE 2: SOLICITATION OF ALLOCATEES PHASE 3: ALLOCATEE DUE DILIGENCE PHASE 4: NEGOTIATION, DOCUMENTATION AND MODEL STRUCTURING

Tilly Capital, LLC +1 (512) 975 7290 michael.ross@bakertilly.

33 QUESTIONS? Connect with us Michael Ross President and Principal of Baker Tilly Capital, LLC +1 (512) Nate Voss Principal, National NMTC Practice Leader +1 (608) bakertilly.com/nmtc

New Markets Tax Credits How to close a gap in a project s financing and add a layer of tax credit equity to the capital stack This information should not be construed as a recommendation, an offer of

34 New Markets Tax Credits How to close a gap in a project s financing and add a layer of tax credit equity to the capital stack This information should not be construed as a recommendation, an offer of services, or an offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The reader should not rely on this information other than as authorized by a written agreement with Baker Tilly Capital, LLC. The commentaries provided are opinions of Baker Tilly Capital, LLC and are for informational purposes only. While the information is deemed reliable, Baker Tilly Capital, LLC cannot guarantee its accuracy, completeness, or suitability for any purpose and makes no warranties with regard to the results to be obtained from its use, or whether any expressed course of events will actually occur. Securities involve risk and possible loss of principal. Past performance does not guarantee future results. No compensation has been paid to person providing a testimonial. Any testimonial is not representative of the experiences of other clients and is not indicative of future performance or success. Securities, when offered, and transaction advisory services are offered through Baker Tilly Capital, LLC, Member FINRA and SIPC; Office of Supervisory Jurisdiction located at Ten Terrace Court, Madison, WI 53718; phone Baker Tilly Capital, LLC is a wholly-owned subsidiary of Baker Tilly Virchow Krause, LLP, an accounting firm. Baker Tilly Virchow Krause, LLP trading as Baker Tilly is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities Baker Tilly Virchow Krause, LLP

Opportunity Zones. How to capitalize the funds and get OZ equity into a project

Opportunity Zones. How to capitalize the funds and get OZ equity into a project Opportunity Zones How to capitalize the funds and get OZ equity into a project CONNECT WITH US Presenter Michael Ross President, Principal +1 (512) 975 7290 michael.ross@bakertilly.com Michael Ross, president