Presenting a live 90-minute webinar with interactive Q&A Leveraging New Markets Tax Credits to Finance Community Development: Latest Regs, Guidance and Legal Developments Twinning With Historic Tax Credits, Allocating COD Income to Partners, Using EB-5 Funds and More TUESDAY, OCTOBER 17, 2017 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: James O. Lang, Shareholder, Greenberg Traurig, Tampa, Fla. C. Randall Minor, Shareholder, Maynard Cooper & Gale, Birmingham, Ala. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted.
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Introduction to Key Acronyms and Parties in New Markets Tax Credit Transactions Community Development Financial Institutions (CDFI) Fund Investor Qualified Equity Investment (QEI) New Markets Tax Credit (NMTC) Community Development Entity (CDE) Qualified Low-Income Community Investment (QLICI) Qualified Active Low-Income Community Business (QALICB) Low-Income Community Leverage Lender 5
Structuring an NMTC deal (cont d) Identify Any Project Team Constraints Accounting Matters Bandwidth/Capacity for Complexity & Ongoing Reporting Requirements Debt Service Coverage Ratio / Project Economics Existing Loan Covenants Financial Return Hurdles Project Readiness Real Estate/Title Matters Required Authorizations/Approvals Required Fee Reserves Sponsor Equity Tax Matters Time Valuation ( true debt tax opinions) Finalize the Transaction Team Sponsor 6
Typical NMTC Leverage Loan Structure Figure 1. NMTC Structure on Closing Day Tax Credit Investor Source Loan/Sponsor Equity (Leverage Lender) $6,724,000 Loan $3,900,000 Credits $3,276,000 Cash Investment Fund (Investor Member) Tax Credit Investor Equity QEI: $10,000,000 Tax Credit %: 39% Investor Ownership %: 100% Price/Credit: $0.84 Investor Equity $3,276,000 CDFI Fund Awardee (CDE) (Managing Member) Sub-Allocation Fee of $X $6,724,000 QLICI A Note Sub-CDE 99.9% owned by Investment Fund $10,000,000 QEI $3,276,000 QLICI B Note Borrower (QALICB) QLICI A $6,724,000 QLICI B 3,276,000 Total $10,000,000 7
Typical NMTC Tax Opinions Related to Transaction Structure Importance of tax opinions and tax structure in NMTC leveraged transactions Typically should level analysis Typical tax opinions: Entity tax classification Non-Qualified Financial Property test opinion True Debt opinion True Lease (or tax ownership) opinion Economic substance opinion/substance over Form/Step Transaction Reimbursable costs opinion (based on FAQ guidance and recent scrutiny) Financing Transaction opinion Tax credit pass through eligibility opinion Long term indebtedness opinion Tax entity differentiation opinion Overall Tax Opinion 8
Typical NMTC Qualification Tax Opinions Typical Qualification Opinions: Qualified Active Low-Income Community Business qualification status Qualified Low-Income Community Investment status Reasonable Expectations opinion Gross Assets test opinion Tangible Property/Services test opinion Intangible Property (business in intangible property) test opinion Sin Business opinion Residential rental/housing opinion Active business opinion Farming opinion Collectibles opinion Control opinion Portion of Business 9
NMTC Mechanics: Options for Funding/Structuring the Leverage Loan Sponsor/Affiliate Sources New Equity Upper Tier Debt primarily secured by pledge of investment fund s membership interest in sub- CDE and direct guarantees (typically by the Sponsor/Affiliate) may be secured by other collateral cannot be directly secured by QALICB assets principal repayment possible structured A Note Commonly Used Other Sources Bridged Equity (reimbursable costs) [bridged] EB-5 funds State NMTCs Grant Proceeds Bonds (tax-exempt vs. taxable) 10
First Principals on Historic Tax Credits Historic Boardwalk Impacts from Historic Boardwalk Hall, LLC v. Commissioner True Partnership and Partnership reallocation Risk allocation Impact on tax credit industry 11
Historic Tax Credits Safe Harbor Revenue Procedure 2014-12 Sponsor s Interest Investor s Interest Minimum Contribution (20%) 75% Fixed Contribution Permissible Guaranties Impermissible Guaranties Unwind (Partnership Flips and Sale of Interests) Examples 13
Twin Deals: HTC Safe Harbor and New Markets Tax Credits Debt versus Equity Leveraged Model NMTC (most common) Pooled Model Direct Equity Investment HTC/NMTC Transactions Risk Allocation Special Issues with Same Investor True Debt Economic Substance Doctrine/Step Transaction/Substance over Form Considerations 14
Typical NMTC Unwind Step 1: Exercise of Put/Call Option to Relating to Membership Interests in the Investment Fund (See Figure 2) Step 2: Exercise of Redemption Option Relating to Membership Interests in the Sub-CDE (See Figure 3) Step 3: Dissolution of Investment Fund (and/or Sub-CDE) (See Figure 4) Step 4: Refinance of QLICI A Note Step 5: Forgiveness of QLICI B Note 15
Figure 2. NMTC Structure After Exercise of Put/Call Option Relating to Membership Interests in the Investment Fund Source Loan/Sponsor Equity (Leverage Lender) 100% Ownership Investment Fund (Investor Member) $10,000,000 QEI $6,724,000 QLICI A Note Sub-CDE 99.9% owned by Investment Fund $3,276,000 QLICI B Note CDFI Fund Awardee (CDE) (Managing Member) Borrower (QALICB) QLICI A $6,724,000 QLICI B 3,276,000 Total $10,000,000 16
Figure 3. NMTC Structure After Exercise of Redemption Option Relating to Membership Interests in the Sub-CDE Source Loan/Sponsor Equity (Leverage Lender) 100% Ownership Investment Fund (Sponsor as Investor Member) $6,724,000 QLICI A Note $3,276,000 QLICI B Note Borrower (QALICB) QLICI A $6,724,000 QLICI B 3,276,000 Total $10,000,000 Note: For simplicity, this step depicts the typical unwind sequence preferred by investors and CDEs in NMTC transactions; transaction documents executed in connection with a given transaction may permit other unwind sequences that may be employed at the option of the parties thereto. 17
Figure 4. NMTC Structure After Dissolution of Investment Fund (and/or Sub-CDE) Sponsor $6,724,000 QLICI A Note $3,276,000 QLICI B Note Borrower (QALICB) QLICI A $6,724,000 QLICI B 3,276,000 Total $10,000,000 18
Allocation of Costs in an Unwind Put/Call Considerations Repayment/Refinance of A Note/Leverage Loan B Note Considerations/COD Income General Timing Considerations Loss of Institutional Knowledge Transaction Costs Accounting CDE Legal Other 20
Cancellation of Indebtedness Considerations Unwind Process Discuss Potential Acquisition of Debt by an Affiliate Tax Exempt vs. For Profit Entities Discussions prior to closing NMTC transaction Tax Strategy Planning during life of transaction Section 108(e) and (i) of the Internal Revenue Code Impact of Tax Reform and corporate structuring considerations 21
Restructuring/Workouts; Recapture Risk Reasonable Expectations Test definition of control Recapture Events During 7-year Compliance Period CDE ceases to be a QCDE Substantially All requirement is not met Redemption of QEI by CDE Statutory Cure/Reinvestment Options Key Transaction Document Provisions Cure/Reinvestment Limitations on Redeployment Investor Indemnifications/Guarantees Removal of Managing Member/General Partner New QALICB New Tax Opinions 22
Legislative Developments Unified Framework Future of Tax Credit Programs NMTC Program Developments FEMA Designations and Resiliency Efforts Go Zone Proposals Healthy Foods Healthcare Nonmetropolitan Counties Targeted States Minority Impacts Infrastructure Tax Credits Tax Rates and Pricing Community Reinvestment Act Status of State NMTC Programs 23
Thank You James O. Lang Greenberg Traurig langjim@gtlaw.com C. Randall Minor Maynard Cooper & Gale rminor@maynardcooper.com 24