Description
Help the Bank meet its Community Reinvestment Act Requirements, Commitment to Fostering Community and Economic Development
1
Toledo HTC Workshop
March 25, 2011
MICHAEL J. TALYOR
Senior Vice President – West Territory Executive
PNC Community Development Banking
(216)222-2293
[email protected]
2
Banking Perspective of Historic Tax Credits
?Commitment to Fostering Community and Economic
Development
?Help the Bank meet its Community Reinvestment Act
Requirements
?Profit Motive
?“It just Makes Sense”
- Leverage other private dollars - enhances property
values
- Creates affordable and market rate housing
- Augments revenues for federal, state and local
government
3
Project Structure/What the Developer Needs
?GAP Financing
?Part II certificate showing readiness to start
construction
?Additional equity equaling 5% - 10% of project costs
?Complete development budget for the project
?A forward commitment on the permanent mortgage is
not required but is preferred
?Developer must show experience in rehabilitation
construction and have acceptable credit history
4
Evaluation Process/Determining Feasibility
?Size of Allocation: The PNCCDC will consider both small investments
and large investments, $500,000 - $20,000,000.
?Debt Coverage*: Minimum of 1.20. * Depending on type of project
?Deferred Development Fee paid out of cash flow prior to the ending of
the 5-year compliance period is evaluated.
?Environmental Assessment: Required
?Term of Outstanding Debt: If a portion of the funding is raised through
debt, the term of the loan must not be less than 5 years (tax credit
compliance period).
?Reporting: Annual tax returns (1065 & K-1) and annual financial
statements.
5
Evaluation Process/Determining Feasibility (Cont.)
? Project must meet the community development definition: Community
development is defined as activities which primarily support affordable
housing, and community services which are targeted at low-to-moderate
income individuals or which promote economic development through
financing of small businesses and farms or which revitalize or stabilize
low-to-moderate income geographies.
? CRA Requirements: Investments consistent with the requirement under
the Community Reinvestment Act;
- The innovativeness of the project
- Responsiveness to credit and community development needs
- Other economic and community development spin off and market
impact
6
Calculating the Historic Preservation Tax Credit
? Federal Credit 20% of a project’s qualifying rehabilitation
expenditures (QRE’s)
? State of Ohio Credit 25% of QRE and is a refundable tax credit.
New legislation allows for the special
allocation of the credit.
? 10% Federal Credit For restoring older buildings that predate 1936.
This is a non-contributing structure by the
department of interior.
7
Calculating the Historic Preservation Tax Credit
? Acceptable
- Hard construction Cost for
Rehabilitation
- Architect’s Fees
- Construction Period Interest
Allocated to the Rehabilitation
- Development Fees Allocated to
the Rehabilitation
- Environmental Testing &
Remediation
- Properly Allocable Legal
Expense
- Historic Consultants
- Insurance & Taxes During
Construction
? Unacceptable
- Land
- Acquisition Costs
- Site Improvements
- Syndication Expenses
- Personal Property, e.g.,
Furniture & Equipment
- Financing Fees (non-
construction)
- Marketing Costs
General Examples of Acceptable and Unacceptable Cost for
Historic Basis Purposes
8
Pricing of Historic Tax Credits
? Depends on the following factors:
- Developer strength
- Investment size
- Capital contribution pay-in schedule
- Structure of return components
- Local market dynamics
Example: $1 million in Qualified Rehabilitation Expenditures X 20% = Your Credit or
$200,000. NCCDC with a 99% partnership interest as a limited partner will receive
$198,000 in credits. The market is approximately 85 - 95 cents of the dollar.
At 90 cents the GP will receive $178,200 for the credits.
State Credit Calculation: $250,000 x 99% = $247,500 x $.60 = $148,500.
Total investment for Federal and State: $326,700.
9
Syndication Structuring
? Limited Partnership/Limited Liability Company
? Placed in Service: The appropriate work has been completed which
allows for occupancy of either the entire building, or some identified
portion of the building.
? Project Completion Date
? Timing of Pay-ins and Investment Horizon
- Capital Contributions
?Can begin as early as construction start
?Can come in as late as near placement
? Investment Horizon
- Can begin as early as construction start
- Can come in as late as near placement
Developer
owns 1%
Investor
owns 99%
Pass-through
Entity
owns
Land and
Buildings
10
Guarantee Requirements
?Historic Tax Credit guarantee
?Construction completion guarantee
?Operating deficit guarantee equaling six months of operating
expenses and debt service coverage
?Development Fee
?Reserve Requirements
- Minimum building reserves set by the first mortgage
requirements
- Operating reserves equal to six months of operating
expenses and debt service
11
New Markets Tax Credits
Fundamentals
NMTC Synopsis
A federal tax credit available to those that provide
equity to certain certified entities that in turn lend
or invest in businesses (including non-profits)
located in low-income communities.
12
How They Work
QALICB* CDE
CDFI
Investor
Allocation
Qualified Equity
Investment Repayments
* Qualified Low Income Community Businesses
** Qualified Low income Community Investments
QLICIs ** Tax Credits
& Return
New Markets Tax Credits
13
New Markets Tax Credits
When is Rehabilitating Real Estate Qualified?
?Developing or renting non-residential real estate is qualified.
?Financing the developing of residential real estate (including multi-
family) is not qualified.
?Lending or investing in developers of residential real estate may be
qualified.
Note: Residential real estate is defined as “any building or
structure if 80% or more of the gross rental income from such
building or structure is rental income from dwelling units.”
14
New Markets Tax Credits
Recapture
?Potential recapture for 7-year period from the date of
investment in a CDE.
?Occurs if:
- The entity ceases to be a CDE; or
- At least 85% of the proceeds of the investment cease
to be invested in QLICIs (drops to 75% in year
seven); or
- The investment is redeemed.
15
Tax Issues
?Profit Motive
- Economic Profit Independent of Tax Benefits
- Cash Flow Distribution
- CRA Supporting Economic Participation
? Exit Strategies/Investor Buyout Strategy
- Fair Market Value Calculations
- Put and Call Provisions
16
Due Diligence Items/Checklist
? Existing Operating Agreement
? Certified Copy of Articles of
Organization and all amendments
? Survey
? Plans and Specifications
? Building Permit
? Availability of Utilities Letters
? Deed
? Owner’s Title Policy
? Notice of Commencement
? General Contractor
? Architect
? Corporate Resolutions
? Certificate of Good Standing
? Loan Documents
? UCC, tax lien search
? Litigation search
? Environmental Report
? Insurance Certificates
? Appraisal
? Initial Construction Budget
? Zoning Letter
? Financial Projections
? Financial Statement(s) of
Principals/Guarantors
? Federal HTC Part I & II application
? Local Approval
? State Part I Approval
? Federal and State Part III
? Commitment Letter
? Local Counsel Opinion
? Tax Opinion
? Development Agreement
? Unconditional Guaranty
? Estoppel Letter from Lender(s)
17
Common Pitfalls for First-Time Users of the
Federal Historic Tax Credits
?Having inadequate contingency in the development budget
?Presenting final drawings and commencing construction prior
to receiving Part II
?Allowing the general contractor to value engineer without
regard to NPS standards
?Using third-party consultants inefficiently
?Delaying contact with potential investors
?Coordinating equity with debt
doc_881201227.ppt
Help the Bank meet its Community Reinvestment Act Requirements, Commitment to Fostering Community and Economic Development
1
Toledo HTC Workshop
March 25, 2011
MICHAEL J. TALYOR
Senior Vice President – West Territory Executive
PNC Community Development Banking
(216)222-2293
[email protected]
2
Banking Perspective of Historic Tax Credits
?Commitment to Fostering Community and Economic
Development
?Help the Bank meet its Community Reinvestment Act
Requirements
?Profit Motive
?“It just Makes Sense”
- Leverage other private dollars - enhances property
values
- Creates affordable and market rate housing
- Augments revenues for federal, state and local
government
3
Project Structure/What the Developer Needs
?GAP Financing
?Part II certificate showing readiness to start
construction
?Additional equity equaling 5% - 10% of project costs
?Complete development budget for the project
?A forward commitment on the permanent mortgage is
not required but is preferred
?Developer must show experience in rehabilitation
construction and have acceptable credit history
4
Evaluation Process/Determining Feasibility
?Size of Allocation: The PNCCDC will consider both small investments
and large investments, $500,000 - $20,000,000.
?Debt Coverage*: Minimum of 1.20. * Depending on type of project
?Deferred Development Fee paid out of cash flow prior to the ending of
the 5-year compliance period is evaluated.
?Environmental Assessment: Required
?Term of Outstanding Debt: If a portion of the funding is raised through
debt, the term of the loan must not be less than 5 years (tax credit
compliance period).
?Reporting: Annual tax returns (1065 & K-1) and annual financial
statements.
5
Evaluation Process/Determining Feasibility (Cont.)
? Project must meet the community development definition: Community
development is defined as activities which primarily support affordable
housing, and community services which are targeted at low-to-moderate
income individuals or which promote economic development through
financing of small businesses and farms or which revitalize or stabilize
low-to-moderate income geographies.
? CRA Requirements: Investments consistent with the requirement under
the Community Reinvestment Act;
- The innovativeness of the project
- Responsiveness to credit and community development needs
- Other economic and community development spin off and market
impact
6
Calculating the Historic Preservation Tax Credit
? Federal Credit 20% of a project’s qualifying rehabilitation
expenditures (QRE’s)
? State of Ohio Credit 25% of QRE and is a refundable tax credit.
New legislation allows for the special
allocation of the credit.
? 10% Federal Credit For restoring older buildings that predate 1936.
This is a non-contributing structure by the
department of interior.
7
Calculating the Historic Preservation Tax Credit
? Acceptable
- Hard construction Cost for
Rehabilitation
- Architect’s Fees
- Construction Period Interest
Allocated to the Rehabilitation
- Development Fees Allocated to
the Rehabilitation
- Environmental Testing &
Remediation
- Properly Allocable Legal
Expense
- Historic Consultants
- Insurance & Taxes During
Construction
? Unacceptable
- Land
- Acquisition Costs
- Site Improvements
- Syndication Expenses
- Personal Property, e.g.,
Furniture & Equipment
- Financing Fees (non-
construction)
- Marketing Costs
General Examples of Acceptable and Unacceptable Cost for
Historic Basis Purposes
8
Pricing of Historic Tax Credits
? Depends on the following factors:
- Developer strength
- Investment size
- Capital contribution pay-in schedule
- Structure of return components
- Local market dynamics
Example: $1 million in Qualified Rehabilitation Expenditures X 20% = Your Credit or
$200,000. NCCDC with a 99% partnership interest as a limited partner will receive
$198,000 in credits. The market is approximately 85 - 95 cents of the dollar.
At 90 cents the GP will receive $178,200 for the credits.
State Credit Calculation: $250,000 x 99% = $247,500 x $.60 = $148,500.
Total investment for Federal and State: $326,700.
9
Syndication Structuring
? Limited Partnership/Limited Liability Company
? Placed in Service: The appropriate work has been completed which
allows for occupancy of either the entire building, or some identified
portion of the building.
? Project Completion Date
? Timing of Pay-ins and Investment Horizon
- Capital Contributions
?Can begin as early as construction start
?Can come in as late as near placement
? Investment Horizon
- Can begin as early as construction start
- Can come in as late as near placement
Developer
owns 1%
Investor
owns 99%
Pass-through
Entity
owns
Land and
Buildings
10
Guarantee Requirements
?Historic Tax Credit guarantee
?Construction completion guarantee
?Operating deficit guarantee equaling six months of operating
expenses and debt service coverage
?Development Fee
?Reserve Requirements
- Minimum building reserves set by the first mortgage
requirements
- Operating reserves equal to six months of operating
expenses and debt service
11
New Markets Tax Credits
Fundamentals
NMTC Synopsis
A federal tax credit available to those that provide
equity to certain certified entities that in turn lend
or invest in businesses (including non-profits)
located in low-income communities.
12
How They Work
QALICB* CDE
CDFI
Investor
Allocation
Qualified Equity
Investment Repayments
* Qualified Low Income Community Businesses
** Qualified Low income Community Investments
QLICIs ** Tax Credits
& Return
New Markets Tax Credits
13
New Markets Tax Credits
When is Rehabilitating Real Estate Qualified?
?Developing or renting non-residential real estate is qualified.
?Financing the developing of residential real estate (including multi-
family) is not qualified.
?Lending or investing in developers of residential real estate may be
qualified.
Note: Residential real estate is defined as “any building or
structure if 80% or more of the gross rental income from such
building or structure is rental income from dwelling units.”
14
New Markets Tax Credits
Recapture
?Potential recapture for 7-year period from the date of
investment in a CDE.
?Occurs if:
- The entity ceases to be a CDE; or
- At least 85% of the proceeds of the investment cease
to be invested in QLICIs (drops to 75% in year
seven); or
- The investment is redeemed.
15
Tax Issues
?Profit Motive
- Economic Profit Independent of Tax Benefits
- Cash Flow Distribution
- CRA Supporting Economic Participation
? Exit Strategies/Investor Buyout Strategy
- Fair Market Value Calculations
- Put and Call Provisions
16
Due Diligence Items/Checklist
? Existing Operating Agreement
? Certified Copy of Articles of
Organization and all amendments
? Survey
? Plans and Specifications
? Building Permit
? Availability of Utilities Letters
? Deed
? Owner’s Title Policy
? Notice of Commencement
? General Contractor
? Architect
? Corporate Resolutions
? Certificate of Good Standing
? Loan Documents
? UCC, tax lien search
? Litigation search
? Environmental Report
? Insurance Certificates
? Appraisal
? Initial Construction Budget
? Zoning Letter
? Financial Projections
? Financial Statement(s) of
Principals/Guarantors
? Federal HTC Part I & II application
? Local Approval
? State Part I Approval
? Federal and State Part III
? Commitment Letter
? Local Counsel Opinion
? Tax Opinion
? Development Agreement
? Unconditional Guaranty
? Estoppel Letter from Lender(s)
17
Common Pitfalls for First-Time Users of the
Federal Historic Tax Credits
?Having inadequate contingency in the development budget
?Presenting final drawings and commencing construction prior
to receiving Part II
?Allowing the general contractor to value engineer without
regard to NPS standards
?Using third-party consultants inefficiently
?Delaying contact with potential investors
?Coordinating equity with debt
doc_881201227.ppt