Combining Historic Tax Credits and New Markets Tax Credits

Combining Historic Tax Credits and New Markets Tax Credits

National Historic Tax Credit Conference - 2007

10:15-11:15 am

Thursday, November 8, 2007

New Markets Tax Credit Fundamentals

NMTC Synopsis

A federal tax credit available to those that provide equity (QEIs) to certain certified community development entities (CDEs) that in turn lend or invest (QLICIs) in qualified businesses (QALICBs) located in low-income communities (LICs).

New Markets Tax Credits

What is a Qualified Business?

• Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business; must meet requirements regarding gross income, tangible property, services performed, collectibles, and nonqualified financial property

• No financing of residential rental property

– Mixed use okay

• Restrictions on certain types of business operations and tenants

– E.g. massage parlor, hot tub facility, liquor store, gambling facility

New Markets Tax Credits

How They Work

Tax Credit Investor

CDE (Subsidiary)

QEI ($100)

Tax Credits over 7 years ($39) and Cash Return

Property Owner (QALICB)

Suballocation of Tax Credit Authority

Loan/Equity QLICI (85%+ of QEI)

CDE (Allocatee)

Typical HTC Structure (Single Entity)

TenantsTenants

RentalPayments

Tax Credit Investor LLC

Tax Credit Investor LLC

Construction/Perm Lender

Construction/Perm Lender

Managing Member(Developer Affiliate)

Managing Member(Developer Affiliate)

HistoricTax Credit

Equity

99.99% Credits, Profits & Losses and Cash Flow

LoanProceeds

DebtService

Payments

Tax Credit, LLC(Property Owner)

Tax Credit, LLC(Property Owner)

Tax Credit InvestorTax Credit Investor

.01% Credits, Profits & Losses, Fees and

Cash Flow

DeveloperEquity

DeveloperDeveloperDev.Fee

Legal Considerations

Pros

• $$$$

• High percentage of historic buildings in Low-Income Communities

• Similarity of basic structure

• $$$$

Legal Considerations

•“Related Party” requirements limit equity

•Operational limitations

– Subtenant mix

– Mixed-use

•Additional guaranties

•Different compliance periods

•Lack of guidance on making equity QLICIs

– CDFI Fund

– IRS

•Increased complexity

Cons

Master Tenant/NMTC Structure

Sub-Tenants/End Users

Sub-Tenants/End Users

RentalPayments

Tax Credit Investor LLC

Tax Credit Investor LLC

Construction/Perm Lender

Construction/Perm Lender

Managing Member(Developer Affiliate)

Managing Member(Developer Affiliate)

100% Credits, Profits & Losses, and Cash Flow

LoanProceeds

DebtService

Payments

.01% Credits, Profits & Losses,

Fees andCash Flow

DeveloperEquity

HistoricTax Credit

Equity

Master Tenant, LLC(Master Tenant)

Master Tenant, LLC(Master Tenant)

Landlord, LLC(Property Owner/Lessor)

Landlord, LLC(Property Owner/Lessor)

99.99% Credits, Profits & Losses, Fees and Cash Flow

Pass-through of Historic Tax Credits & Share of Residual

Lease Payment &Equity Investment

Tax Credit Investor

Tax Credit InvestorCDECDE

QLICI

Single Member LLC(Disregarded Entity)

Single Member LLC(Disregarded Entity)

Non-Member Manager

QALICBQALICB

QLICI

Tax Credit Investor

Tax Credit Investor

QEI

Dia:BeaconBeacon, New York

Thank you

Merrill Hoopengardner, Esq.

401 9th Street, NWSuite 900Washington, DC 20004

202.585.8169202.585.8080 (Fax)

mhoopengardner@nixonpeabody.com