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CBIZ & MHM Executive Education Series™

Tax Incentives As Part of Capital Formation EMERGING TRENDS IN REAL ESTATE:

A Collaborative Presentation with

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent accounting firms

*MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.

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Before We Get Started…

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Steve Dunavant is a Managing Director in the CBIZ MHM Memphis

office. He has over 25 years of public accounting experience with both

local and international accounting firms. Steve specializes in the areas of

pass-through entity taxation, entity structuring for privately held

businesses, and mergers and acquisitions for privately held businesses.

He provides guidance and counsel on variety of financial and taxation

matters involving borrowing and capitalization, acquisitions and

divestitures, joint venturing, succession planning, and the utilization of

tax incentives.

Steve serves clients in a wide range of industries and diverse types of

ownership ranging from private equity firms to family groups. He works

with a number of attorneys and private equity groups to structure

agreements and transactions to suit the needs of the client and its

investors. He has also designed compensation planning strategies for

tiered partnerships.

901.685.5575 • sdunavant@cbiz.com

STEVE DUNAVANT, CPA Managing Director

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Presenters

Joel Superfon is the Director of Investment Management and Advisory

Services of Dudley Ventures, a position he assumed in August 2006

following 10 years of combined financial, real estate, legal and strategic

development experience. Joel has led and closed transaction volume in

excess of $1 billion in connection with structured business, real estate

and renewable energy project financings utilizing benefits from multiple

federal and state tax credit programs.

A native of Arizona, Joel earned his JD/MBA from the University of

Denver and his BS from the University of Southern California. Prior to

joining Dudley Ventures, Mr. Superfon worked for Wells Fargo Bank

servicing commercial business clients where he incorporated business

and real estate underwriting, financial analysis, and business

development skills to successfully grow and manage a middle-market

portfolio.

602.759.5310 • jsuperfon@dudleyventures.com

JOEL B. SUPERFON Director of Investment Management

and Advisory Services

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Agenda

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Types of businesses and projects that qualify for NMTCs and HTCs

Mechanics of a combined NMTC/HTC transaction; representative successful NMTC/HTC transactions

Questions

CBIZ MHM and Dudley Ventures welcome you to today’s discussion of how the New Markets Tax Credits (NMTC) and Historic Tax Credits (HTC) can be employed, along with traditional sources for capital, to fund real estate development project costs. Topics will include:

NMTC and HTC program basics; how the subsidies work

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New Market Tax Credits (NMTCs)

• The New Markets Tax Credit (“NMTC”) Program was created in 2000 and is run by the CDFI Fund, a part of the Department of the Treasury.

• The credits are competitively allocated annually to Community Development Entities (“CDEs”) that, in turn, invest in Qualified Active Low-Income Community Businesses located in qualifying census tracts in Low-Income Communities.

• The $61 billion NMTC Program was recently extended through 2019, with $3.5 billion being awarded to CDEs annually.

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New Market Tax Credits (NMTCs)

• 39% Tax Credit used to offset corporate income tax over a 7 year-period.

• New Markets Tax Credits are a “shallow” credit with approximately 20% of the project cost subsidized from the sale of the credits.

• New Markets Tax Credits can take the form of a permanent subsidy to the Project or Business.

• 7 year compliance period.

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What Can Be Financed

• Typical NMTC project size is $10-$20 million

• Non-profits and for profit businesses

• Types of projects that may qualify for NMTCs: • Hospitals, health centers, medical office buildings and other health related facilities • Community centers • Manufacturing and industrial facilities • Educational facilities • Mixed-use commercial/residential properties (more than 20% of gross income from non-

residential portion) • Cultural facilities • Energy technology companies • Grocery, food processing businesses, food distribution facilities and food production

businesses

• Crosstown Concourse combined healthcare, arts, education, sustainability, social services, and more

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Where Can Projects Be Located?

Qualified locations are low-income communities in areas where the poverty rate exceeds 20% or the median income is below 80% of the greater of the statewide or metropolitan area median.

Non-profits and for profit businesses

Highly Distressed Qualified Census Tracts are locations which also include one of the characteristics below: The poverty rate exceeds 30% Median family income below 60% Unemployment rates at least 1.5 times the national average Rural/non-metropolitan census tracts “Targeted populations” Crosstown Concourse is located in a severely disinvested area where the

poverty rate is 37.6% and the unemployment rate is 2.29 times the national average.

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NMTC Community Impacts and “But For” Test

• Creation of new quality jobs – jobs that pay living wage and above average for a similar position

• Jobs to low-income individuals

• Training and advancement, particularly for low-income individuals

• Creation of community services – focus on serving the low-income community

• Create of goods and services – access to fresh food, basic and supportive goods, other goods and services

• Flexible lease rates and affordable housing units – using the subsidy to provide lower rents to non-profits, small businesses and apartment units

• Impact to minorities

• Sustainable outcomes - remediation, LEED, or other environment outcomes; alternative energy, green manufacturing, and green/recycling projects

• Catalytic and ability to spur additional private investment

• But For NMTCs, the project would not have sufficient capital to move forward

• Crosstown Concourse had strong impacts in almost every category

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Jackson State University – Jackson, Mississippi

$27,000,000 NMTC Qualified Equity Investment

• Located in Jackson, Mississippi in a highly-distressed, low-income area with a poverty rate of 34% and a median family income of 47.9%.

• Development of a 4-story mixed-use facility to include 78 student and faculty housing rental units, approximately 22,000 SF of new retail and office space on the ground floor of the new student housing building.

• The Project was part of Jackson State University and the City of Jackson’s commitment to revitalize the neighborhoods surrounding the campus and connecting to revitalization efforts in downtown Jackson.

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Jackson State University – Structure Chart

TC-JSU QEI, LLC Special Purpose Entity

Tax Credit Investor Owns 100%

Equity = $7,900,000

NMTCs = $8,200,000 State NMTCs = $2,400,000

University Park of Jackson II, LLC QALICB

0.01%

Loan C: $7,532,868

CDE

debt service

$4,400,000, 7 Years, Interest Only

JSUDF Affiliate Jr. Leverage Lender

QEI $6,000,000

Sub-CDE 1

Tax Credit Investor (Federal & State) Bank

Sr. Leverage Lender

debt service

$9,400,000, 7 Years, Interest Only

Sub-CDE 2 Sub-CDE 3 CDE CDE

Loan A: $4,400,000 Loan B: $2,400,000

Loan A: $4,400,000 @ Terms to Mirror Jr.

Leverage Loan Loan B: $1,100,000

QEI $8,000,000

QEI $7,000,000

0.01% 0.01%

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Jackson State University – Community Impact

• The redevelopment of the neighborhood surrounding JSU was a central part of the City’s efforts to revitalize downtown Jackson and the surrounding communities and attract new residents.

• The project was endorsed and supported by the City of Jackson, its Mayor and City Counsel as well as the President of the University and JSUDF, who saw the revitalization of the neighborhood adjacent to the University Campus as critically important to the City and the University.

• The redevelopment leveraged the economic strength of JSU students and faculty and other public employees. The combination of facilities dealing with both of these underserved markets, with the addition of community serving facilities, creates a balanced, livable community.

• Below-market rate commercial rents support retail tenants which are all small, local businesses and minority-owned and operated.

• Moderately-priced housing offered to JSU students and faculty, with 26% of units meeting affordable housing criteria.

• Created 150 full-time construction jobs.

• Created 61 new full-time positions.

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Use of Incentives – Historic Tax Credits (HTCs)

• The first federal tax incentive for historic preservation was approved by Congress in 1976 and has since become one of the federal government’s most successful and cost-effective community revitalization programs.

• The Historic Tax Credit (“HTC”) Program is administered by the National Park Service and the Internal Revenue Service in partnership with State Historic Preservation Offices.

• There are two tax incentives for preservation including:

• A 20% tax credit for a certified rehabilitation of certified historic structures; and

• A 10% tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936.

• HTCs are claimed during the first year, subject to a 5 year compliance period, 20% vesting each year.

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Historic Tax Credits – Direct Investment

Tenants

Rental Payments

Tax Credit Investor, LLC

Construction/ Perm Lender

Managing Member (Developer Affiliate)

Historic Tax Credit

Equity

HTCs 99% Credits, Profits & Losses and Cash Flow

1% Credits, Profits & Losses, Fees and

Cash Flow

Developer Equity

Loan Proceeds

Tax Credit, LLC Property Owner

Debt Service

Payments

Tax Credit Investor

Developer

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Historic Tax Credits – Master Tenant

1% Credits, Profits & Losses, Fees and Cash Flow

Developer Equity

51-99% Credits, Profits & Losses, Fees and Cash Flow

Pass-through of Historic Tax Credits Master Tenant owns 0-49% of Property Owner

Lease Payment & Equity Investment/Upfront Lease Payment

Managing Member (Developer Affiliate)

Construction/ Perm Lender Tax Credit Investor, LLC

Loan Proceeds

Debt Service

Payments

Historic Tax Credit

Equity

HTCs 99% Credits, Profits & Losses, and

Cash Flow

Sub-Tenants/ End Users

Rental Payments

Tax Credit, LLC Property Owner

Master Tenant, LLC Master Tenant

Tax Credit Investor

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Twinning NMTCs and HTCs

• NMTCs can be twinned with the HTCs on projects that are both commercial and located in qualified low-income census tracts.

• Approximately 77% of HTC projects are located in NMTC QCTs • Approximately 51% of HTC projects are commercial

• Twinning Structures Master Tenant Structure:

o Building owner passes HTCs to Master Tenant who leases the project from the building owner

o HTC investor owns 99% of the Master Tenant entity & Master Tenants owns TBD % of building owner

o Compatible with NMTC structure

Direct Investment Structure:

o HTCs claimed based on ownership interest in the building owner

o HTC investor owns 99% of building owner

o Compatible with NMTC structure

• Structure Considerations • Depreciation and Tax Implications

• More moving pieces

• Different investors have different preferences

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Crosstown Concourse - Example Project

Crosstown Development Project, Memphis, TN • $200 million redevelopment of a 16- acre tract that includes the historic Sears &

Roebuck Distribution Center and a 1,100 car multi-level parking garage. • A 14-story building is being transformed into a 1.5 million square foot "Vertical

Urban Village" that will include office, healthcare, wellness, retail, restaurants, education, performance and exhibition spaces, a theater and residential apartments.

• The project brings 1,800 jobs to Memphis

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Crosstown Concourse - Project Tenants

• A Step Ahead Foundation • Church Health Center • Christian Brothers University • City Leadership • Crosstown Arts • Crosstown Back Institute • The Excel Center for Adult

Learners • G4S

• The Kitchen Next Door • Methodist LeBonheur Healthcare • Memphis Teacher Residency • The Poplar Foundation • The Pyramid Peak • Southern College of Optometry • St. Jude Children's Research

Hospital • Teacher Town

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Crosstown Concourse - Project Funding Scheme

Non-Profit Loans $12.5 million

Government Grants

$6.250 million

Investor Capital $31.7 million

Bank Loans $80.5 million

City Loan $8.150 million

NMTC Equity $16.4 million

HTC Equity $36 million

Project Costs $191 million

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Crosstown Concourse – NMTC/HTC Master Tenant Structure Chart

NMTC Equity

NMTC Investor NMTCs

Crosstown Building Owner, LLC

(QALICB)

Crosstown Arts Inc. (Leverage Lender)

Leverage Loan

Collateral: Pledge of Fund’s CDE membership; 7 year forbearance

HTC Investor

Crosstown LLC

6 CDEs

Upfront Lease Payments

HTC Equity 99% Interest

Sponsor Equity

Equity 1% Interest

QEI: $56,000,000

NMTC QLICI Loans

Investment Fund, LLC (100% Owned by NMTC Investor )

6 Sub-CDEs Investment Fund Owns 99.99%

CDE Owns 0.01%

Crosstown LLC

Loan Grant

Bank Loan City Loan

Crosstown Master Tenant, LLC

(Master Tenant)

City/HUD Non-Profit

Lender

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Use of Incentives - Twinning NMTCs and HTCs

Impact to Crosstown Concourse and Key Highlights • Total Project Costs - $191 million • NMTCs - $56 million of allocation/$12 million of net subsidy • 6 Community Development Entities • CDEs with a national presence – capital directed at Memphis • Huge Community Impact –

• Creation of new quality jobs • Jobs targeted to low-income individuals • Flexible lease rates

• Sustainable outcomes • Catalytic • Project Readiness – years of planning preceded the tax credit financing process • Permanent subsidy provided through highly favorable loans assigned to the project

via a put/call post compliance

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Use of Incentives - Twinning NMTCs and HTCs

Impact to Crosstown Concourse and Key Highlights • HTCs $36.5 million/$26 million of net subsidy

• Master Tenant Structure • 50% Non-profit Tenants • Disqualified Lease Limitation – lease to non-profits cannot exceed 19

years • National HTC Investor – HTC marketplace with limited to moderate

liquidity • Bridge HTC Equity • Remarkable Adaptive Reuse Project – strong support with the SHPO

and NPS, but stringent historic requirements • Total Tax Credit Subsidy – 20% of total project cost

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Use of Incentives – Crosstown Concourse Example

Benefits • Additional subsidy up to 40%

when twinning • Legal consolidation & cost savings • Tax credits can substitute sponsor

equity • Increased investor return • Mission compatibility with NMTCs

and other state and federal subsidy programs

• Broader community impact & support

• Series 2.0: Can twin ITCs (renewable energy) and utilize 3 credits

Difficulties • Complexity • Each tax credit can cause tension

when satisfying requirements for both credits

• Herding the cats - coordination of more parties/organizations/ agencies/professionals/agendas

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Use of Incentives – Crosstown Concourse Example

Recap • Project Readiness • Clear and Substantial Community Impact – Strong National CDE

Draw • SHPO/NPS Support • Master Tenant Structure • Different NMTC & HTC Investor

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? QUESTIONS

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If You Enjoyed This Webinar…

Upcoming Courses: • Building an Actionable and Easy-to-Implement Business Continuity Plan

• 4/13 & 4/20: First Quarter Accounting and Financial Reporting Issues Update

• 4/28 & 5/3: Eye on Washington – Quarterly Business Tax Update

Related Publications: • CBIZ MHM Commercial Real Estate Hot Topics Newsletter

• Complete Insurance Audit Yields Improved Coverage and $600,000 in Annual Savings

• Crowdfunding - The Ultimate Flexibility • Congress Permanently Extends Several Tax Provisions Important to Real Estate

Industry • How to Minimize Your Property Taxes

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THANK YOU CBIZ & Mayer Hoffman McCann P.C. cbizmhmwebinars@cbiz.com