How Credits Become Capital: When and How to Syndicate

Incentives for Historic Preservation in Detroit

Thursday, June 5, 2008The Detroit Athletic Club

The Basic of Syndication:What? Why? How?

Rehabilitation Tax Credit SyndicationWhat is Syndication?

• “Syndication” is the process by which the owner of a building brings an investor into the ownership structure of the building so that the investor can claim the credits (and other economic and tax benefits), typically in exchange for providing equity to the project.

What is Syndication?

• Federal Historic Tax Credits are not sold directly to an investor.

• Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company.

• Some State Historic Tax Credits can be “certificated” and sold to investors.

What is Syndication?

• Federal Historic Tax Credits are not sold directly to an investor.

• Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company.

• Some State Historic Tax Credits can be “certificated” and sold to investors.

Single Entity Structure

End UserEnd User End UserEnd User

Owner(LP or LLC)

Owner(LP or LLC)

InvestorInvestorGP/ManagerGP/Manager

DeveloperDeveloper

PropertyProperty

0.1% Management Fees, etc.

DevelopmentFee

99.9% Tax Credits

Lease Lease

Fee Ownership

Master Lease/Credit Pass-ThroughLessee Claims Credit

DeveloperDeveloper

Master Lessee(LP or LLC)

Master Lessee(LP or LLC)

InvestorInvestorGP/ManagerGP/Manager

PropertyProperty

End UserEnd User End UserEnd User

0.1%

Development

Fee

99.9% Tax Credits

Lease Lease

Owner/Lessor(Affiliate of GP/Manager)

Owner/Lessor(Affiliate of GP/Manager)

MasterLease

Funds

Rehabilitation Tax Credit Syndication Calculating the Investor’s Contribution

Qualified Rehab Expenditures 2,000,000Credit Rate 20.00%

Total Calculated Credit 400,000Tax Credit Investor Allocation 99.99%

Total Credit to Investors 399,960

Credit Price Per Each $1 of Credit 0.95

Equity Contributions by Investors 379,962

Should the Owner/Developer Syndicate?

• Factors to Consider:

– Does the Developer have limitations on claiming the credit for itself?

• Is the Developer a tax exempt entity or have insufficient taxable income to be able to use tax credits?

• Business Tax Credit Limitations ($25K +75%)

• Passive Activity Rules Apply

Should the Owner/Developer Syndicate? Cont’d

• Factors to Consider:

– Net Economic Benefits

• Equity raise versus lost cash and (sometimes) lost depreciation.

• Transaction Costs (both closing and on-going).

Should the Owner/Developer Syndicate? (cont’d)

• Factors to Consider:

– Is additional equity needed during construction (i.e. prior to completion of the rehabilitation)?

Should the Owner/Developer Syndicate? (cont’d)

• Factors to Consider:

– Control: Are you willing to have a partner?

• Loss of control issues.

• Disclosure and Reporting.

• Unwind concerns.

Finding Investors

• Does your bank or its CDC make HTC investments?

• Referral sources:

– State Historic Preservation Office (SHPO)

– State and local preservation organizations

– Other developers

– Experienced accountants and lawyers

Soliciting Investment Proposals —Things Investors Want to Know

• Proposed Budget and Timing

• Financing Commitments

• Property Acquisition Status

• Real Estate issues including title and environmental issues, zoning, parking and other permitting

Soliciting Investment Proposals —Things Investors Want to Know cont’d

• Leasing Commitments/Market Study

• Part 1 and Part 2 Status

• Development Team—who they are, their experience and financial capacity

Key Syndication Business Issues — Picking The Best Offer

• Pricing

• Equity Pay-In Schedule

• Reserves

• Cash Flow, Fees, and other items that reduce the net economics to the developer

Key Syndication Business Issues — Picking The Best Offer cont’d

• Exit Strategy (Put and Call Options)

• Guarantees

• Structure

• Due Diligence Requirements

• Experience/Reputation and Closing Process

Successful Negotiation and Closing — Strengthening the Developer’s Position

• Reducing Risk of Recapture:

– favorable debt terms

– high debt coverage ratio

– significant developer equity

• Leasing Commitments/tenant strength

• Guarantor Strength/Scope

Successful Negotiation and Closing — Strengthening the Developer’s Position

• Reducing Construction Risk: delayed pay in

• Team Coordination and due diligence follow through

“We structured the deal so it won’t make any sense to you.”

More Information?

apotts@nixonpeabody.com

dschon@nixonpeabody.com