Date post: | 01-Nov-2014 |
Category: |
Entertainment & Humor |
Upload: | heritage-ohio |
View: | 829 times |
Download: | 0 times |
1
Springfield HTC WorkshopMay 6, 2011
Jackie R. WinchesterVice President – Community Development Advisor
PNC Community Development Banking(614) 463-8109
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 ContributionsCan begin as early as construction startCan come in as late as near placement
Investment Horizon- Can begin as early as construction start- Can come in as late as near placement
Developerowns 1%
Investorowns 99%
Pass-throughEntity
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 SynopsisA 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
InvestmentRepayments
* 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