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New Market Tax Credit Investment

New Market Tax Credit Investment. By the Michigan Magnet Fund Prepared by Albert A. Bogdan Monday, November 17, 2014. NMTC History. Bill Signed 12/21/2000 Purpose - Attract $15 Billion in Investment to Low-Income Communities $2.5 Billion Allocated for 2001 and 2002

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New Market Tax Credit Investment

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  1. New Market Tax CreditInvestment By the Michigan Magnet FundPrepared by Albert A. Bogdan Monday, November 17, 2014

  2. NMTC History • Bill Signed 12/21/2000 • Purpose - Attract $15 Billion in Investment to Low-Income Communities • $2.5 Billion Allocated for 2001 and 2002 • $3.5 Billion Allocated for 2003 and 2004 • One In Michigan ($27 Million - Wayne County – Detroit CDE Inc.) • $2.0 Billion Targeted for 2005 • Michigan Magnet Fund Gets $60 Million Allocation • $3.5 Billion/Year in 2006, 2007, 2008 • Only $15 Million Allocation to Michigan Prepared by Albert A. Bogdan

  3. NMTC - How it Works • 39% Investment Tax Credits to Investor for Over 7 Years • First Three Years = 5%/Year • Next Four Years = 6%/Year • Total = 39% • Funds Used to Invest Almost Any Businesses Located in a Low Income Census Tract • Tax Credits Allocated to a Community Development Entity (CDE) by US Treasury • Cash Flows to CDE as Qualified Equity Investment • Must Stay in Deal For 7 Years • Flows In as Equity, Flows Out as Equity, Loan or Loan Purchase • Deals May Be Pooled or Pass-Through Investments • Tax Credit Goes to Investor Regardless of Investment Success or Failure Prepared by Albert A. Bogdan

  4. New Market Tax Credit Flow Chart Prepared by Albert A. Bogdan

  5. Criteria for Eligible Location • Census Tract with • Poverty Rate > 20% or • Greater of the Following Two: • Median Family Income < 80% of MSA Median Income or • Median Family Income < 80% of Statewide Median Family Income • 95% of Financing Must Have Additional Levels of Distress, Poverty Rate > 30%, Median Family Income < 60%, Brownfield, Urban Renewal Area, Enterprise Zone, etc. Go to MMF1.org to Verify Census Tract Prepared by Albert A. Bogdan

  6. Almost Any Business Units Located In Low To Moderate Income Areas Can Qualify Definition Of Business Unit May Be Branch Or Division Investment Must Be Traced To The Facility Typical Businesses Shopping Center, LLC Small Technology Firm Hotel Manufacturer Retail Store Micro Entrepreneur Single Family Home Developer No Liquor Stores No Gambling Establishments No Golf Courses No Collectibles No Rental Residential – However, Residential Defined as Project Where More Than 80% of Income Comes from Residential Portion What Type of Business Can Receive NMTC Financing? Prepared by Albert A. Bogdan

  7. MMF Investment Guidelines Finance Projects That • Real Estate Projects In Targeted Cities & Rural Areas • Create Job Opportunities in Low-income Communities, • Are Located In Traditional Downtowns And/Or Significant Development “Nodes”, • Are Needed To Support Low-income Community & Neighborhood Development Initiatives • Support GLCF and MSHDA Development Initiatives Prepared by Albert A. Bogdan

  8. MMF Investment Guidelines • Must Have Sufficient Financing Commitments Acceptable To MMF. • Must Have Site Control • An Acceptable Environmental Remediation Plan. • Minimum MMF Financing is $2 Million. Maximum is $10 Million. • Other NMTC Allocatees May Be Invited To Partner • A Long-term, Comprehensive Economic Develop. Strategy in Place. • Demonstrate Construction to Begin Within 6 Mos. of Commitment. • The Project Must Meet One of The Following “But For” Tests: • Costs Exceeding Value (Residuals putted to Owner); • Insufficient Equity (Residuals Loaned to Owner @ Zero interest); • Inadequate Cash Flow To Debt Service Coverage; • Need Low Income Community Vs. Non-low Income Community Location Incentive. • Preference Given To Financial Institutions And Investors Committed To Invest In The MMF As Evidenced In Its NMTC Application. • All Other NMTC Program Requirements Must Be Met. Prepared by Albert A. Bogdan

  9. MMF Contract Requirements MMF Subsidiaries Must Invest: • 100% of Its Investment In Real Estate Projects. • New Building For A Business Is Not Considered A Real Estate Project, i.e., Factory For A Manufacturer, BuildingFor Nonprofit To Conduct Its Own Business. • 100% of Its Aggregate Investment In Unrelated Entities • 95% As Flexible, Non-conventional, Or Non-conforming To Standard Practice In The Marketplace. • 90% of the MMF Investments Must Be Made In Targeted Distressed Areas Which Have More Than Just 20% Poverty Or 80% Median Family Income, • i.e., Brownfield, Redevelopment Area, 30% Poverty, 70% Median Family Income, HOPE VI Area, Empowerment Zone, etc. Prepared by Albert A. Bogdan

  10. The Procedures • Developers Invited to Submit Pre-application • Need Interest Letter from Investor • Investment Committee Reviews • Based on Its Guidelines • Best Projects Invited to Submit Full Application • Need Commitment Letter from Investor • $5,000 Fee Charged • MMF Makes Firm Offer • Deal Closed Prepared by Albert A. Bogdan

  11. MMF Fee Structure • Origination Fee = 2.5% • Annual Service Fee = 50 Basis Points (0.5%) • Exit Fee = Zero • Total Fees = 6.0% over 7 years • Plus Transactional Cost • Legal, • Accounting, & • Consulting Costs • Typical $150,000 to $300,000 Prepared by Albert A. Bogdan

  12. Leveraged Real Estate Investment Prepared by Albert A. Bogdan

  13. Doing the DealNo Repayment for 7 Years • Assumptions • Lender Lends $7,000,000 to “Investment LLC” • 7 Years • Interest only • CDE Provides Tax Credit Allocation to Investment LLC • Investment LLC Sells Tax Credit for $3,000,000 • CDE Invests $9.6 Million in Firm • 20 Year Amortization • Balloon Repayment in Year 8 • Results • FirmRepays CDE $9,600,000 • No National Consistency in Product – Each CDE Can Do Own Thing • The Tax Credit Portion is Easiest Part of the Deal Prepared by Albert A. Bogdan

  14. Leveraged Real Estate Investment • Commodity Market for NMTC Slowly Taking Shape • Tax Credit May Not Go to Developer or Owner • Have Used HUD 108, HOME Funds, Foundation Loans as Debt – Can Use Pension Funds • CDE is Facilitator –Need Debt & Equity – Price & Deal Negotiable – Tax Credit Value Can Vary $100,000/Million Prepared by Albert A. Bogdan

  15. Who Can be an Eligible Equity Investor? • Any Taxable Investor • Individual • Company • Investment Fund • Debt Investor Can Be Anyone – HUD, Bank, Pension Fund • Debt Investor Receives No Collateral – Nonrecourse Loan • MMF Committed Investors are: • National City CDC • Key CDC • Wells Fargo Bank Michigan, N.A. • Fifth Third Bank CDC • Bank of America • First Independence National Bank • The Huntington Bank CDC Prepared by Albert A. Bogdan

  16. Negotiating the Deal Points of Negotiation • Terms & Conditions of Debt to Investment LLC • No Collateral • Size of Interest Only (7 Year Balloon) • Internal Rate of Return for Tax Credit to Equity Investor • Term & Conditions of Qualified Equity Investment • No Collateral • 7 year Balloon Principal Repayment • Fees & Professional Charges • Try to Keep it Simple – Costs Add Up Quickly • MMF are Real Estate Deals – Prepare Application – Complete It • Do not start Paperwork until All Pieces are Together • MMF Loan – Must Cover Above Commitments • Collateral • Interest on $10 Million Loan = Interest on $7.2 Million Loan + 50 Basis Pts • 7 Year Balloon Principal Repayment • Negotiate Residuals – Based on “But for” Need • Example - Principal Balloon Repayment Range = $9.6 Million to $7.0 Million Prepared by Albert A. Bogdan

  17. Contact Info • Mr.. Albert A. Bogdan • Michigan Magnet Fund • 1000 South Washington • Lansing, MI 48910 • Phone (313) 445-1843 • E-Mail bogdanaa@aabds.com • Web page: http://www.aabds.com or http://www.mmf1.org Prepared by Albert A. Bogdan

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