1. Integrating New Markets and Historic Tax Credits
North Carolina Affordable Housing Conference
September 16, 2010

2. Fundamentals of Federal Historic Tax Credits
HTC program has been in existence over 20 years.
Provides dollar for dollar federal income tax credit for rehabilitation of historic income producing properties (commercial, industrial, agricultural, or residential rental).
National Park Service and State Historic Preservation Officer approve and monitor (i) qualification of building for HTC and (ii) development of and compliance with plans and specs for rehabilitation to ensure historic character is maintained.
HTC is equal to 20% of “qualified rehabilitation expenditures.” Qualified rehabilitation expenditures must exceed the acquisition costs of the “Historic Building.”
HTC is not competitive, but National Park Service must certify that building qualifies for credit and that rehabilitation was completed in accordance with approved plans and specs.

3. Fundamentals of Federal Historic Tax Credits (cont.)
Building must be listed on the National Registry of Historic Places or be located in and add to the significance of a registered historic district.
HTC is taken all at one time when the project is placed in service.
Subject to recapture for 5 years.
Less technical than LIHTC, but requires substantial interaction with National Park Service on Plans and Specs.
As with LIHTCs, some states have state HTC programs, many of which “piggy- back” on Federal HTC programs.
Allocation of HTCs among partners follows profits.

4. Historic Tax Credit Project – Single Tier Structure Diagram
Developer
General Partner
.01%
Services
Cash
Services
Developer
Fee
Property Owner
Cash
99.99%
Interest
(including 99.99% of HTCs Profits and Losses)
Investor
Lender(s)
Property must be located in a qualifying area or be listed on National Register of Historic Places. (Part 1)
Developer/GP work with National Park Service on satisfactory plans and specs for qualified rehabilitation of Historic Building. (Part 2)
HTC based on 20% of qualified rehabilitation expenditures.
HTC claimed on date project is placed in service.
No significant future monitoring by National Park Service after building receives certification that rehabilitation was completed in accordance with agreed upon plans and specs. (Part 3)
Five year compliance period during which Property Owner must remain owner of property and Investor must remain partner in Property Owner in order to avoid recapture.
Tax basis in historic building is reduced by amount of HTC.

5. Historic Tax Credit Project – Lease Pass-Through Structure Diagram
Developer
General Partner
85% Interest
Services
Cash
Services
Developer
Fee
Cash & Services
.01% Interest
Property Owner / Landlord
15% Interest
Cash
Cash
Rent
99.99%
Interest
(including 99.99% of HTCs, Profits and Losses)
Master
Tenant
Investor
Lender(s)
Master Lease &
“Pass-Through”
of HTCs
Rent
Sub Tenants
Substantially similar to single tier structure on technical points, with addition of Master Lease and Master Tenant between Investor and Property Owner.
HTCs are allowed to be passed through to Master Tenant upon Property Owner/Landlord and Master Tenant making valid Pass-Through Election.
Important to maintain integrity of Master Lease.
No reduction in tax basis of historic building, instead Master Tenant must include HTC amount in annual income pro rata over term of lease.

6. Historic Tax Credit Project Structures Comparing Advantages and Disadvantages
Single Tier
Lease Pass-Through
Advantages
Simplicity – fewer entities, fewer documents required
No mandatory basis reduction in property or HTC Investor’s partnership interest
GP receives higher tax basis and depreciation with respect to property
Minimizes HTC Investor’s participation in property owner’s cash flow
Disadvantages
Investor has potential to receive higher distributions of cash flow and losses
Mandatory basis reduction of depreciable property and HTC Investor’s basis in partnership interest
More complex, leading to higher transaction costs and higher on-going administrative costs
Master Tenant recognizes income in amount of HTC via amortization over term of Master Lease (Note: this result may be attractive to some Investors)

7. Diagram of Combined LIHTC and HTC Project with Lease Pass-Through Structure
Cash
Services
.01% Interest
General Partner
Developer
Developer
Fee
Property Owner/ Landlord
10% Interest
.01% Interest
Cash
Cash
Master Lease
and Pass-
Through of
HTCs
Cash
Rent
LIHTC
Investor
89.99% Interest
(Including % Special allocation of Depreciation & LIHTCs)
Master Tenant
HTC
Investor
Cash
(99.99%
Interest
Including
99.99% of HTCs)
Lenders

8. Combined LIHTC and HTC Project with Lease Pass-Through Structure
Comments
LIHTC Investor holds 89.99% limited partner interest in Property Owner receiving 99.99% special allocation of depreciation on property.
Lease Pass-Through Structure avoids reduction in basis of property and accordingly no reduction in LIHTC.
Can dismantle HTC Structure at end of 5 year HTC compliance period.
Can have different investors for LIHTCs and HTCs.

9. Fundamentals of New Market Tax Credits
NMTC program has been in existence for almost 10 years.
Provides dollar for dollar federal income tax credit for investments in community development entities (“CDEs”) that use substantially all the invested funds to make investments in qualifying low-income community businesses (“QALICBs”).
QALICBs must be located in low-income communities designated by census tract. Certain businesses are excluded (e.g. residential rental activities, golf courses, country clubs, horse tracks and other gambling businesses, massage parlors, stores where principal business is sale of alcohol for consumption off-premises).
The U.S. Treasury through the Community Development Financial Institutions Fund (“CDFI”) allocates to CDEs the dollar amounts on which NMTC can be claimed through highly competitive process.

10. Fundamentals of New Market Tax Credits (cont.)
CDEs are domestic corporations, limited liability companies or partnerships certified by the CDFI. They must demonstrate a primary mission of servicing or providing investment capital for low-income communities and maintain accountability to residents of low-income communities (representation on governing or advisory boards).
CDE must invest substantially all of the QEI in QALICBs through “Qualified Low-Income Community Investments” (“QLICIs”). Can be debt or equity (but not a “grant”). QLICIs must stay “invested” during 7 year compliance period to avoid recapture.
NMTC = 39% of QEI taken over 7 years (5% first 3 years and 6% last 4 years).
Requirements for qualification as QEI, CDE, QLICI and QALICB are very technical with primary burden on CDE.

11. Sample Structure New Markets Tax Credit Structure
QEI triggers credit delivery period. Total NMTC = 39% of QEI delivered over 7 years.
Loan A = Qualified Low Income Community Investment (QLICI) based on market rate interest. Interest-only with balloon payment at end of 7 year compliance period.
Loan B = Also a QLICI. Typically has below market interest rate (e.g. 2%) and, provided all other requirements are met (e.g. debt service on Loan A and Loan B paid, no violations of NMTC requirements by QALICB), final payment generally reduced to fraction of principal outstanding (but QLICI must be characterized as “bona fide debt” versus a “grant”).
Investor
$10M
Qualified Equity Investment (QEI)
100% Interest in CDE, NMTCs, Profits, Losses and Cash Flow
Community Development Entity (CDE)
Loan A
Loan B
$7M
$3M
Qualified Low
Income Community
Business (QALICB)

12. The Tax Credit Marketplace
Federal
North Carolina
South Carolina
Low Income
Yes
Refundable No
Historic / Mill
New Markets
Renewable Energy
Brownfields 12

13. Which Credits Work Well Together?
Low Income and Historic
Low Income and Renewable Energy
New Markets and Historic
New Markets and Renewable Energy 13

14. HTC Funding HTC Investor Managing Member: Project Lender
NTCIC Investment Fund X, LLC
Managing
Member:
NOLA Manager, LLC
HTC
HTC Equity
Project Lender
Local/Regional Bank
Lessor (Landlord)
NOLA Operating Co., LLC
89% Man. Member: NOLA Mgr, LLC
10% Member: NOLA Operating Co., LLC
1% Member: State HTC Investor, LLC
Master Lease
Master Tenant
NOLA Operating Co., LLC
99.99% Man. Member: NTCIC IFX, LLC
.01% Member: NOLA Manager, LLC
HTC
Lease Payment
State HTC
Investor
LA State Credit Fund
HTC Equity
Developer
Tenants

15. HTC & NMTC Funding Affiliated Developer Entity Leveraged Lender
Local/Regional Bank
Equity
Repay SHTC Bridge Loan
Repay HTC Bridge Loan
HTC & NMTC Investor
NTCIC Investment Fund X, LLC
Equity Bridge Loans
Constr./Perm Loans
Project Investment Fund
NOLA Investment Fund, LLC
100% Member: NTCIC IFX, LLC
NMTC
State HTC
Investor
LA State Credit Fund
NMTC Equity
HTC
QEI
NMTC
QEI
NMTC
SHTC
NTCIC Sub-CDE
NTCIC Investment Fund X, LLC
Second Sub-CDE
NOLA Investment Fund III, LLC
HTC Equity
QLICI 1
QLICI 2
Master Lease
Lessor (Landlord)
NOLA Operating Co., LLC
89% Man. Member: NOLA Mgr, LLC
10% Member: NOLA Operating Co., LLC
1% Member: State HTC Investor, LLC
Master Tenant
NOLA Operating Co., LLC
100% Member: NTCIC IFX, LLC
HTC
SHTC Equity
Lease Payment
Managing
Member:
NOLA Manager, LLC
HTC Equity
Developer
Tenants

16. Combining The Tax Credits
Federal Historic Tax Credits:
Total Qualified Costs:
QREs $12 M
Tax Credit Percentage %
Federal Credits $2.4 M
Federal Credit Price $1.00
Total Equity to Developer $2.4 M

17. Combining The Tax Credits
New Markets Tax Credits:
NTCIC CDE Allocation $ 11 M
2nd CDE Allocation $ 5 M
Total QEI $ 16 M
Tax Credit Percentage %
New Markets Credits $6.24 M
New Markets Credit Price $.70
NMTC Equity to Project $4.37 M

18. Combining The Tax Credits
Total Tax Credit Investment:
Federal Equity $2.40 M
NMTC Equity $4.37 M
TOTAL EQUITY $6.77 M

19. What Makes a Project Attractive to Investors
Tell a good story
Project Economics (low loan-to-value, strong debt service coverage ratios, pre-leasing)
Minimize risk of something going wrong
High level of Community Impact
Job creation
Grocery or other services
Developer Experience
Market (CRA)

20. Issues for Lenders with NMTC
Lack of direct security interest
Forbearance
7 years, interest-only
Limited reserve accruals

21. Sponsor as Leveraged Lender
Sponsor receives grants, pledges or other funds and loans them through the new markets structure
Caveats
Understand the restrictions on the money being enhanced
Some grants only fund on a % of completion basis,
Some grants/loans need to be secured by mortgage on property (AHP)
Labor Intensive for Sponsor
Set up new entity to act as QALICB
Annual reporting requirements
Need to have cash at closing for leveraged loan

23. Legislative Update & Current Bills
Codification of Economic Substance – impact on Tax Credit Transactions
HR 4213
Extend LIHTC 1602 for 9%, extend NMTC program, extend GO Zone Deadlines for LIHTC and GO Zone HTC
S 3326
5 year carry-back provision for LIHTC investments, extend 1602 for a year and expand 1602 to 4% credits
HR 2628 / S 1583
Multi-year extension of NMTC program, increase the annual funding and exempt NMTC from AMT
HR 3715 / S 1743
Several enhancements to the HTC program
HR 2336
Energy retrofits for real estate owners
HR 4868
Affordable Housing preservation bill

24. Contact Information
Robert L. Mendenhall
Marshall Phillips
Kirk Carrison
Leigh Ann Smith