Presentation on theme: "1 New Markets Tax Credits Revisited: Origins and Current Developments May 6, 2008 Herbert F. Stevens, Esq. Gregory N. Doran, Esq."— Presentation transcript:
1 New Markets Tax Credits Revisited: Origins and Current Developments May 6, 2008 Herbert F. Stevens, Esq. Gregory N. Doran, Esq.
2 Community Development Entity Investors Qualified Equity Investment (Substantially ALL) Qualified Low- Income Community Investment Qualified Active Low- Income Community Business Low-Income Community CDFI Fund (Treasury Dept.) NMTC Application CDE Youre a CDE CDE Certification Application NMTC Allocation Applicatio n
3 Program Overview Enacted on December 21, 2000 Part of the Community Renewal Tax Relief Act of 2000 Creates a tax credit for qualified equity investments (QEIs) in Community Development Entities (CDEs)
4 Process Overview Step 1:Entities apply to the Fund for CDE certification Step 2:Entities apply to the Fund for an NMTC allocation Step 3:The Fund competitively selects CDEs to receive NMTC allocations Step 4:CDEs use allocations to offer NMTCs to investors for cash Step 5:CDEs use proceeds to make Qualified Low- Income Community Investments (QLICIs)
5 Amount of NMTC Investment Authority Available 2001$1.0 billion 2002$1.5 billion 2003$1.5 billion 2004$2.0 billion 2005$2.0 billion 2006$3.5 billion 2007$3.5 billion 2008$3.5 billion Total$18.5 billion (not including $1 billion GO Zone) Unallocated investment authority may be carried over from year to year until 2014.
6 Credit Amount Equals 39% of amount of original investment Invest $100 and Receive $39 Tax Credit Credit taken over a 7-year period Credit rate: – 5% in each of the first 3 years – 6% in each of the final 4 years
7 CDEs Definition – Community Development Entities (CDEs) must: Have a primary mission of community development; Maintain accountability to residents of low-income communities through their representation on any governing board or advisory board; Be certified by the CDFI Fund Be a domestic corporation or partnership (including LLCs)
8 Substantially All & QEIs Qualified Equity Investment (QEI) – Requirements: Investment in a CDE; Either stock or a capital interest; Acquired at original issue solely in exchange for cash; Substantially all of such cash must be used to make Qualified Low-Income Community Investments (QLICIs); and CDE must designate the investment as a QEI and report it to the CDFI Fund.
9 Substantially All & QEIs Timing of Investment – Investment must be made in the CDE within 5 years of allocation of NMTCs. – Once the CDE receives cash from an equity investment, it has 12 months to make a qualified low-income community investment (QLICI) with the equity.
10 Substantially All & QEIs Substantially All Test – 85% of Qualified Equity Investments (QEIs), received by the CDE, must be invested in Qualified Active Low- Income Businesses (QALICBs) to be considered Qualified Low-Income Community Investments (QLICIs). – Continuously invested
11 QLICIs Qualified Low-Income Community Investment – Any capital or equity investment in, or loan to, any QALICB in a Low-Income Community; – The purchase by a CDE (the NMTC CDE) from another CDE of any loan that is a QLICI; – Financial counseling and other services to (e.g., advice regarding organization and operation) to businesses located in, and residents of, low-income communities; and – Any equity investment in, or loan to, any CDE (second CDE) by a CDE (primary CDE), to the extent the second CDE uses the proceeds in a certain manner.
12 QALICBs Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business that meets all 5 requirements: – Gross Income – Tangible Property – Services Performed – Collectibles – Nonqualified Financial Property
13 QALICBs Qualified Businesses – Rental real estate Cannot be IRC § 168(e)(2)(A) residential rental property (building which derives 80% or more of gross rental income from dwelling units) Substantial Improvements must be located on property No lessee can be a country club, golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility or liquor store
14 QALICBs Qualified Businesses – Excluded businesses: A business which develops or holds intangibles for sale or license A business which operates: a country club, golf course, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility or liquor store Certain farming businesses
15 Low-Income Communities Low Income Communities are census tracts where: – Poverty rate exceeds 20% or – Median income is below 80% of the greater of: Statewide median income or Metropolitan area median income – Targeted populations – Census tracts with less than 2,000 people that is contiguous to a low-income community and within an empowerment zone – High migration rural counties (use 85% instead of 80%)
16 NMTC Structures
17 ABC Community Development Fund Non-Leveraged - Closing NMTC Investor ABC CDE, LLC QALICB ABC Sponsor Investor Member 99.99% QEI $10,000,000 Managing Member 0.01% Sponsor Fees $500,000 Loan Loss Reserve $500,000 $9,000,000 Loan Interest 5.5% 7 years
18 ABC Community Development Fund Non-Leveraged - Compliance Period NMTC Investor ABC CDE, LLC QALICB $3,325,000 Cash Distributions $3,900,000 Tax Credits Interest Payments $3,465,000, or $495,000 per year Operating Expenses $140,000, or 20,000 per year
19 ABC Community Development Fund Non Leveraged - Termination NMTC Investor ABC CDE, LLC QALICB $9,500,000 Cash Distributions $9,000,000 Principal Payment Release of Loan Loss Reserves $500,000
20 ABC Community Development Fund Leveraged - Closing Leverage Fund ABC CDE, LLC QALICB ABC Sponsor Investor Member 99.99% QEI $10,000,000 Managing Member 0.01% Sponsor Fees $500,000 Loan Loss Reserve $500,000 $7,000,000 Loan (A Loan) Interest 6.5% 7 years $2,000,000 Loan (B Loan) Interest 1% 40 years NMTC InvestorEconomic Lender $3,000,000 Equity Contribution Investor Member 99.99% $7,000,000 Loan Interest 6.5% 7 years
21 ABC Community Development Fund Leveraged - Compliance Period Leverage Fund ABC CDE, LLC QALICB NMTC InvestorEconomic Lender $3,900,000 Tax Credits $3,185,000 Cash Distributions Loan A Interest Payments $3,185,000, or 455,000 per year $140,000 Interest Payments (B Loan) $3,185,000 Interest Payments Operating Expenses $140,000, or 20,000 per year
22 ABC Community Development Fund Leveraged - Termination Leverage Fund ABC CDE, LLC QALICB ABC Sponsor NMTC InvestorEconomic Lender Release of Loan Loss Reserves $500,000 $7,000,000 Payoff of A Loan $2,000,000 B Loan $200,000 Cash Distribution $7,300,000 Cash Distributions $7,000,000 Payoff of Loan $300,000 Cash Distribution
23 Recapture Time period for recapture – Subject to recapture for 7 years after equity investment is made in CDE Amount of recapture is equal to the sum of: – NMTCs allowed for all prior taxable years; and – Interest at the IRS underpayment rate. – This amount is referred to as the credit recapture amount.
24 Recapture Recapture is triggered if: – CDE ceases to be a qualified CDE; or – Equity investment proceeds no longer satisfy the Substantially All requirement (i.e., less than 85% are used for QLICIs); or – Equity investment is redeemed or cashed out by CDE. These events are referred to as recapture events.
25 Require Additional Information? To ensure compliance with IRS requirements, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Herbert F. Stevens Gregory N. Doran Nixon Peabody LLP