2. Using Historic Tax Credits in New York Combining HTCs and NMTCs Wednesday, June 24, 2009

3. New Markets Tax Credit Fundamentals NMTC Synopsis A federal tax credit available to those that provide equity (QEIs) to certain certified community development entities (CDEs) that in turn lend or invest (QLICIs) in qualified businesses (QALICBs) located in low- income communities (LICs).

4. New Markets Tax Credits What is a Qualified Business? Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business; must meet requirements regarding gross income, tangible property, services performed, collectibles, and nonqualified financial property No financing of residential rental property – Mixed use okay Restrictions on certain types of business operations and tenants – E.g. massage parlor, hot tub facility, liquor store, gambling facility

5. New Markets Tax Credits What is a Low-Income Community? Generally, a census tract where – The poverty rate is at least 20%, or – The median family income is 80% or less of either statewide median family income, or the greater of statewide or metropolitan median family incomes. Special rules for Targeted Populations, low population areas, and high migration rural counties Go to: www.cdfifund.gov and click on NMTC tab

6. New Markets Tax Credits What is a CDE? A partnership or corporation who: – Has a primary mission of community development; – Maintains accountability to residents of low-income communities through their representation on any governing board or advisory board; and – Is certified by the CDFI Fund division of the Treasury CDEs participate in national competition for allocations of NMTC authority

7. Confirm your project qualifies – Low-income community – Additional distress criteria Reach out to CDEs who – Specialize in financing historic rehabilitation – Target allocation to your geographical area (city/state or urban/rural) – Prefer your tenant mix (retail, community facilities, etc.) New Markets Tax Credits Finding an Allocation

8. New Markets Tax Credits How They Work Tax Credit Investor CDE (Subsidiary) QEI ($100) Tax Credits over 7 years ($39) and Cash Return Property Owner (QALICB) Suballocation of Tax Credit Authority Loan/Equity QLICI (85%+ of QEI) CDE (Allocatee)

9. Typical HTC Structure (Single Entity) Tenants Rental Payments Tax Credit Investor LLC Construction/ Perm Lender Managing Member (Developer Affiliate) Managing Member (Developer Affiliate) Historic Tax Credit Equity 99.99% Credits, Profits & Losses and Cash Flow Loan Proceeds Debt Service Payments Tax Credit, LLC (Property Owner) Tax Credit, LLC (Property Owner) Tax Credit Investor.01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Developer Dev. Fee

10. Sample Transaction Calculating the HTC Equity Qualifying Rehab Expenditures24,060,799 Credit Rate20.00% Total Calculated Credit4,812,160 Tax Credit Investor Allocation99.99% Total Credit to Investors4,811,679 Credit Price Per Each $1 of Credit0.98 Equity Contributions by Investors4,727,474

11. Sample Transaction Calculating the NMTC Equity Gross HTC Equity5,252,800 Credit Rate39.00% Total Calculated NMTC Credit2,048,592 Iterative Effect124.21% Total Credit to Investors2,544,556 Price Per Each $1 of NMTC Credit0.65 Addl Equity Contributions by Investors1,653,961

12. Key Business Issues Pricing (e.g. $.9825 vs. $1.24+) Equity Pay-In Schedule (same or faster) Exit Strategy (unwind may be delayed 2-3 years) – Put Option – Call Option

13. Key Business Issues contd Guarantees (expanded – negotiable; adjuster gross up) Reserves (no change) Cash Flow Participation (3% industry standard) Operational limitations (subtenant mix)

14. Master Tenant/NMTC Structure Sub-Tenants/ End Users Rental Payments Tax Credit Investor LLC Construction/ Perm Lender Managing Member (Developer Affiliate) Managing Member (Developer Affiliate) 100% Credits, Profits & Losses, and Cash Flow Loan Proceeds Debt Service Payments.01% Credits, Profits & Losses, Fees and Cash Flow Developer Equity Historic Tax Credit Equity Master Tenant, LLC (Master Tenant) Master Tenant, LLC (Master Tenant) Landlord, LLC (Property Owner/Lessor) Landlord, LLC (Property Owner/Lessor) 99.99% Credits, Profits & Losses, Fees and Cash Flow Pass-through of Historic Tax Credits & Share of Residual Lease Payment & Equity Investment Tax Credit Investor CDE QLICI Single Member LLC (Disregarded Entity) Single Member LLC (Disregarded Entity) Non-Member Manager QALICB QLICI Tax Credit Investor QEI

15. Thank you Merrill Hoopengardner, Esq. 401 9th Street, NW Suite 900 Washington, DC 20004 202.585.8169 202.585.8080 (Fax) mhoopengardner@nixonpeabody.com