Combining Historic Tax Credits and New Markets Tax Credits National Historic Tax Credit Conference - 2007 10:15-11:15 am Thursday, November 8, 2007

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). 3

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 Accountability Test: It has a board or advisory board that maintains accountability to residents of low-income communities Primary Mission Test: Its primary mission is providing loans or investments or technical assistance to low income communities and that at least 60% of its activity is targeted at low-income communities THIS IS MEANT TO BE EASY Remind them to remember that sometimes CDEs are pass-through entities (define)

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

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

Legal Considerations Pros $$$$ High percentage of historic buildings in Low-Income Communities Similarity of basic structure Related party – per CDFI Fund rules, test is done AFTER QLICI is made.

Legal Considerations Cons “Related Party” requirements limit equity Operational limitations Subtenant mix Mixed-use Additional guaranties Different compliance periods Lack of guidance on making equity QLICIs CDFI Fund IRS Increased complexity

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

Dia:Beacon Beacon, New York

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