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Historic Tax Credit Equity Syndication
Basics
Historic Tax Credit Developer’s Conference
Thursday, February 5, 2009Miami Beach, Florida
What is Syndication?
• “Syndication” is the process by which the owner of a building brings an investor into the ownership structure of the building so that the investor can claim the credits (and other economic and tax benefits), typically in exchange for providing equity to the project.
What is Syndication?
• Federal Historic Tax Credits are not sold directly to an investor.
• Investors become “owners” of the property as limited partners in a limited partnership or as members in a limited liability company.
• Some State Historic Tax Credits can be “certificated” and sold to investors.
Common Investment Structures
• Single Entity Structure.
• Master Lease/Credit Pass-Through Structure.
Single Entity Structure
End UserEnd User End UserEnd User
Owner(LP or LLC)
Owner(LP or LLC)
InvestorInvestorGP/ManagerGP/Manager
DeveloperDeveloper
PropertyProperty
0.1% Management Fees, etc.
DevelopmentFee
99.9% Tax Credits
Lease Lease
Fee Ownership
Master Lease/Credit Pass-ThroughLessee Claims Credit
DeveloperDeveloper
Master Lessee(LP or LLC)
Master Lessee(LP or LLC)
InvestorInvestorGP/ManagerGP/Manager
PropertyProperty
End UserEnd User End UserEnd User
0.1%
DevelopmentFee
99.9% Tax Credits
Lease Lease
Owner/Lessor(Affiliate of GP/Manager)
Owner/Lessor(Affiliate of GP/Manager)
MasterLease
Should the Owner/Developer Syndicate?
• Factors to Consider:
– Does the Developer have limitations on claiming the credit for itself?
• Is the Developer a tax exempt entity or have insufficient taxable income to be able to use tax credits?
• Business Tax Credit Limitations ($25K +75%)
• Passive Activity Rules Apply
• Can now offset AMT for QRE’s incurred after 2007
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Net Economic Benefits
• Equity raise versus lost cash and (sometimes) lost depreciation.
• Transaction Costs (both closing and on-going).
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Is additional equity needed during construction (i.e. prior to completion of the rehabilitation)?
Should the Owner/Developer Syndicate? Cont’d
• Factors to Consider:
– Control: Are you willing to have a partner?
• Loss of control issues.
• Disclosure and Reporting.
• Unwind concerns.
Finding Investors
• Does your bank or its CDC make HTC investments?
• Referral sources:
– State Historic Preservation Office (SHPO)
– State and local preservation organizations
– Other developers
– Experienced accountants and lawyers
Soliciting Investment Proposals —Things Investors Want to Know
• Proposed Budget and Timing
• Financing Commitments
• Property Acquisition Status
• Real Estate issues including title and environmental issues, zoning, parking and other permitting
Soliciting Investment Proposals —Things Investors Want to Know cont’d
• Leasing Commitments/Market Study
• Part 1 and Part 2 Status
• Development Team—who they are, their experience and financial capacity
Key Syndication Business Issues — Picking The Best Offer
• Pricing
• Equity Pay-In Schedule
• Reserves
• Cash Flow, Fees, Tax Priority Payments and other items that reduce the net economics to the developer
Key Syndication Business Issues — Picking The Best Offer cont’d
• Exit Strategy (Put and Call Options)
• Guarantees
• Structure
• Due Diligence Requirements
• Experience/Reputation and Closing Process
More Information?
John H. Cornell III, Esq.Nixon Peabody LLP100 Summer StreetBoston, MA 02110
(617) 345-1127
