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#cbizmhmwebinar 1
CBIZ & MHM Executive Education Series™
Tax Incentives As Part of Capital Formation EMERGING TRENDS IN REAL ESTATE:
A Collaborative Presentation with
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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide
A member of Kreston International A global network of independent accounting firms
*MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.
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Before We Get Started…
• To view this webinar in full screen mode, click on view options in the upper right hand corner.
• Click the Support tab for technical assistance.
• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
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CPE Credit
This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
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Disclaimer
The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
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Presenters
Steve Dunavant is a Managing Director in the CBIZ MHM Memphis
office. He has over 25 years of public accounting experience with both
local and international accounting firms. Steve specializes in the areas of
pass-through entity taxation, entity structuring for privately held
businesses, and mergers and acquisitions for privately held businesses.
He provides guidance and counsel on variety of financial and taxation
matters involving borrowing and capitalization, acquisitions and
divestitures, joint venturing, succession planning, and the utilization of
tax incentives.
Steve serves clients in a wide range of industries and diverse types of
ownership ranging from private equity firms to family groups. He works
with a number of attorneys and private equity groups to structure
agreements and transactions to suit the needs of the client and its
investors. He has also designed compensation planning strategies for
tiered partnerships.
901.685.5575 • [email protected]
STEVE DUNAVANT, CPA Managing Director
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Presenters
Joel Superfon is the Director of Investment Management and Advisory
Services of Dudley Ventures, a position he assumed in August 2006
following 10 years of combined financial, real estate, legal and strategic
development experience. Joel has led and closed transaction volume in
excess of $1 billion in connection with structured business, real estate
and renewable energy project financings utilizing benefits from multiple
federal and state tax credit programs.
A native of Arizona, Joel earned his JD/MBA from the University of
Denver and his BS from the University of Southern California. Prior to
joining Dudley Ventures, Mr. Superfon worked for Wells Fargo Bank
servicing commercial business clients where he incorporated business
and real estate underwriting, financial analysis, and business
development skills to successfully grow and manage a middle-market
portfolio.
602.759.5310 • [email protected]
JOEL B. SUPERFON Director of Investment Management
and Advisory Services
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Agenda
02
01
03
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Types of businesses and projects that qualify for NMTCs and HTCs
Mechanics of a combined NMTC/HTC transaction; representative successful NMTC/HTC transactions
Questions
CBIZ MHM and Dudley Ventures welcome you to today’s discussion of how the New Markets Tax Credits (NMTC) and Historic Tax Credits (HTC) can be employed, along with traditional sources for capital, to fund real estate development project costs. Topics will include:
NMTC and HTC program basics; how the subsidies work
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New Market Tax Credits (NMTCs)
• The New Markets Tax Credit (“NMTC”) Program was created in 2000 and is run by the CDFI Fund, a part of the Department of the Treasury.
• The credits are competitively allocated annually to Community Development Entities (“CDEs”) that, in turn, invest in Qualified Active Low-Income Community Businesses located in qualifying census tracts in Low-Income Communities.
• The $61 billion NMTC Program was recently extended through 2019, with $3.5 billion being awarded to CDEs annually.
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New Market Tax Credits (NMTCs)
• 39% Tax Credit used to offset corporate income tax over a 7 year-period.
• New Markets Tax Credits are a “shallow” credit with approximately 20% of the project cost subsidized from the sale of the credits.
• New Markets Tax Credits can take the form of a permanent subsidy to the Project or Business.
• 7 year compliance period.
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What Can Be Financed
• Typical NMTC project size is $10-$20 million
• Non-profits and for profit businesses
• Types of projects that may qualify for NMTCs: • Hospitals, health centers, medical office buildings and other health related facilities • Community centers • Manufacturing and industrial facilities • Educational facilities • Mixed-use commercial/residential properties (more than 20% of gross income from non-
residential portion) • Cultural facilities • Energy technology companies • Grocery, food processing businesses, food distribution facilities and food production
businesses
• Crosstown Concourse combined healthcare, arts, education, sustainability, social services, and more
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Where Can Projects Be Located?
Qualified locations are low-income communities in areas where the poverty rate exceeds 20% or the median income is below 80% of the greater of the statewide or metropolitan area median.
Non-profits and for profit businesses
Highly Distressed Qualified Census Tracts are locations which also include one of the characteristics below: The poverty rate exceeds 30% Median family income below 60% Unemployment rates at least 1.5 times the national average Rural/non-metropolitan census tracts “Targeted populations” Crosstown Concourse is located in a severely disinvested area where the
poverty rate is 37.6% and the unemployment rate is 2.29 times the national average.
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NMTC Community Impacts and “But For” Test
• Creation of new quality jobs – jobs that pay living wage and above average for a similar position
• Jobs to low-income individuals
• Training and advancement, particularly for low-income individuals
• Creation of community services – focus on serving the low-income community
• Create of goods and services – access to fresh food, basic and supportive goods, other goods and services
• Flexible lease rates and affordable housing units – using the subsidy to provide lower rents to non-profits, small businesses and apartment units
• Impact to minorities
• Sustainable outcomes - remediation, LEED, or other environment outcomes; alternative energy, green manufacturing, and green/recycling projects
• Catalytic and ability to spur additional private investment
• But For NMTCs, the project would not have sufficient capital to move forward
• Crosstown Concourse had strong impacts in almost every category
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Jackson State University – Jackson, Mississippi
$27,000,000 NMTC Qualified Equity Investment
• Located in Jackson, Mississippi in a highly-distressed, low-income area with a poverty rate of 34% and a median family income of 47.9%.
• Development of a 4-story mixed-use facility to include 78 student and faculty housing rental units, approximately 22,000 SF of new retail and office space on the ground floor of the new student housing building.
• The Project was part of Jackson State University and the City of Jackson’s commitment to revitalize the neighborhoods surrounding the campus and connecting to revitalization efforts in downtown Jackson.
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Jackson State University – Structure Chart
TC-JSU QEI, LLC Special Purpose Entity
Tax Credit Investor Owns 100%
Equity = $7,900,000
NMTCs = $8,200,000 State NMTCs = $2,400,000
University Park of Jackson II, LLC QALICB
0.01%
Loan C: $7,532,868
CDE
debt service
$4,400,000, 7 Years, Interest Only
JSUDF Affiliate Jr. Leverage Lender
QEI $6,000,000
Sub-CDE 1
Tax Credit Investor (Federal & State) Bank
Sr. Leverage Lender
debt service
$9,400,000, 7 Years, Interest Only
Sub-CDE 2 Sub-CDE 3 CDE CDE
Loan A: $4,400,000 Loan B: $2,400,000
Loan A: $4,400,000 @ Terms to Mirror Jr.
Leverage Loan Loan B: $1,100,000
QEI $8,000,000
QEI $7,000,000
0.01% 0.01%
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Jackson State University – Community Impact
• The redevelopment of the neighborhood surrounding JSU was a central part of the City’s efforts to revitalize downtown Jackson and the surrounding communities and attract new residents.
• The project was endorsed and supported by the City of Jackson, its Mayor and City Counsel as well as the President of the University and JSUDF, who saw the revitalization of the neighborhood adjacent to the University Campus as critically important to the City and the University.
• The redevelopment leveraged the economic strength of JSU students and faculty and other public employees. The combination of facilities dealing with both of these underserved markets, with the addition of community serving facilities, creates a balanced, livable community.
• Below-market rate commercial rents support retail tenants which are all small, local businesses and minority-owned and operated.
• Moderately-priced housing offered to JSU students and faculty, with 26% of units meeting affordable housing criteria.
• Created 150 full-time construction jobs.
• Created 61 new full-time positions.
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Use of Incentives – Historic Tax Credits (HTCs)
• The first federal tax incentive for historic preservation was approved by Congress in 1976 and has since become one of the federal government’s most successful and cost-effective community revitalization programs.
• The Historic Tax Credit (“HTC”) Program is administered by the National Park Service and the Internal Revenue Service in partnership with State Historic Preservation Offices.
• There are two tax incentives for preservation including:
• A 20% tax credit for a certified rehabilitation of certified historic structures; and
• A 10% tax credit for the rehabilitation of non-historic, non-residential buildings built before 1936.
• HTCs are claimed during the first year, subject to a 5 year compliance period, 20% vesting each year.
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Historic Tax Credits – Direct Investment
Tenants
Rental Payments
Tax Credit Investor, LLC
Construction/ Perm Lender
Managing Member (Developer Affiliate)
Historic Tax Credit
Equity
HTCs 99% Credits, Profits & Losses and Cash Flow
1% Credits, Profits & Losses, Fees and
Cash Flow
Developer Equity
Loan Proceeds
Tax Credit, LLC Property Owner
Debt Service
Payments
Tax Credit Investor
Developer
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Historic Tax Credits – Master Tenant
1% Credits, Profits & Losses, Fees and Cash Flow
Developer Equity
51-99% Credits, Profits & Losses, Fees and Cash Flow
Pass-through of Historic Tax Credits Master Tenant owns 0-49% of Property Owner
Lease Payment & Equity Investment/Upfront Lease Payment
Managing Member (Developer Affiliate)
Construction/ Perm Lender Tax Credit Investor, LLC
Loan Proceeds
Debt Service
Payments
Historic Tax Credit
Equity
HTCs 99% Credits, Profits & Losses, and
Cash Flow
Sub-Tenants/ End Users
Rental Payments
Tax Credit, LLC Property Owner
Master Tenant, LLC Master Tenant
Tax Credit Investor
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Twinning NMTCs and HTCs
• NMTCs can be twinned with the HTCs on projects that are both commercial and located in qualified low-income census tracts.
• Approximately 77% of HTC projects are located in NMTC QCTs • Approximately 51% of HTC projects are commercial
• Twinning Structures Master Tenant Structure:
o Building owner passes HTCs to Master Tenant who leases the project from the building owner
o HTC investor owns 99% of the Master Tenant entity & Master Tenants owns TBD % of building owner
o Compatible with NMTC structure
Direct Investment Structure:
o HTCs claimed based on ownership interest in the building owner
o HTC investor owns 99% of building owner
o Compatible with NMTC structure
• Structure Considerations • Depreciation and Tax Implications
• More moving pieces
• Different investors have different preferences
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Crosstown Concourse - Example Project
Crosstown Development Project, Memphis, TN • $200 million redevelopment of a 16- acre tract that includes the historic Sears &
Roebuck Distribution Center and a 1,100 car multi-level parking garage. • A 14-story building is being transformed into a 1.5 million square foot "Vertical
Urban Village" that will include office, healthcare, wellness, retail, restaurants, education, performance and exhibition spaces, a theater and residential apartments.
• The project brings 1,800 jobs to Memphis
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Crosstown Concourse - Project Tenants
• A Step Ahead Foundation • Church Health Center • Christian Brothers University • City Leadership • Crosstown Arts • Crosstown Back Institute • The Excel Center for Adult
Learners • G4S
• The Kitchen Next Door • Methodist LeBonheur Healthcare • Memphis Teacher Residency • The Poplar Foundation • The Pyramid Peak • Southern College of Optometry • St. Jude Children's Research
Hospital • Teacher Town
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Crosstown Concourse - Project Funding Scheme
Non-Profit Loans $12.5 million
Government Grants
$6.250 million
Investor Capital $31.7 million
Bank Loans $80.5 million
City Loan $8.150 million
NMTC Equity $16.4 million
HTC Equity $36 million
Project Costs $191 million
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Crosstown Concourse – NMTC/HTC Master Tenant Structure Chart
NMTC Equity
NMTC Investor NMTCs
Crosstown Building Owner, LLC
(QALICB)
Crosstown Arts Inc. (Leverage Lender)
Leverage Loan
Collateral: Pledge of Fund’s CDE membership; 7 year forbearance
HTC Investor
Crosstown LLC
6 CDEs
Upfront Lease Payments
HTC Equity 99% Interest
Sponsor Equity
Equity 1% Interest
QEI: $56,000,000
NMTC QLICI Loans
Investment Fund, LLC (100% Owned by NMTC Investor )
6 Sub-CDEs Investment Fund Owns 99.99%
CDE Owns 0.01%
Crosstown LLC
Loan Grant
Bank Loan City Loan
Crosstown Master Tenant, LLC
(Master Tenant)
City/HUD Non-Profit
Lender
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Use of Incentives - Twinning NMTCs and HTCs
Impact to Crosstown Concourse and Key Highlights • Total Project Costs - $191 million • NMTCs - $56 million of allocation/$12 million of net subsidy • 6 Community Development Entities • CDEs with a national presence – capital directed at Memphis • Huge Community Impact –
• Creation of new quality jobs • Jobs targeted to low-income individuals • Flexible lease rates
• Sustainable outcomes • Catalytic • Project Readiness – years of planning preceded the tax credit financing process • Permanent subsidy provided through highly favorable loans assigned to the project
via a put/call post compliance
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Use of Incentives - Twinning NMTCs and HTCs
Impact to Crosstown Concourse and Key Highlights • HTCs $36.5 million/$26 million of net subsidy
• Master Tenant Structure • 50% Non-profit Tenants • Disqualified Lease Limitation – lease to non-profits cannot exceed 19
years • National HTC Investor – HTC marketplace with limited to moderate
liquidity • Bridge HTC Equity • Remarkable Adaptive Reuse Project – strong support with the SHPO
and NPS, but stringent historic requirements • Total Tax Credit Subsidy – 20% of total project cost
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Use of Incentives – Crosstown Concourse Example
Benefits • Additional subsidy up to 40%
when twinning • Legal consolidation & cost savings • Tax credits can substitute sponsor
equity • Increased investor return • Mission compatibility with NMTCs
and other state and federal subsidy programs
• Broader community impact & support
• Series 2.0: Can twin ITCs (renewable energy) and utilize 3 credits
Difficulties • Complexity • Each tax credit can cause tension
when satisfying requirements for both credits
• Herding the cats - coordination of more parties/organizations/ agencies/professionals/agendas
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Use of Incentives – Crosstown Concourse Example
Recap • Project Readiness • Clear and Substantial Community Impact – Strong National CDE
Draw • SHPO/NPS Support • Master Tenant Structure • Different NMTC & HTC Investor
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If You Enjoyed This Webinar…
Upcoming Courses: • Building an Actionable and Easy-to-Implement Business Continuity Plan
• 4/13 & 4/20: First Quarter Accounting and Financial Reporting Issues Update
• 4/28 & 5/3: Eye on Washington – Quarterly Business Tax Update
Related Publications: • CBIZ MHM Commercial Real Estate Hot Topics Newsletter
• Complete Insurance Audit Yields Improved Coverage and $600,000 in Annual Savings
• Crowdfunding - The Ultimate Flexibility • Congress Permanently Extends Several Tax Provisions Important to Real Estate
Industry • How to Minimize Your Property Taxes
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