New Market Tax Credit Financing

							New Market Tax Credit
     Investment
             By the
      Michigan Magnet Fund
       Prepared by Albert A. Bogdan
         Tuesday, April 19, 2011
                                NMTC History
    Bill Signed 12/21/2000
    Purpose - Attract $15 Billion in Investment to Low-
     Income Communities
    $2.5 Billion Allocated for 2001 and 2002
    $3.5 Billion Allocated for 2003 and 2004
                   One In Michigan ($27 Million - Wayne County – Detroit CDE Inc.)
    $2.0 Billion Targeted for 2005
                   Michigan Magnet Fund Gets $60 Million Allocation
    $3.5 Billion/Year in 2006, 2007, 2008
                   Only $15 Million Allocation to Michigan


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                 NMTC - How it Works
   39% Investment Tax Credits to Investor for Over 7 Years
           First Three Years = 5%/Year
           Next Four Years = 6%/Year
           Total = 39%
   Funds Used to Invest Almost Any Businesses Located in a
    Low Income Census Tract
   Tax Credits Allocated to a Community Development
    Entity (CDE) by US Treasury
   Cash Flows to CDE as Qualified Equity Investment
       Must Stay in Deal For 7 Years
       Flows In as Equity, Flows Out as Equity, Loan or Loan Purchase
   Deals May Be Pooled or Pass-Through Investments
   Tax Credit Goes to Investor Regardless of Investment
    Success or Failure
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   New Market Tax Credit Flow Chart




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             Criteria for Eligible Location
   Census Tract with
           Poverty Rate > 20% or
           Greater of the Following Two:
                Median Family Income < 80% of MSA Median Income or
                Median Family Income < 80% of Statewide Median Family
                 Income
      95% of Financing Must Have Additional Levels of
       Distress, Poverty Rate > 30%, Median Family Income
       < 60%, Brownfield, Urban Renewal Area, Enterprise
       Zone, etc.
      Go to MMF1.org to Verify Census Tract

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    What Type of Business Can Receive
           NMTC Financing?
   Almost Any Business Units                        No Liquor Stores
    Located In Low To                                No Gambling Establishments
    Moderate Income Areas                            No Golf Courses
    Can Qualify                                      No Collectibles
   Definition Of Business Unit                      No Rental Residential –
           May Be Branch Or Division                 However, Residential Defined as
           Investment Must Be Traced To              Project Where More Than 80%
            The Facility                              of Income Comes from
   Typical Businesses                                Residential Portion
           Shopping Center, LLC
           Small Technology Firm
           Hotel
           Manufacturer
           Retail Store
           Micro Entrepreneur
           Single Family Home Developer

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            MMF Investment Guidelines
Finance Projects That
 Real Estate Projects In Targeted Cities & Rural Areas

 Create Job Opportunities in Low-income
  Communities,
 Are Located In Traditional Downtowns And/Or
  Significant Development “Nodes”,
 Are Needed To Support Low-income Community &
  Neighborhood Development Initiatives
 Support GLCF and MSHDA Development Initiatives


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            MMF Investment Guidelines
   Must Have Sufficient Financing Commitments Acceptable To MMF.
   Must Have Site Control
   An Acceptable Environmental Remediation Plan.
   Minimum MMF Financing is $2 Million. Maximum is $10 Million.
   Other NMTC Allocatees May Be Invited To Partner
   A Long-term, Comprehensive Economic Develop. Strategy in Place.
   Demonstrate Construction to Begin Within 6 Mos. of Commitment.
   The Project Must Meet One of The Following “But For” Tests:
      Costs Exceeding Value (Residuals putted to Owner);
      Insufficient Equity (Residuals Loaned to Owner @ Zero interest);
      Inadequate Cash Flow To Debt Service Coverage;
      Need Low Income Community Vs. Non-low Income Community
        Location Incentive.
   Preference Given To Financial Institutions And Investors Committed To
    Invest In The MMF As Evidenced In Its NMTC Application.
   All Other NMTC Program Requirements Must Be Met.

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     MMF Contract Requirements
MMF Subsidiaries Must Invest:
 100% of Its Investment In Real Estate Projects.
           New Building For A Business Is Not Considered A Real Estate
            Project, i.e., Factory For A Manufacturer, Building For Nonprofit
            To Conduct Its Own Business.
   100% of Its Aggregate Investment In Unrelated Entities
   95% As Flexible, Non-conventional, Or Non-conforming
    To Standard Practice In The Marketplace.
   90% of the MMF Investments Must Be Made In Targeted
    Distressed Areas Which Have More Than Just 20%
    Poverty Or 80% Median Family Income,
           i.e., Brownfield, Redevelopment Area, 30% Poverty, 70% Median
            Family Income, HOPE VI Area, Empowerment Zone, etc.

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                      The Procedures
   Developers Invited to Submit Pre-application
           Need Interest Letter from Investor
   Investment Committee Reviews
           Based on Its Guidelines
   Best Projects Invited to Submit Full Application
           Need Commitment Letter from Investor
           $5,000 Fee Charged
   MMF Makes Firm Offer
   Deal Closed

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                  MMF Fee Structure
   Origination Fee = 2.5%
   Annual Service Fee = 50 Basis Points (0.5%)
   Exit Fee = Zero
   Total Fees = 6.0% over 7 years
   Plus Transactional Cost
           Legal,
           Accounting, &
           Consulting Costs
           Typical $150,000 to $300,000

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    Leveraged Real Estate Investment
 Bank, Pension,
                                        Owner’s Entity
    HUD 108                                                                              Investment Entity
 or Other Loan                             0.01%
                                                                      Equity
                      $7,000,000
                                                                    $3,000,000
                                                    NMTC
                                                    $1,190
              Interest Only                                                 NMTC
                 7 Years                                                   $3,899,810
                                        Investment LLC
                                           (99.99%)                                        Michigan Magnet
                                                                                                 Fund
                                                                                              (Sponsor)
                                                                                                (.01%)
                                 QEI         NMTC          Debt
                              $10,000,000   $3,900,000    Service


                                                                       Origination Costs, Legal,
                                                                           Consulting Fees
                                         MMF A, LLC                           $400,000
                                    A Certified Subordinated
                                        CDE (99.99%)                                     Origination, Legal,
                                                                                        & Consulting Services


                                        Debt         Debt
                                     $9,600,000     Service
                                                                         In Some Cases the Origination Costs,
                                                                           Legal & Consulting costs may be
                                                                              Paid by the Developer After
                                                                            Receiving $10,000,000 in Debt
                                            Owner

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                                 Doing the Deal
                                 No Repayment for 7 Years

   Assumptions
      Lender Lends $7,000,000 to “Investment LLC”
                7 Years
                Interest only
           CDE Provides Tax Credit Allocation to Investment LLC
           Investment LLC Sells Tax Credit for $3,000,000
           CDE Invests $9.6 Million in Firm
                20 Year Amortization
                Balloon Repayment in Year 8
   Results
      Firm Repays CDE $9,600,000
                No National Consistency in Product
                   – Each CDE Can Do Own Thing
                The Tax Credit Portion is Easiest Part of the Deal

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     Leveraged Real Estate Investment
    Commodity Market for NMTC Slowly Taking Shape
    Tax Credit May Not Go to Developer or Owner
    Have Used HUD 108, HOME Funds, Foundation Loans as Debt – Can
     Use Pension Funds
    CDE is Facilitator
       – Need Debt & Equity
       – Price & Deal Negotiable
       – Tax Credit Value Can Vary $100,000/Million




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 Who Can be an Eligible Equity Investor?
   Any Taxable Investor
           Individual
           Company
           Investment Fund
           Debt Investor Can Be Anyone – HUD, Bank, Pension Fund
           Debt Investor Receives No Collateral – Nonrecourse Loan
           MMF Committed Investors are:
               National City CDC
               Key CDC
               Wells Fargo Bank Michigan, N.A.
               Fifth Third Bank CDC
               Bank of America
               First Independence National Bank
               The Huntington Bank CDC


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                   Negotiating the Deal
Points of Negotiation
   Terms & Conditions of Debt to Investment LLC
           No Collateral
           Size of Interest Only (7 Year Balloon)
      Internal Rate of Return for Tax Credit to Equity Investor
      Term & Conditions of Qualified Equity Investment
           No Collateral
           7 year Balloon Principal Repayment
      Fees & Professional Charges
           Try to Keep it Simple – Costs Add Up Quickly
           MMF are Real Estate Deals – Prepare Application – Complete It
           Do not start Paperwork until All Pieces are Together
      MMF Loan – Must Cover Above Commitments
           Collateral
           Interest on $10 Million Loan = Interest on $7.2 Million Loan + 50 Basis Pts
           7 Year Balloon Principal Repayment
           Negotiate Residuals – Based on “But for” Need
               Example - Principal Balloon Repayment Range = $9.6 Million to $7.0 Million


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              Contact Info
   Mr.. Albert A. Bogdan
   Michigan Magnet Fund
   1000 South Washington
   Lansing, MI 48910
   Phone (313) 445-1843
   E-Mail        bogdanaa@aabds.com
   Web page: http://www.aabds.com or
                  http://www.mmf1.org

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