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CITY COUNCIL MEMQIPANDUM

Mayor and City Council

FROM:

DATE:

I SUBJECT: New Markets Tax Credits (NMTC)

Attached are two presentations to facilitate a discussion on New Markets Tax Credits (NMTC)
at the Committee of the Whole meeting November 2, 2009. One is prepared by Mr. Richard
Miller of Angel1 Edwards Dodge & Palmer, LLP, Special Counsel, hired by the City. The
other is prepared by Mr. Ed Gray, Executive Director of Capital Trust Agency - Community
Development Entity, the agency allocating the NMTCs.

a
Vince Whibbs Sr. Community Maritime Park & 
Vice Admiral John H. Fetterman 
State of Florida Maritime Museum and Research Center
October 2009
New Markets Tax Credit Program
y Enacted on December 21, 2000
y Creates a tax credit for equity investments in 
Community Development Entities
y Community Development Entities (CDEs) must 
use Substantially All of the proceeds from the 
Qualified Equity Investments (QEIs) to make the 
Loan into the Qualified Business located in Low‐
Income Communities.
Municipal Controlled CDE History
y New Markets Tax Credits (NMTCs) have a history at 
the municipal level.
y Founded in July 2005, the Chicago Development Fund 
(CDF) is a Community Facilities corporation that 
provides capital to qualifying projects and
y Controlled by the City of Chicago.
CDF Projects ‐ Homan Square 
Powerhouse High School
CDF Projects ‐ Gary Comer College 
Prep High School
CDF Projects ‐ Christ the King 
College Prep High School
CDF Projects ‐ Imperial Zinc
CDF Projects ‐ Community Career 
Training & Economic Development 
Center
Sample NMTC Structure
Transaction Summary
1.NMTC investor provides 
equity to the CDE
2.Sub‐CDE provides debt 
financing to the project
Equity (QEI) Tax credits and 
3.The loan has a 7 year  cash return
term consistent with the 
tax credit schedule
4.Project makes interest‐
only payments during the 
term of the loan
Loan (QLICI) Repayment 
5.Loans are repaid or  of loan

refinanced at the end of 
the seven‐year compliance 
period
State New Markets Tax Credits
y FL Statute 288.9914 (5) ‐‐ The qualified community 
development entity must issue the qualified 
investment in exchange for cash within 60 days after 
it receives the order approving an investment as a 
qualified investment, otherwise the order is void.  
y State tax credit time constraints
y 60 days to cash
y November 29, 2009 (Sunday)
y November 30, 2009 (Confirmed with the state)
State New Markets Tax Credits
y FL Statute 288.9915 (3) ‐‐ A qualified active low‐
income community business, including its affiliates, 
may not receive more than $10 million in qualified 
low‐income community investments under the New 
Markets Development Program Act. 
y CTA‐CDE received the maximum amount allowed by 
Florida Statute for the Maritime Park.
State New Markets Tax Credits
Leverage Effect Leverage Example
The Florida NMTCs allow for 
one (1) QEI to be used for both 
federal and state NMTCs.

$4.S6MM NMTC EquiLy


Transaction that must close by 
November 30, 2009
y $10 million investment (QEI) into Investment LLC by 
the tax credit investor (US Bank).
y NO UP FRONT COSTS REQUIRED of CMPA other 
than closing costs and obligation to pay unwind costs
y Agreement with US Bank to fund the sub‐CDE within 
9 months.
y Substantial penalties and interest if sub‐ CDE is not 
funded.
NMTCs Market
New markets tax credits, both federal and state, are a 
market driven investment.  The market is currently 
devaluing tax credits, and delays in this environment 
have already lowered the benefits to CMPA by 
$980,000.  The current anticipated pricing for the 
Florida credits is as follows:
Calculation of Anticipated State of FL NTMC Value
Anticipated FL NMTC pricing
Assumptions
Maximum QEI per project 10,000,000
Gross value of FL NMTCs 3,900,000
Value of federal NMTCs 26.1% of QEI
Additional discount from value of federal NMTCs 25.0%
Net value of FL NMTC after additional discount from federal value 19.6%
NMTC equity anticipated from FL NMTC 1,957,500
Funding Proposal to Construct Park
AND Maritime Museum
Updated as of 10/30/2009
Sources
Gross proceeds from sponsor equity (CRA) $  43,000,000.00 
Museum Shortfall in fund raising 2,040,375.00 
Museum Pledges 727,972.00 
Museum Cash on Hand 4,463,879.00 
NMTC equity - Federal 18,450,574.00 
Net Benefit of NMTCs
NMTC equity - State 1,957,500.00 

Total Sources $  70,640,300.00  NMTC equity ‐ Federal $  18,450,574.00 


NMTC equity ‐ State 1,957,500.00 
Uses
CMP Infrastructure proj (incl $2M pre‐dev) $  40,000,000.00  Debt Service & Payoff (3,214,800.00)
Museum Project 20,000,000.00 
CDE Award Fee (3,489,500.00)
Cost of Issuance 661,232.00  Compliance and Audit over 7 
Capitalized Interest ‐ bonds 2,338,768.00  Years (420,000.00)
CDE Fee for Allocation Award 3,489,500.00 
NMTC Legal & Other Professional Fees 516,000.00  NMTC Legal & Professional (516,000.00)
Compliance and Audit over 7 Years 420,000.00 
$  12,767,774.00 
Debt Service (1% of $26,790,002) "NMTC Debt" 1,875,300.00 
PayOff Sinking Fund to Retire NMTC Debt in Yr. 7 1,339,500.00 

Total Uses $  70,640,300.00 
Minimum Necessary for Preserving the State 
Credits
Updated as of 10/30/2009

Sources

Gross proceeds from sponsor equity (CRA) $    5,432,500.00 

NMTC equity - Federal 2,610,000.00 


Net Benefit of NMTCs
NMTC equity - State 1,957,500.00 

Total Sources $  10,000,000.00  NMTC equity ‐ Federal $    2,610,000.00 

NMTC equity ‐ State 1,957,500.00 


Uses
Debt Service & Payoff (548,100.00)
CMP Infrastructure proj (incl $2M pre‐dev) 8,015,900.00 
CDE Award Fee (500,000.00)
CDE Fee for Allocation Award 500,000.00 
Compliance and Audit over 7 Years (420,000.00)
NMTC Legal & Other Professional Fees 516,000.00 
NMTC Legal & Professional (516,000.00)
Compliance and Audit over 7 Years 420,000.00 

Debt Service (1% of $4,567,500) "NMTC Debt" 319,725.00  $    2,583,400.00 

PayOff Sinking Fund to Retire NMTC Debt in Yr. 7 228,375.00 

Total Uses $  10,000,000.00 
Benefits and Risks to preserving the State tax 
credits by November , 30, 2009
Benefits
y The CMPA will realize a net benefit in cash for 
qualifying projects of approximately $2.5 million
Risks
y If the funding by USBank of the $10 million QEI does 
not convert to an investment within 9 months for 
CMPA projects, the “unwind” costs result in a penalty 
and legal costs totaling approximately $1.2 million.
Action Necessary
y The CRA be authorized to provide financial guarantee 
to the CMPA to fund a minimum leveraged debt of 
approximately $5.5 million to fund a qualifying NMTC 
investment by August 30, 2010.
y The resulting qualifying benefit to projects of the 
CMPA will be approximately $2.5 million.
y Total project funds available will be approximately $8 
million.
Contact:

Ed Gray, III
Capital Trust Agency Community Development Entity 
edgray3@ctacde.com

Alex Bell
Capital Trust Agency Community Development Entity
alexbell@ctacde.com
CITY OF PENSACOLA, FLORIDA

PRESENTATION
ON USE OF
NEW MARKETS TAX CREDITS
IN CONNECTION WITH
TAX EXEMPT AND TAXABLE MUNICIPAL
BONDS

RICHARD J. MILLER, ESQ.


STEVEN L. PAUL, ESQ.
EDWARDS
ANGELL
PALMER & NOVEMBER 2, 2009
DODGELLP 1
Background Information:
Rick Miller and Steve Paul are partners in the Public
Finance and Tax Departments of Edwards Angell
Palmer & Dodge LLP, a large national/international law
firm centered in Boston with offices in Fort Lauderdale
and West Palm Beach, Florida. The firm specializes in
municipal bond work, corporate tax matters, including
tax credits, among other areas.

We serve as disclosure counsel to the City in


connection with its financings and have been asked by
the City Attorney and Finance Director to serve as
special counsel in connection with New Markets Tax
Credits (“NMTCs”).
EDWARDS
ANGELL
PALMER &
DODGELLP 2
We have served as bond counsel and as special NMTCs
counsel in many such transactions throughout the Northeast
and other parts of the country.

The use of New Markets Tax Credits in connection with


municipal bonds is not new. Their use in connection with
taxable Build America Bonds is new because such bonds are a
creature of the recently enacted economic stimulus act, the
American Recovery and Reinvestment Act of 2009 (“ARRA”).

Your City Attorney and Finance Director requested our response


to issues and questions emanating from staff and members of
the City Council relating to the use of New Markets Tax Credits
in conjunction with municipal bonds, which we will address
EDWARDS today as part of our presentation.
ANGELL
PALMER &
DODGELLP 3
Goals Today:
I. To provide an introduction to New Markets Tax Credits,
defining terms where necessary, and explaining their
contemplated use.

II. To explain New Markets Tax Credit considerations for the


Community Maritime Park Project, including the security and
flow of funds were New Markets Tax Credits to be used in
connection with the City’s municipal bonds.

III. To review the nine initial questions, and any further questions
on the use of New Markets Tax Credits raised by Messrs.
Barker and Wells, including:

A. explaining why it is necessary to change the


composition/corporate control of CMPA to accomplish the
transaction with Build America Bonds, and
EDWARDS
ANGELL B. outlining the risks associated with the use of New Markets
PALMER & Tax Credits, and the steps we would recommend that the
DODGELLP City take to mitigate risk. 4
IV. To outline the documents required in connection with New
Markets Tax Credits.

V. To review the required disclosure to investors in the Official


Statement.

EDWARDS
ANGELL
PALMER &
DODGELLP 5
I. WHAT ARE NEW MARKETS TAX CREDITS?
“New Markets Tax Credits” (“NMTCs”) are federal tax credits
used to raise investment capital for qualified businesses in low-
income communities (any census tract with a poverty rate of 20%
or more). They are governed by Internal Revenue Code section
45D and Treasury Regulations section 1.45D-1. The Community
Development Financial Institutions Fund (“CDFI Fund”), a part of
the U.S. Department of Treasury, administers the New Markets
Tax Credit Program.

“Community Development Entities” (or “CDEs”) are the


vehicles through which NMTCs investments are made. CDEs
must apply for certification by the CDFI Fund in order to receive
tax credit allocations. To qualify, a CDE must show that their
primary mission is to serve the needs of, or provide investment
EDWARDS capital via equity or loans to, low-income communities or
ANGELL individuals. Community development entities must be either
PALMER &
DODGELLP
partnerships or corporations for tax purposes.
6
A Community Development Entity must apply to the CDFI Fund for
an allocation of New Markets Tax Credit investment authority.
Allocations are subject to an aggregate annual dollar limit,
currently $3.5 billion, and are made once a year. Allocatees have
included banks and other for-profit entities, nonprofits and state
agencies. In this instance the primary Community Development
Entity is Capital Trust Agency –Community Development Entity,
LLC.

Community Development Entities sell NMTCs for cash to investors


in exchange for investors’ equity investment in the CDE referred to
as qualified equity investments (or “QEI”). Investors receive tax
credits over a seven-year period, and the tax credits amount to
39% of the equity investment in the Community Development
Entity. For example, if an investor invests $1,000,000 in a
EDWARDS
ANGELL Community Development Entity, the investor receives tax credits
PALMER & totaling $390,000 over seven years.
DODGELLP 7
Expenditure Requirements. Upon receiving cash from investors
in exchange for NMTCs, a Community Development Entity has
twelve (12) months to place at least 85% of the investor’s cash in
qualified low-income community investments such as the
Community Maritime Park Project. This 85% requirement, which
is statutory, is usually increased typically to 95% by the terms of
the Allocation Agreement between the CDE and the CDFI Fund.

Maintenance of investments must be maintained for seven years


or the tax credits will be subject to “recapture” by the IRS and the
loss of their value. Consequently, the Community Development
Entity cannot make distributions to its members or shareholders in
excess of its operating income from the qualified low-income
community investments.
EDWARDS
ANGELL
PALMER &
DODGELLP 8
Qualified low-income community investments include any capital
investment or equity investment in, or loan to, a “qualified active
low-income community business” (“Qualified Business” or
“QALICB”). CMPA is expected to qualify as a Qualified Business.
Because of the requirement that the investment be outstanding for
seven years, loans to QALICBs frequently provide for interest-only
payments during this seven-year period.

Qualified Businesses or QALICBs are, generally, businesses


that, in any given tax year, generate at least 50% of their annual
gross income by conducting business in a low-income community,
use at least 40% of their tangible property within a low-income
community and perform at least 40% of their services in a low-
income community. In addition, not more than 5% of the assets of
a Qualified Business can consist of “collectibles” or “nonqualified
EDWARDS financial property,” which includes cash and cash equivalents
ANGELL (other than reasonable working capital and accounts receivable),
PALMER &
DODGELLP securities and similar property. 9
Thus, for example, a nonprofit with a substantial endowment
would have to form a separate legal entity that constitutes a
Qualified Business in order to receive money from a Community
Development Entity. If a business has no employees, it is not
required to perform 40% of its services in a low-income
community but may be a qualified active low-income community
business if 85% of its assets are located in such a community.

EDWARDS
ANGELL
PALMER &
DODGELLP 10
Leveraged loans (such as the City’s bond financing) enhance
NMTCs value/return. Many investors and CDEs seek to leverage
the investor’s investments in order to maximize the tax credits and
make the New Markets Tax Credit Program more attractive to
investors. The use of leverage means that the investor borrows
most of the money used to make its investment in the CDE.
These loans, referred to as “Leverage Loans”, are typically
nonrecourse, and secured by the investment in the CDE. Note
that the Leverage Loan is made to the investor, rather than the
Qualified Business, and is typically secured by the investor’s
equity interest in the Community Development Entity, not by any
security interest in the Qualified Business. Leveraging will be
explained further in Part II in the context of the proposed
transaction.

EDWARDS
ANGELL
PALMER &
DODGELLP 11
II. NEW MARKETS TAX CREDIT CONSIDERATIONS FOR THE
COMMUNITY MARITIME PARK PROJECT, INCLUDING THE
SECURITY AND SOURCE OF PAYMENT FOR BONDS.

The following is a brief description of the financing of the


Community Maritime Park Project (the “Project”) if augmented by
the use of NMTCs as shown in the proposed Official Statement for
the financing.
Capital Trust Agency and its CDE, Capital Trust Agency –
Community Development Entity, LLC (“CTA-CDE”) have
committed $35,000,000 in NMTC investment authority to CMPA
and the Community Maritime Park Project (the “Project”) and are
seeking commitments of an additional $35,000,000 from other
Community Development Entities for a total NMTC investment of
$70,000,000. Such an investment is estimated to generate
$27,300,000 of NMTCs over seven years, resulting in additional
proceeds for the Project estimated at between $15,000,000 and
$20,000,000. These additional proceeds would be used for
EDWARDS construction of a museum for use by the University of West Florida
ANGELL or its not-for-profit subsidiary, or a conference center or other
PALMER & component of the Project.
DODGELLP 12
To effectuate the additional NMTC investment, the following
structure would be employed: Series 2009 Bond proceeds in
the amount of up to $43,000,000 received by the City would be
loaned to the NMTC investor entity (the “Investor”) and used by
the Investor, together with its own equity investment (“NMTC
Equity”) and other available sources (such as proceeds from the
sale of state NMTCs and funds provided by the University, to
make qualified equity investments in CTA-CDE and the other
CDE(s), of up to $70,000,000 which investment would entitle the
Investor to NMTCs. See Diagram.

EDWARDS
ANGELL
PALMER &
DODGELLP 13
Maritime Park and Museum – Leveraged NMTC Financing Structure
Bond Debt
Service

Bond Purchaser
Bond Proceeds

Issuer

Loan of Bond Issuer loan


Proceeds ($40MM) debt service

NMTC Equity
Leverage Loan
NMTC Equity ($10MM)
Other Sources
($20MM) New Markets Tax Credit
Investor(s) (Bank Debt,
NMTCs Investor Fund
Debt service? Museum Funds)
9 %
99 .
CTA $35MM Investment Cash Distributions
Investment
Investment (QEI) &
Cash Distributions NMTCs (QEI)
.1% (QEI)
& NMTCs
Fees
New Markets New Markets New Markets
Tax Credit CDE – I Tax Credit CDE – 2 Tax Credit CDE – 3
Capital Trust ? ?
Loan Loan
A and B Payments A and B Loans Payments A and B Loans
Loans
Museum
Community Maritime Park Lease
Associates, Inc. Maritime Museum
(Owner/Lessor) - QALICB (501 ( c ) ( 3 ))
Rent
501 ( c ) ( 3 ) (nominal)

Grants of tax revenues

CRA
The Leverage Loan from the City to the Investor would be interest-
only for seven years and would be secured by a pledge of the
Investor’s equity interest in CTA-CDE and the CDE(s). CTA-CDE
and the CDE(s), in turn, would make senior and subordinate loans
to the active Qualified Business, in this case, CMPA, to finance
substantially all of the Project. The amount of the senior loan is
expected to be $43,000,000, corresponding to the Series 2009
Bond proceeds loaned to the Investor and the amount of the
subordinate loans would be based upon the NMTC equity and
other sources less any fees and transaction costs paid by the
CDE. All the loans from the CDE would also be interest-only for
seven years and would amortize fully over their remaining terms.

EDWARDS
ANGELL
PALMER &
DODGELLP 15
CMPA Repayment Obligations. The principal source of
repayment by CMPA of such loans would be a first claim on Tax
Increment Revenues per agreement to be entered between
CMPA and the CRA providing that the CRA would compensate
CMPA for development of the Project. Thus, if NMTCs are
used, the Series 2009 Bonds would have a security interest in
the equity interests in CTA-CDE and CDEs and a claim only on
the Tax Increment Revenues in the Redevelopment Trust Fund
available after the payment of debt service on the CDE loans.

EDWARDS
ANGELL
PALMER &
DODGELLP 16
The source of CMPA loan repayment would be its income, to
include the Tax Increment Revenues (in an amount sufficient to
pay debt service on the CMPA loan) received from the CRA.
CMPA then pays such amount to the CDE, and the CDEs remit
payment to the Investor. Finally, the Investor uses the amounts
received from the CDE(s) to pay debt service on the loan from the
City which then becomes Pledged Revenues available for
payment of the Series 2009 Bonds.

To the extent there is a shortfall in such payment for any reason,


including the bankruptcy of CMPA or the CDE(s) or other claims,
the City has covenanted in the Bond Resolution to appropriate in
its annual budget, by amendment if necessary, in each Fiscal
Year, Non-Ad Valorem Revenues sufficient, after application of the
other Pledged Revenues and any applicable Federal Direct
EDWARDS
ANGELL Payments, to pay the Bond Service Requirements on the Series
PALMER & 2009 Bonds, as the same shall become due and payable.
DODGELLP 17
Federal Direct Payments with respect to BABs would remain
Pledged Revenues outside the NMTCs structure, as would
Pledged Revenues with respect to Bonds evidencing the
proceeds of the Series 2009 Bonds that do not fund the loan to
the Investor ($2,935,000*).

* Preliminary; subject to change.

In the event NMTCs are employed, the City may amend the
Bond Resolution to provide fully for the foregoing, so long as
such amendment would not cause a change in the ratings then
carried on the Series 2009 Bonds.

EDWARDS
ANGELL
PALMER &
DODGELLP 18
Under the loan agreements with CTA-CDE and the CDE(s),
CMPA would make certain representations and provide certain
covenants to support the conclusion and reasonable expectation
of the CDE(s) that CMPA qualifies and will continue to qualify as
a “qualified active low-income community business” (“QALICB”)
under the Code. If CMPA fails to continue to qualify as a QALICB,
misrepresents or violates the covenants or representations made
to the CDE on which the CDE relied, or fails to cooperate with the
CDE in maintaining its CDE status, such failure may result in a
recapture of the NMTCs claimed by the Investor.

EDWARDS
ANGELL
PALMER &
DODGELLP 19
If a recapture were to occur for this reason, CMPA may become
liable for the recaptured amount as set forth in Section 45D of
the Code. As a result, CMPA could be forced to find a source of
funding for such liability, or could be forced to cease operations,
which could negatively affect the Tax Increment Revenues in
possession of CMPA for the payment of the Bond Service
Requirement on the Series 2009 Bonds and operation of the
2009 Project.

These risks are discussed further under the nine specific


questions in Part III.

EDWARDS
ANGELL
PALMER &
DODGELLP 20
III. NINE SPECIFIC QUESTIONS RAISED IN CONNECTION WITH THE
USE OF NEW MARKETS TAX CREDITS, INCLUDING (A) WHY
CHANGES IN CMPA CONTROL, AND (B) THE RISKS.

Question 1 Can tax-exempt bonds be used in conjunction


with NMTCs to fund the Project?

Answer 1 Tax-exempt bonds may be used in conjunction


with NMTCs under the Code. In our view, the tax-exempt status
of the bonds is determined by ultimate use of the bonds proceeds,
in this case by CMPA as described below, rather than their use by
the NMTC investor though which these proceeds pass.

Explanation: Tax-exempt bonds can be either governmental


bonds or tax-exempt private activity bonds, such as tax-exempt
501(c)(3) bonds for not for profit use. In the usual case, City
bonds paid from tax increment revenues would be classified as
governmental bonds because of characterization of the tax
increment revenues as “generally applicable taxes” and the
absence of, or limited nature of, private sector involvement.
EDWARDS
ANGELL
PALMER &
DODGELLP 21
The Distinction for NMTC Structure: Unlike the usual case, the
NMTCs structure requires that proceeds of the City’s bonds and
moneys used to pay debt service on the bonds both flow through
CMPA. If CMPA is restructured to be an instrumentality or alter
ego of the City, the City’s bonds should qualify as tax-exempt
governmental bonds. If CMPA is not an instrumentality of the City,
the City’s bonds should still qualify as tax-exempt, but would be
classified as tax-exempt 501(c)(3) private activity bonds. Although
in either case the City’s bonds would be tax-exempt, a structure
which results in the City’s bonds being classified as private activity
bonds precludes issuance of the bonds as taxable BABs as more
fully described in answer to Question 2.

EDWARDS
ANGELL
PALMER &
DODGELLP 22
Question 2 Can BABs be issued in conjunction with
NMTCs?

Answer 2 The answer turns on whether the proposed BABs can


be characterized as “governmental” under the IRC Code rather
than a “private activity bond” or a private loan bond. Normally,
bonds issued for 501(c)(3) corporations are considered private
activity bonds under the Code where the corporation directly or
indirectly repays the debt and uses the project or the facilities.

Explanation: Since CMPA would (1) receive the loan proceeds


indirectly from the Investors through the CDEs and (2) will, in
effect, “use” the Project under its Lease, this financing would
constitute a qualified 501(c)(3) private activity eligible for tax
EDWARDS exempt funding under the Code but not as a “governmental bond”.
ANGELL
PALMER &
DODGELLP 23
The BAB rules require, among other things, that bonds treated
as BABs must satisfy virtually all of the rules applicable to tax-
exempt bonds, but may not be private activity bonds.
Classification of the City’s bonds as 501(c)(3) private activity
bonds would thus spoil the use of BABs. If the payments in the
payment stream do not retain their characterization as
“generally applicable taxes,” as they move up the chain from
CRA to CMPA to CDEs, the repayment and use by CMPA
would meet the two-pronged private activity bond test and, thus,
preclude issuance of the bonds as BABs. There is no certainty
found in the Code or Treasury rulings that the stream of
payments up the chain shown in the diagram would retain their
character as generally applicable taxes, as they pass from
CMPA through the CDE and the Investor to pay the bonds.

EDWARDS
ANGELL
PALMER &
DODGELLP 24
Reason for City Control of CMPA This conclusion would not
follow were CMPA to be controlled by the City and treated as an
instrumentality of the City. In that event, the bonds would be
deemed to have been issued by the City and repaid by the City,
regardless of the intermediate steps, since CMPA would be an
alter ego of the City for tax purposes.

It is our view that were the structure of CMPA such that it was
controlled by the City, it would, in effect, be an instrumentality of
the City and its bonds issued for the Project would be classified as
governmental bonds. Further, it is our view that the status of
CMPA as an instrumentality of the City will not preclude the
qualification of CMPA as a 501(c)(3) corporation under the Code
or the capacity to use NMTCs in conjunction with tax-exempt
bonds or BABs under this structure.
EDWARDS
ANGELL
PALMER &
DODGELLP 25
What is Control? In order to constitute an instrumentality of the
City, a majority of the members of the Board of CMPA, by virtue of
the terms of the charter and by-laws, must be appointed by the
City and may be removed by the City without cause. At the end of
the day were the 501(c)(3) to dissolve , the assets of CMPA must
be distributed to the City. Accordingly, the charter and by-laws of
CMPA would require amendment and the membership in the
Board adjusted in order to accomplish BAB financing in
conjunction with NMTCs, as only 1/3 of the CMPA board members
are now appointed by the City.

EDWARDS
ANGELL
PALMER &
DODGELLP 26
Question 3 What is the required coincidence of the
timing of the two funding sources? Must they be
simultaneous?

Answer 3 NMTC’s equal 39% of the Investor’s QEI and are


not directly tied to project costs. All the money invested should
be placed in and through the Investor at the same time so that
the Investor can combine the bond or loan proceeds with its own
equity in determining the amount of its QEI. Thus, the Investor
must be in place in time to receive the bond proceeds and invest
them in the CDE.

EDWARDS
ANGELL
PALMER &
DODGELLP 27
Question 4 Under the Code, when must the Project be
completed to afford the benefits of NMTCs?

Answer 4 The Code provides a 12-month period for the


CDE to disburse 85% of the QEI to CMPA, though as a regulatory
matter most allocations agreements increase the required
disbursement percentage to 95%. In order to be a qualified active
low-income business (QALICB), CMPA, in turn, is prohibited from
holding “nonqualified financial assets, including cash in excess of
5% of the adjusted basis of all its assets. There is an exception
permitting CMPA to hold “reasonable working capital” and a safe
harbor under this exception for up to 12 months of construction
expenditures.

EDWARDS Explanation: The cumulative impact of all these rules permits


ANGELL expenditures to be spread over 24 months.
PALMER &
DODGELLP 28
Example: The following is an example of how this can work: if
total Project costs were $24 million to be expended at the rate of
$1 million per month, all $24 million would be paid to the CDE at
closing (so that the Investor can claim NMTCs immediately on the
total investment), $1 million could be disbursed to the qualified
business in each of the next 12 months, and on the final day of the
12 month period, an additional $12 million could be disbursed, and
the qualified business would then have 12 months to expend the
final $12 million.

EDWARDS
ANGELL
PALMER &
DODGELLP 29
Contracted Expenditures: It is contemplated, although not
necessarily within the safe harbor, that it is reasonable to retain
working capital for purposes of contracts that have been let and
are reasonably expected to have been completed within the 24-
month permissible period, but are not. Accordingly, the
reasonably expected contractual period for expending 95% of
the proceeds received from the CDE could be outside of 24
months. This outcome will depend upon the approval of the
investors.

EDWARDS
ANGELL
PALMER &
DODGELLP 30
Question 5 Can the park and the museum be combined as a
single project for purposes of calculation of New Markets Tax
credits benefits?

Answer 5 Yes, if the project is put together in such a way as


the museum and the other Maritime Park improvements are
funded together as a single project within the low income
community.

EDWARDS
ANGELL
PALMER &
DODGELLP 31
Question 6 What is the risk to the City if the tax credits for some
reason are not realized by Investors?

Answer 6 Under the Code, the Investor is at risk for “recapture “ of


NMTCs for an equity investment in a CDE where, (1) the CDE ceases
to be a CDE ; (2) the CDE ceases to use substantially all of the
proceeds of the equity investment for qualified low-income community
investments; or (3) the CDE redeems the Investor’s equity investment. .

Explanation: Since redemption of the investment is entirely within the


Investor’s control, that event of recapture should not place any liability
on the CMPA or the City, even indirectly. Under clause (2), however,
loss of NMTC will result from the failure of CMPA to maintain its status
as a QALICB, the principal risks of which are that it will retain more
than the permitted amounts of nonqualified financial assets or
collectibles. The question remains whether the close nexus between
CMPA and the City could cause liability to the City were Investors’
required to rebate their NMTCs.
EDWARDS
ANGELL
PALMER &
DODGELLP 32
Limit City’s Risk. We would recommend that the City take steps
to alleviate the risks attendant to the NMTC obligations of CMPA
by resisting any guarantees concerning CMPA’s QALICB status
and through safeguards built into contracts with contractors and
builders requiring on-time completion, completion bonds and
penalties, not to mention substantial prior planning of the Project
by CMPA , the museum and other participants. In addition,
Project beneficiaries of the NMTCs may be requested to indemnify
CMPA and the City from liability to the extent they benefit from the
use of NMTCs. Moreover, documents should contain a disclaimer
of City liability as stated in the Preliminary Official Statement. The
agreements, representations and warranties to be undertaken
with respect to NMTCs will expressly state that the City is not
liable for and makes no representations or warranties with
respect to NMTCs.
EDWARDS
ANGELL
PALMER & .
DODGELLP 33
ƒ The primary party responsible for the sale of the New Markets
Tax would be Capital Trust and its CDE. The primary parties
responsible for disbursal of the bond and NMTC moneys
received would be the CDE and CMPA. Presumably Capital
Trust would bear any risk concerning the loss of qualified status
of the CDE; CMPA, the loss of qualified status of the Qualified
Business.

EDWARDS
ANGELL
PALMER &
DODGELLP 34
Question 7 This question relates to the substantial cost of
the transaction and, particularly, the substantial commission
to CTA in connection with this transaction. Is this large
commission in the permissible range?

Answer 7 NMTC transaction costs are VERY high. They can


include upfront, annual and exit fees to the CDE, accountants fees
for preparation of financial projections and fees for the separate
counsels of the CDE(s), the Investor(s), the Leverage Lender(s)
and the QALICB. They were nearly $3 million for a recent
transaction in which the gross NMTC equity was about $8.5
million and the allocation was $30 million. Thus the net to the
project was about $5.5 million.

EDWARDS
ANGELL
PALMER &
DODGELLP 35
Question 8 What is the but/for test and does it present
an issue here?

Answer 8 It appears that part of the Project and particularly


the museum would not be funded without the use of tax
increment monies in any timely fashion--the museum may take
years to raise required amounts. However, the but/for test may
be a regulatory matter because it’s not part of the Code relating
to New Markets Tax credits, but rather, possibly, a policy of the
oversight agency, CDFI.

EDWARDS
ANGELL
PALMER &
DODGELLP 36
Question 9 Can the City act as trustee or disbursement
agent in connection with the funds in the hands of CMPA.

Answer 9 Yes. An agency agreement would be permissible.


The City may act similar to the way a lender would in overseeing
its loan proceeds. Funds would need to flow to CMPA as
outlined but could be deposited by CMPA in a project account
administered by the City. Here, City may not want to associate
itself with the terms of disbursement that could affect the timing
of required expenditures.

EDWARDS
ANGELL
PALMER &
DODGELLP 37
IV. DOCUMENTS REQUIRED IN NEW
MARKETS TAX CREDITS TRANSACTIONS
ƒ QLICI Loan Documents between the CDE(s) and
CMPA
ƒ Loan Agreement (Senior and Subordinate)
ƒ Promissory Notes
ƒ Mortgages
ƒ Assignments of Leases and Rents
ƒ Agreement between CMPA and CRA regarding
TIF revenues
ƒ Intercreditor Agreement (for multiple CDE’s)

EDWARDS
ANGELL
PALMER &
DODGELLP 38
ƒ Unwind or Exit Documents to collapse NMTC
structure after 7 years
ƒ Put/Call Agreement
ƒ LLC Agreement of CDE(s)
ƒ LLC Agreement of Investment Fund
ƒ Leverage Loan Documents between City and Fund
ƒ Promissory Note
ƒ Pledge Agreement regarding interest in CDE
ƒ Loan Agreements
ƒ Forbearance Agreement
ƒ UCC-1
EDWARDS
ANGELL
PALMER &
DODGELLP 39
ƒ Real Estate and Entity Due Diligence
ƒ Title, survey, environmental, insurance
ƒ Authority and good standing
ƒ Construction and Architects Contracts
ƒ Building Permits
ƒ Opinions
ƒ Overall tax opinion (Investor Counsel)
ƒ QALICB tax opinion (QALICB tax counsel)
ƒ QALICB authority opinion (QALICB general counsel)
ƒ CDE tax and authority opinions (CDE counsel)
ƒ Investor counsel opinions regarding Leverage Loan
ƒ Financial Forecasts

EDWARDS
ANGELL
PALMER &
DODGELLP 40
V. REQUIRED DISCLOSURE TO BOND INVESTORS
Required Disclosure. The Official Statement for the City’s bonds
issued for the Project should have disclosure as to the possible
use of New Markets Tax Credits, the risks involved and the effect
on the flow of funds and bondholders’ security. The information
provided in Part II regarding the flow of funds with New Markets
Tax Credits has been set forth in the draft Preliminary Official
Statement, as well as the risks that have been explained both in
that part and in Part III Question 6.

EDWARDS
ANGELL
PALMER &
DODGELLP 41
The format for disclosure at this point is contained in the draft
Preliminary Official Statement which has been distributed to the
City Council Members in connection with the bond sale. Were
the bond issue to take place simultaneously with the New
Markets Tax Credits investment, the disclosure would change
because the flow of funds and bond documents would have
been modified and the normal flow of funds now set out in the
other parts of the Preliminary Official Statement would be no
longer applicable. The important point is that the bond holders
would receive information similar to that which the City Council
has received with respect to their investment and the effect of
the use of New Markets Tax Credits on their investment.

EDWARDS
ANGELL
PALMER &
DODGELLP 42
ANY TAX ADVICE CONTAINED HEREIN WAS NOT
INTENDED OR WRITTEN TO BE USED, AND CANNOT BE
USED, FOR THE PURPOSE OF AVOIDING FEDERAL TAX-
RELATED PENALTIES OR PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY TRANS-
ACTION OR MATTER ADDRESSED HEREIN.

EDWARDS
ANGELL
PALMER &
DODGELLP 43

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