Professional Documents
Culture Documents
FROM:
DATE:
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.
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
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
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:
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.
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.
EDWARDS
ANGELL
PALMER &
DODGELLP 13
Maritime Park and Museum – Leveraged NMTC Financing Structure
Bond Debt
Service
Bond Purchaser
Bond Proceeds
Issuer
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)
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.
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.
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.
EDWARDS
ANGELL
PALMER &
DODGELLP 22
Question 2 Can BABs be issued in conjunction with
NMTCs?
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?
EDWARDS
ANGELL
PALMER &
DODGELLP 27
Question 4 Under the Code, when must the Project be
completed to afford the benefits of NMTCs?
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?
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?
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?
EDWARDS
ANGELL
PALMER &
DODGELLP 35
Question 8 What is the but/for test and does it present
an issue here?
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.
EDWARDS
ANGELL
PALMER &
DODGELLP 37
IV. DOCUMENTS REQUIRED IN NEW
MARKETS TAX CREDITS TRANSACTIONS
QLICI Loan Documents between the CDE(s) and
CMPA
Loan Agreement (Senior and Subordinate)
Promissory Notes
Mortgages
Assignments of Leases and Rents
Agreement between CMPA and CRA regarding
TIF revenues
Intercreditor Agreement (for multiple CDE’s)
EDWARDS
ANGELL
PALMER &
DODGELLP 38
Unwind or Exit Documents to collapse NMTC
structure after 7 years
Put/Call Agreement
LLC Agreement of CDE(s)
LLC Agreement of Investment Fund
Leverage Loan Documents between City and Fund
Promissory Note
Pledge Agreement regarding interest in CDE
Loan Agreements
Forbearance Agreement
UCC-1
EDWARDS
ANGELL
PALMER &
DODGELLP 39
Real Estate and Entity Due Diligence
Title, survey, environmental, insurance
Authority and good standing
Construction and Architects Contracts
Building Permits
Opinions
Overall tax opinion (Investor Counsel)
QALICB tax opinion (QALICB tax counsel)
QALICB authority opinion (QALICB general counsel)
CDE tax and authority opinions (CDE counsel)
Investor counsel opinions regarding Leverage Loan
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