You are on page 1of 8

New MarketsTax Credit Connection

Helping You Stay Connected


Winter 2010

CDFI Fund 2009 NMTC Awards


By: Ed Creskoff, Reznick Group
On October 30th, the Community Development Financial Institutions (CDFI) Fund announced the winners of awards of NMTC authority (allocatees) for the 2009 round of the NMTC program. From 249 applicants the CDFI Fund selected 99 allocatees, to which it awarded the authority to create a 39% tax credit on a total of $5.0 billion of capital. The average award was for $50.5 million in NMTC allocation. As Chart 1 indicates, it seems the CDFI Fund prefers this award size on average, after higher average award sizes for the two years following Hurricane Katrina. Since the programs inception, the CDFI Fund has made 495 awards to Community Development Entities (CDEs) with total awards authorized to create NMTCs on approximately $26 billion of capital. Chart 1. Average Award Size ($ millions)
65.1 56.5 48.8 37.9 49.0 50.5 64.1

2002

2003/4

2005

2006

2007

2008*

2009

Allocation Round
*2008 includes $1.5B of supplemental allocation. Source: CDFI Fund

In This Issue

CDFI Fund 2009 NMTC Awards Beware of the Allocation Agreement

Carver Leverages NMTC to Overcome Homelessness in the Bronx 4 Private Letter Rulings Affecting the NMTC Industry NMTC Coalition Corner About Reznick Group

5 6 8

On average, each competitor for the NMTC awards had about a 40% chance of winning in the 2009 allocation round. Banks had among the lowest success rate in receiving an award. As Chart 2 shows, banks were awarded only 16.7% of the award dollars, roughly the same amount as government entities and somewhat more than real estate companies, both of which were more likely than banks to have winning applications. While the program requires allocatees to invest 85% of funds in low-income communities, 91 of the 99 awardees indicated that 100% of their activities will be provided to areas with higher economic distress than the minimum, and an additional four awardees indicated a minimum of 90% would be targeted to these areas. Ninety-eight of the 99 are committed to providing at least

Chart 2. Percent of Award Dollars by Allocatee Type


Real Estate Developers 12.0% Banks 16.7% Other 55.5% Government 15.8%

Source: CDFI Fund

75% of investments in areas characterized by (1) multiple indices of distress; (2) significantly greater indices of distress than required by NMTC program
Continued on page 3

Reznick Group New Markets Tax Credit Connection

Beware of the Allocation Agreement


By: Dave Raderman, Gallagher Evelius & Jones
Developers are generally aware of the basic requirements of the Internal Revenue Code when attempting to obtain New Markets Tax Credit (NMTC) financing. Usually, the first issues reviewed in determining whether a real estate project qualifies for an NMTC investment are: (i) location is the project in the appropriate census tract; and (ii) the building use and tenants does the project violate the restriction on residential rental property, and are the potential tenants permissible commercial tenants? Developers should be aware that there are additional important contractual requirements agreed to by entities that are allocated NMTCs. If these requirements are not considered until the documentation phase of the transaction, a great deal of time and expense can be wasted. NMTC financing is available to real estate developers through Community Development Entities (CDEs). The CDEs obtain an allocation of the statutorily limited NMTCs from the federal government through the Community Development Financial Institutions Fund. The CDFI determines, pursuant to a competitive process, which CDEs are awarded an allocation. To win these competitions, CDEs, generally, must promise to the CDFI that the CDEs investments will meet more stringent standards than are required by the Internal Revenue Code and related Treasury Regulations. These additional restrictions are memorialized in the allocation agreement the document by which the CDFI officially allocates NMTCs to a CDE. Developers should be aware of some of the more common additional restrictions when discussing their projects with potential investors and CDEs. While any of the additional restrictions can impact the project and make structuring the project more difficult, to a developer the following additional restrictions are most important: (i) Limits on Service Area; (ii) Targeted Distressed Communities; and (iii) Affordable Housing. Limits on Service Area. Some CDEs are restricted to certain targeted geographic service areas in which the CDE can make an investment. The CDE must understand the exact location of the project to determine that the requirement is met.
Targeted Distressed Communities.

Internal Revenue Code Section 45D(e) specifies requirements for all low-income communities that qualify for NMTC projects. The general rule is that a qualifying census tract must either have a poverty rate of at least 20% or a median family income that does not exceed 80% of median family income (based on statewide median family income for nonmetropolitan areas and based on the greater of statewide or metropolitan area income for metropolitan areas). Many CDEs elect more restrictive rules for qualifying areas known as the Targeted Distressed Community rules. There are numerous ways to qualify as a Targeted Distressed Community. Some of the more common methods are as follows: (i) a census tract with poverty rates greater than 30%; (ii) a census tract meeting the median family income test using a 60% limit instead of an 80% limit; (iii) a census tract with an unemployment rate at least one and one-half (1.5) times the national average; (iv) areas meeting at least two of a list of thirteen or more unusual designations; or (v) generally, certain counties, during certain time periods, that are subject to a FEMA major disaster declaration

and that have a FEMA determination indicating such county is eligible for both individual and public assistance. Affordable Housing. Many CDEs are subject to affordable housing restrictions. Allocation agreements with this restriction require CDEs to enter into investments resulting in at least 20% of housing units developed or rehabilitated as a result of such investments being affordable to low-income persons. For rental housing, low-income persons is defined based on 80% of area

median income, and affordability requires the units to be rent restricted. The rent restriction and income tests must be met for the entire seven-year NMTC compliance period. With respect to for-sale projects, the income test is applied at the time of sale only, and, in place of the rent restriction, at the time of the sale, the for-sale units must be occupied by individuals meeting a 38% debt-to-income ratio requirement. When attempting to benefit from the NMTC program, real estate developers

must be careful that their projects meet all of the NMTC programs technical requirements. In addition to the Internal Revenue Code and Treasury Regulation requirements, developers need to understand any additional restrictions and obligations that a CDE has promised to the CDFI in the CDEs application and allocation agreement. Understanding these requirements early in the process helps assure that the developers project is compatible with the CDEs allocation agreement requirements.

. . . NMTC Awards
continued from page 1

rules; or (3) high unemployment rates. Ninety-six indicated that at least 95% of QEI dollars would be invested in QLICIs. Additionally, 96 of the 99 winners indicated that 100% of their investment dollars would be made at least 50% below market and/or with at least five concessionary features. To make the awards, the CDFI Fund used independent graders to evaluate four categories of questions from the applications. A minimum score of Good in each category was required to be considered further. The applications that passed were then rank ordered by total points, with bonus points awarded for effectively demonstrating previous service to disadvantaged businesses or communities and for committing to invest in unrelated entities. The amount of the awards was based on each applicants expected allocation needs for a two-year period. The CDFI Fund vetted past activities to determine if those allocatees that had received prior awards had made effective use of prior awards and met other program requirements. The CDFI Fund then reviewed the awards to direct a targeted amount toward rural areas. The results of this process show

that, as compared with last years initial allocation round, there has been a decrease in the amount committed to rural counties, as shown in Chart 3.

Chart 4. Percent of Allocation Dollars by Predominant Financing Activity


68%

Chart 3. Percent of Award Targeted to Rural Counties


25.6% 18.4% 32%

Business

Real Estate

Source: CDFI Fund

2008 Initial Round

2009 Round

Source: CDFI Fund

Aside from the chart above, which shows the awardees own estimates for projects directed to rural counties, the CDFI Fund states that it will require that an additional $44 million of allocation authority, approximately 0.9% of the total allocation, be directed toward projects in nonmetropolitan counties. The CDFI Funds stated investment target for rural areas is 20% of all dollars invested by allocatees. The CDFI Fund stated that 57% of NMTC proceeds will likely be used to

finance and support real estate projects in low-income communities. The analysis of 2009 allocation round awards by type of CDE (Chart 4) shows a breakdown of award dollars that may favor more real estate investment than the CDFI Fund predicts. Based on new information requested in the applications, some observers expected that the CDFI Fund would comment on the aggregate level of fees that may be charged by CDEs outside of those that are charged from QEIs; however, there was no comment in the award announcements related to those fees. To read more, see the CDFI Funds website at http://www.cdfifund.gov.

Reznick Group New Markets Tax Credit Connection

Carver Leverages NMTC to Overcome Homelessness in the Bronx


By: Angela Butler and James Simmons, Carver CDE
Carver Federal Savings Bank (Carver) was founded in 1948 to serve AfricanAmerican communities whose residents, businesses, and institutions had limited access to mainstream financial services. Today, Carver is the largest African and Caribbean-American operated bank by assets in the United States and continues to operate as a community bank focused on meeting the financial needs of families and businesses throughout its growing service area. Carver Community Development Corporation, a wholly owned subsidiary of the bank, was formed in 2006 and awarded a $59 million NMTC allocation that same year. That allocation has been fully invested and allowed Carver, through its CDE affiliate, to continue its mission of reinvestment and revitalization in the communities it serves. Carver CDE was recently awarded a second allocation of NMTC providing an additional $65 million for investment in low- and moderate-income (LMI) communities across New York City and also in LMI communities in New Jersey and New York States. While Carvers service area is expanding, the Bronx remains a primary area of focus for the new allocation. Through the NMTC program, Carver has actively originated 25% of its 2006 allocation in low-interest loans to Bronx real-estate developers. With investments from Carver and other NMTC awardees, the borough is experiencing a boost in economic development. In addition to improving the quality of the housing stock, NMTC investments have been a catalyst for spurring the next stage of community growth. Carver has financed projects which have included the creation of affordable commercial

space, community healthcare facilities and much needed retail space. One of the most inspiring of Carvers projects is located on Cromwell Avenue in the Highbridge section of the Bronx. The site contains an auto repair shop and parking garage in addition to serving as a new location for the Volunteers of America (VOA), a national organization founded in New York City in 1896. VOA of Greater New York is the largest of the organizations affiliates, operates over 70 programs in the metropolitan area, and is at the forefront of the provision of social services helping troubled individuals overcome homelessness, addiction, untreated mental illness, and intergenerational poverty. VOA had outgrown its previous site and this new facility allowed for the creation of a transitional homeless shelter containing 80 beds, 40 of which have been reserved for soldiers returning from overseas. The new facility is accessible 24 hours a day

and has an on-site social services program that works with program participants to prepare them for independent living while helping them to locate permanent housing. With NMTC financing, Carver was able to refinance a high-interest loan on the property, replacing it with an interest-only payment at a six-year Federal Home Loan Bank (FHLB) rate plus 1% (5.25%). The low interest rate and favorable terms on the new loan allowed the property owner to waive more than $250,000 in improvement costs to VOA, which helped the organization continue investing 90 cents of every dollar received in client care. The Cromwell Avenue project will serve as a catalyst to promote economic development in the Bronx not only through the provision of VOAs valuable social services, but also through added property value and sustainable job
Continued on page 7

Private Letter Rulings Affecting the NMTC Industry


By: Kevin Beattie, Reznick Group
Within the past few months, two Private Letter Rulings (PLRs) were issued by the IRS with potential impact on the NMTC industry. While PLRs are fact specific and can only be relied on as support by the taxpayer requesting the ruling, they do give insight into the thought process of the IRS and how the law is applied to a particular fact pattern. To date, neither PLR has been made public. The first PLR addresses the question of whether a multiple building development can be treated as a single building for the purpose of determining whether it qualifies as residential rental property or nonresidential real property under Internal Revenue Code 168(e)(2). This question has a significant impact on developers and investors wishing to finance a mixed use project containing more than one building under the NMTC program because, under the program, investments in businesses that operate residential rental real estate, as defined in 168(e)(2)(A), do not qualify. The taxpayer represented that the project consisted of three buildings, which were located on contiguous parcels of land, and that the project would be developed into a hotel, a commercial parking garage, and residential space. Despite the different types of uses, the taxpayer intended the development of the three buildings to result in one operating unit. This was supported through the facts represented by the taxpayer and detailed documentation, including one overall plan to finance the project, budgets, management agreements, and contracts that were inclusive of all three buildings. Due to the nature of the project and the facts and representations mentioned above, the IRS affirmed the taxpayers request to treat the separate buildings as a single building for the purpose of determining whether it qualifies as residential rental property or nonresidential real property. Part of the fact pattern provided by the taxpayer indicated that the project would be master leased to an entity that would lease it to the ultimate occupants. While this PLR does provide some clarity regarding the IRS position related to whether the buildings can the dwelling units are rented first and generate disproportionately more of the revenue in the earlier years such that more than 80% of the gross income in the earlier years is derived from the rental of dwelling units? Was the master lease written such that a portion of the master lease income was allocated to the different product types? If so, is the master tenant sufficiently unrelated to the landlord so that the IRS would respect the allocation? Unfortunately, there are not sufficient facts in the PLR to answer these questions. However, in a situation such as this, if the allocations are not thoroughly documented and/or do not fairly represent the true division of residential and commercial revenue, or if the building owner and the master tenant are related parties, then the taxpayer risks having the allocations challenged by the IRS, which could risk their status as a qualified business under the NMTC program. The second PLR dealt with a situation where a CDE was unable to make a QLICI within twelve months of receiving a QEI. The CDE worked diligently with several QALICBs during the twelve months after receiving the QEI, but was unable to close on any of the projects. A short time before the twelve-month window closed, the last two potential QALICBs notified the CDE that they would not be able to finalize the financing before the window closed. At that time, the CDE and the investor asked the IRS to rule on whether they could take advantage of the six-month cure period for the substantially all test in Treasury Regulations 1.45D-1(e)(6) even though the initial QLICI had not been made.
Continued on page 7

be aggregated and treated as one building, it does not provide guidance on how it would determine what portion of the master lease payments is related to residential units. This is critical because if 80% or more of the gross rental income is related to rental income from dwelling units, then the aggregate building would still be residential rental property. Perhaps this was not a concern because when viewed in the aggregate, the projected revenue from the rental of dwelling units was far less than 80%. But what happens if the operations of the buildings start at different times such that

Reznick Group New Markets Tax Credit Connection

NMTC Coalition Corner


Lobbying Needed on the NMTC Extension Act of 2009 On October 30th, Treasury Secretary Geithner joined CDFI Director Donna Gambrell in Chicago to announce the 2009 New Markets Tax Credit Allocation Awards. The Fund awarded $5 billion in NMTC allocations to 99 CDEs, including 24 first-time allocatees. The NMTC Coalition congratulates the FY 2009 allocatees and urges all NMTC allocatees and supporters to make sure that Congress extends the NMTC so we can continue to support the good work of CDEs and NMTC investors with an additional $5 billion in credits in 2010. Congress will begin work on tax extender legislation in November in hopes that it can pass before the end of the year. The NMTC Coalition is working to demonstrate strong bipartisan support for the NMTC extension by getting Senators and Members of Congress to co-sponsor the New Markets Tax Credit Extension Act of 2009 (HR 2628 and S.1583). The NMTC Coalition is urging all NMTC supporters to: Call your Representatives Washington office (202-225-3121) and ask for the staffer who handles tax issues. If you havent done so already, take some time to brief the staffer on how you have used the NMTC in the Members district and then ask them to co-sponsor HR 2628 as introduced by Representatives Richard Neal (D-MA) and Patrick Tiberi (R-OH). Next, call your Senators Washington office (202-224-3121) and ask for the staffer who handles tax issues. Again, take some time to brief the staffer on how you have used the NMTC in the Senators home state and then ask if the Senator will co-sponsor S.1583 as introduced by Senators Jay Rockefeller (D-WV) and Olympia Snowe (R-ME). Copies of HR 2628 and S.1583, along with the House and Senate Dear Colleague letter and fact sheets, can be found on the NMTC Coalitions website (www.nmtccoalition.org ) and can be easily emailed to Congressional offices. Please contact the NMTC Coalition staff at NMTCCoalition@ rapoza.org if you have any questions about the NMTC Extension Act or how to contact your Senators and Members of Congress. Comments on the NMTC Allocation Application In August 2009, the CDFI Fund issued a request for public comments on the NMTC Allocation Application, and the NMTC Coalition submitted a letter on behalf of its members. As the CDFI Fund will not ask for comments again for three years, the Coalition took advantage of the opportunity to offer the CDFI Fund a comprehensive set of comments on issues large and small. While it is unlikely the Fund could implement all of the Coalitions recommendations in the near term, given both the policy and technical application reprogramming that might be needed, we felt it important to raise as many issues as have been noted by one CDE or another over the last few years. A copy of the NMTC Coalitions comment letter can be found on the NMTC Coalitions website (www. nmtccoalition.org ). The Coalitions letter recommended a number of technical changes to the application and also addressed a number of the policy and program issues raised by the CDFI Fund, including: The NMTC Coalition recommends that the Fund change the QEI issuance test for prior applicants to a test based on the dollar amount of QLICIs committed by the CDE rather than the amount of QEIs issued by the CDE. At a minimum, we recommend measuring the amount of cash that a CDE has been able to deploy, which is a stronger barometer of success than the CDEs ability to secure investors. Recasting the test would also create a level playing field for CDEs that are affiliated with an investor and those that are not since affiliated investors can self-issue QEIs just to meet the CDFI threshold even if they have not yet identified a QLICI. The NMTC Coalition urges the Fund to approach the related

party test so that it promotes private sector investing in lowincome communities while also preventing entities from obtaining a federal tax credit to reduce the costs of expanding or building upon their existing businesses. For that reason, we believe that the related party test should focus on the relationship between the investor and the qualified business. The NMTC Coalition suggested that the Fund consider the feasibility of a three-year award of what an applicant requests, up to a maximum of $300 million. The Fund could take a percentage, for example 20%, of each annual allocation amount, and use it to fund such three-year awards. The Coalition would not recommend using more than $2 billion of the $5 billion in allocation authority for multi-year awards in either the pilot program or going forward. There are many issues that would have to be addressed, including whether there needs to be a minimum size of allocation requested or whether only previously successful allocatees could participate. The NMTC Coalition recommends that the Fund require all applicants to self-identify as to whether they are minority CDEs and that the definition of a minority CDE be modified to require (1) a majority of the board of directors be members of a minority population in the case of a not-for-profit organization that controls a CDE or, in the case of a for-profit organization that controls a CDE, a majority of the stock be held by individuals who are members of minority groups, and (2) 50% or more of the applicants and controlling entitys activities be targeted to low- and moderate-income minority populations and/or low-income census tracts which are majority minority.

Please visit the NMTC Coalition website to find a copy of the Coalitions comment letter submitted to the Fund, which offers a more complete description of the recommendations outlined here.

. . . the Bronx
continued from page 4

creation. The project is estimated to create 40 full- and part-time jobs with VOA and an additional 50 construction jobs, which is a meaningful step toward a more prosperous community. In addition to the Cromwell Avenue project, Carver provided a $5.2 million predevelopment loan to Abyssinian Development Corporation, a Harlembased community development corporation. The loan was used toward the renovation of the legendary Renaissance Ballroom, which had been vacant for over 30 years. Carvers NMTC loan will enable Abyssinian Development Corporation to revitalize this historic property while offering community and cultural space, and affordable homeownership opportunities. Carver also provided a $2 million loan to the Community Partnership Development Corporation to capitalize a revolving loan fund that provides no-interest, predevelopment loans and

equity stakes to small, minority- and women-owned housing builders and developers in New York City. Carver has an unparalleled commitment to investing in the most distressed neighborhoods in New York City and has been a great contributor to the revitalization efforts throughout the area. As the recipient of an additional $65 million NMTC allocation in 2008 through the American Recovery and Reinvestment Act, Carver will continue its commitment while further expanding its products and services.

. . . NMTC Industry
continued from page 5

The PLR affirmed that the CDE could avail itself of the six-month cure period, allowing it to continue to negotiate a potential deal. However, the ruling indicated that the six-month cure period did not bring the total window for closing a QLICI to eighteen months. Pursuant to the Treasury Regulations, the clock for the additional six months starts on the date that the CDE becomes aware (or reasonably should have become aware) of the failure to invest substantially all of the QEI proceeds in a QLICI within the twelve-month window after receiving a QEI.

Reznick Group Editorial Board


Austin Baltimore Baltimore Baltimore Bethesda Charlotte Sacramento Matthew Malcom David Norton, Managing Editor Gary Perlow Ira Weinstein Don Nimey Tony Portal Beth Mullen 512-499-1406 410-783-4900 410-783-4900 410-783-4900 301-652-9100 704-332-9100 916-930-5750

Reznick Group New Markets Tax Credit Connection

About Reznick Group


Focusing on the community development and real estate industries for more than 30 years, Reznick Group is recognized as one of the nations leading advisors to developers, managers, lenders, owners, investors, public finance agencies and other participants in the field. As a national leader in providing public accounting and business advisory services, Reznick Group is committed to providing clients with outstanding service. With more than 1,400 professional and staff members serving clients nationwide, Reznick Group provides value by exercising the highest levels of integrity, quality and responsiveness in providing solutions to help our clients meet their business objectives in the community development and real estate industries. To learn more about the services we provide and our perspective on issues that impact your business, please visit www.reznickgroup.com.

We Want Your Feedback!


Please send us your feedback so we can include articles and information on NMTC topics you choose. This approach will ensure you spend your time reading about issues and opportunities that are most important to you! Send your feedback to nicole.mazmanian@reznick group.com.

PRESRT STD U.S. Postage PAID


500 East Pratt Street, Suite 200 Baltimore, MD 21202 (410) 783-4900 Phone (410) 727- 0460 Fax

Permit No. 2446 Merrifield, VA

ADDRESS SERVICE REQUESTED

You might also like