INVESTING IN TAX CREDITSA General Overview

Agenda

• Two most recognized tax credit types• What you need to know about investment tax credits• Benefits of investment tax credits• Potential risks associated with investment tax

credits• Governmental regulation that positively impacts

investment tax credits• Points of consideration when investing in tax credits

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Types of Credits

• Certificate– Issued by governmental agency– Usually a short term i.e. one year– Typically viewed and accounted for as a purchase, not

an investment• Investment Tax Credits

– Regulated by governmental agency (federal/state)– Can also have industry specific oversight (NAIC)– Longer term benefit i.e. 5 – 10 years

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Investment Tax Credits

• Affordable Housing (Low Income Housing) Tax Credit (IRC Section 42)

• New Markets Tax Credit (IRC Section 45D)

• Energy Tax Credits – Electricity Production (IRC Section 45)

• Others4

Investment Tax Credits - Benefits

• Provide attractive yields

• Volatility can be very low compared with other asset classes

• Social good/Community outreach

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Investment Tax Credits - Benefits

• Lower effective tax rate

• Can be used to offset a variety of taxes– Federal income tax (including AMT in some instances)– State income tax, premium tax, franchise tax and bank

tax– Various “Carryback” and Carryforward” rules

• Can be used to meet certain reinvestment requirements (CRA)

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Investment Tax Credits - Risks

• Construction– Incompletion can prevent the credits from flowing– Delays can cause the credits to be delivered slower

than originally projected

• Production– Failure to place process into production can prevent the

credits from flowing– Lower production levels can cause the credits to be

delivered at a slower rate than projected7

Investment Tax Credits - Risks

• Recapture of credits– Compliance related concerns

• Initial regulatory requirements need to be met to start the flow of credits

• Ongoing regulatory requirements need to be followed to continue the flow of credits

– Financial related concerns regarding the asset– Investment structure issues

• Stripping credits• Historic Boardwalk Case• Virginia Case

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Tax Credit Investments - News

• December 2012 – The NAIC adopts a proposal to equalize the RBC factor used for federal and certain state LIHTC investments across all types of insurers (2.6%)

• April 10, 2013 - In its proposed budget for fiscal year (FY) 2014 the Obama administration proposes to permanently extend the production tax credit for renewable energy property and to make it refundable

• August 6, 2013 – The Obama administration calls on Congress to continue to fund the low-income housing tax credit (LIHTC) and new markets tax credit (NMTC)

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Points to Consider

• Expertise and track record– Financially sound & seasoned providers– Experienced professionals

• Vertical integration of expertise & knowledge of asset management

• Strong relationships with government & regulatory officials• Active in the continuing evolution & improvement of the credit

program• Credit delivery history• Upfront & continued investor services• Ability to customize each investment to each investor’s

needs

Points to Consider

• Broker/dealer vs. syndicator/partner– Do you have a viable, knowledgeable contact?– Do they maintain “skin in the game” over long-term?

• Due diligence & asset management processes

• Ease of implementation– What documentation is required to redeem credits?– Will provider assist with statutory accounting & GAAP

guidelines? 11

Points to Consider

• Geographic diversification – can be good or bad– May make sense to protect against economic

downturns in certain regions– Having assets congregated in states with both federal

and state programs dramatically reduces the risk of recapture due to financial problems of the asset.

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Investment Tax Credits - Recap

• Types of tax credits• Investment tax credits• Benefits of investment tax credits• Potential risks of investment tax credits• Positive governmental regulation impacting

investment tax credits• Points of consideration when making tax credit

investments

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Dan TorgersonDirector of Investor Relations

Email: dtorgerson@aepartners.com

Mobile: 573.356.8423

Corporate Office206 Peach Way (65203)

PO Box 7688

Columbia, Missouri 65205

Phone: 573.443.2021

Southeast Region OfficeThe Forum

3290 Northside Parkway, Suite 330

Atlanta Georgia, 30327

Phone: 404.842.2227