Financing Commercial

Development Commercial Development

Advanced Seminars

Agenda

• Underwriting a Commercial Project

• Constructing a Commercial Pro Forma

• Financing Sources• New Markets Tax

Credits

Underwriting a Commercial Loan

Exercise:

1. Would you recommend funding this loan?

2. What additional information do you need?

3. Do you seen the need to change any aspects of the project before the bank approves financing?

Financing Sources

Types of Financing

DEBT

• Senior Debt– Bank Loan

– Bond Financing

• Subordinate Debt– Community Development

Lenders

– Public Sector Lenders

“EQUITY”

• Traditional Equity

• Tax Credit Equity

• Deferred Developer Fees

• Grants– Foundation Grants

– Economic Development Grants (Federal or local)

SOFT DEBT–Deferred Payment Loans

–Residual Receipts Loans

Federal Economic Development Funds

HUD • Community Development

Block Grants• Section 108 Loans• Economic Development

Initiative/BEDI• Enterprise Zone, etc.

Department of Health and Human Services

• Office of Community Services

Department of Commerce– Economic Development

Administration

State and Local Government Sources

• Local Government– Community

Development Block Grants

– Tax Increment Financing (Redevelopment)

– Community Facilities Districts

– Tax Exempt Bonds– Business Improvement

Districts

• State Government– Tax Exempt Bonds

– State Grant Programs

– State Tax Credits• Enterprise Zones, etc.

Other Sources

• Private Banks• Private Foundations

– Program Related Investments

• Capital Campaigns• Community Development Financial

Institutions– Community Loan Funds– Community Development Banks– National Intermediaries

• 47 units of housing over 10,000 feet of retail• Total Development Cost: $11,011,844• Cost attributed to commercial space: $757,917 (6 %)

Excluded from Tax Credit Basis

• Tenant Improvements for Commercial: $390,000

Financing Sources – Permanent • California Community Reinvestment Corporation (CCRC)• Daly City Redevelopment Agency• City of Daly City• Edison Capital (9% tax credits)

Financing SourcesSchool House Station

Swans Marketplace

Sponsor: EBALDC

Location: Old Oakland

Uses:• Office Space 17,000 sf• Retail 25,000 sf + 18 pkg

including Housewives Market

• Live/work rental 1,000 sf• 20 Cohousing condos

• 18 1- and 2-bdrm apts (50-60% AMI)

Financing SourcesSwans Marketplace

• Wells Fargo Bank ($3,350,000)

• Standard Insurance ($3,300,000)

• California Equity Fund-Historic Credits ($2,100,000)

• Economic Development Administration ($1,700,000)

• Commercial Tenant Prepaid Rent (1,700,000)

• Oakland Redevelopment Agency ($1,150,000)

• Capital Campaign/Kresge Found. ($1,150,000)

• Office of Community Services ($500,000)

• Heron Foundation PRI ($300,000)

• Total:$12,100,000

New Horizons Center

MBD Development Corporation – The Bronx

134,000 square foot shopping center• Pathmark Supermarket

• Athlete's Foot

• Blockbuster Video

• Paramount Home Decorators

• Petland Discount Stores

• Radio Shack

• Rent-A-Center

Financing SourcesNew Horizons Center

Debt:

1st Mortgage (8.75% 25 year amortization)

2nd ESDC (5% 25 years)

2nd LISC (6%, 10 years w/25 yr amortization)

Developer Equity:

Office of Community Services (OCS) ($500,000)

HUD Special Purposes Grant (Congressman Serrano) ($350,000)

Comprehensive Community Revitalization Program ($150,000)

MBD Contribution from Retained Earnings

Private Equity:

The Retail Initiative, Inc. ($3,500,000)

Distribution of Cash Flows New Horizons Center

Hypothetical ProjectionNet Operating Income: $2,515,872Debt Service $2,115872Net Cash Flow $400,000

TRI Preferred Return – 10% $350,000Remaining Cash Flow $50,000NETS – 50% $25,000MBD – 50% $25,000

Fruitvale Transit Village

Sponsor: The Unity CouncilLocation: Oakland, CAUses: • 68,000 s.f. community resources• 47,000 s.f. La Clinica • 52,000 s.f. housing (47)

• 38,000 s.f. retail

• 50,000 s.f. parking

Financing SourcesFruitvale Transit Village

• Citibank• Local Initiatives Support

Corporation• National Cooperative

Bank• City of Oakland• Dept. of Commerce, EDA• US. Dept. of Housing and

Urban Development• Environmental Protection

Agency

• BART• Federal Transit

Administration• Federal Emergency

Management Agency• U.S. Department of Health

and Human Services• California Health Facilities

Financing Authority • Alameda County

Transportation Improvement Agency

Grant SourcesFruitvale Transit Village

• Evelyn & Walter Haas Foundation

• Richard & Rhoda Goldman Fund

• Levi-Strauss Foundation• The Ford Foundation• Neighborhood

Reinvestment Corporation• James Irvine Foundation• National Council of La

Raza• PG&E Corporation

Elmwood Theater

Business Improvement District

• 5 Cents per square foot additional property tax

• Extra fee for businesses open in evenings

• Annual revenuerepays City loan

New Markets Tax Credits

Intent

• Make lower cost capital available to viable businesses in low-income areas

• Generate jobs, services, and physical revitalization

• Encourage partnerships between private investors and community organizations

New Markets Tax Credits are intended to:

Investments

• Investors receive credits for equity investments in Community Development Entities (CDEs) which in turn make equity or debt investments in qualified businesses including:

• For Profit Businesses

• Non Profit Businesses

• Commercial Real Estate Projects

CDEs

• Have a primary mission of community development

• Maintain accountability to residents of low-income communities through a governing board or advisory board

• Are certified by Treasury

Qualified Investments

• Any capital or equity investment in, or loan to, any Qualified Business in a Low-Income Community:

• Note: “Capital investment” means that a CDE can directly own and conduct a business.

• The purchase from another CDE of any loan made by the CDE

• Any equity investment in, or loan to, any CDE

Eligible Uses of NMTCs

• Applies to a wide range of economic development and business activities– Commercial real estate

– Community facilities

– Business financing

• Rental housing is specifically excluded– Mixed-use projects are permissible if less than 80% of

gross revenue is from dwelling units (or if the project is separated into residential & nonresidential components)

Qualified Businesses

• A corporations (including non-profits) or partnerships that derives more than 50% of its income from business in a low-income area.• The rental to others of real property qualifies

only if it is not residential rental property.• A proprietorship will qualify if it would meet the

test were it incorporated.• Any trade or business will qualify if it would meet

the test were it separately incorporated.

Geographic Targets

• Census tracts where:

• The poverty rate exceeds 20% or

• The median income is below 80% of the greater of:

• The statewide median income or

• The metropolitan area median income (for metro areas tracts only)

– Eligible census tracts can be found at: http://www.qsgconsulting.net*

Value of Credits

• The NMTC is based on the amount of equity invested in a CDE - not the cost of the project or business

• The NMTC is claimed over seven years:5% in years 1-3; 6% in years 4 - 7 (39% aggregate)Present value of about 30% Note: the Housing Credit’s present value is 70%- 95%

Result: Activities will need substantial cash flow and capital recovery/appreciation to attract investors.

How it Works

Recapture

• NMTCs are subject to recapture for seven years after an equity investment is made in a CDE.

• Recapture is triggered if either:

– A CDE ceases to be a certified CDE, or

– The equity investment proceeds are no longer “substantially all” used for eligible purposes or

– The CDE redeems the equity investment.

• The amount subject to recapture is the sum of the NMTCs claimed, plus nondeductible interest.

“Substantially All”

• 85% of investment proceeds must be in QALICBs during the first 6 years

• 75% during year 7

• This restriction makes shorter term amortizing loans difficult

• Also makes revolving loans very difficult

Distribution of NMTC Benefits

• NMTC benefits shared by investor, CDE and Project– Investor returns enhanced to cover additional

risk– CDE fees cover costs of obtaining NMTCs &

implementing its program– Project (QALICB) receives more favorable

financing terms

Accessing Credits

• There is more than one way to access credit enhanced investment funds– Form your own CDE, apply for

credits and find an investor– Form your own CDE, apply for

credits and use a syndicator– Apply for funds from someone

else’s CDE

NMTC Allocations• Round I: 2002-2003 Allocation

– $2.5 billion– 66 Awardees – March 14, 2003

• Round II: 2003-2004 Allocation– $3.5 billion– 63 awardees – May 6, 2004

• Round III: 2005 Allocation– $2.0 billion– 41 awardees – May 11, 2005

• Round IV: 2006 Allocation– $3.5 billion– $600,000 Gulf Opportunity Zone supplement

• Round V: 2007 Allocation– $3.5 billion– $500,000 Gulf Opportunity Zone supplement

Patchwork of NMTC Availability

• In addition to the NMTC program requirements, the use of NMTCs is governed by the limits established by the terms of the successful application. They include:– Geography

• State• Region• Nation (identified states)

– Financing Activity• Real Estate vs. Business• Debt vs. Equity

– Fund Structure• Single- vs. Multiple-QALICBs

2005 NMTC Program – Allocation Amounts

• Distribution of 2005 Round Allocations: – 208 CDEs applied, requesting $22.9 billion

– 41 CDEs (or 20% of total applicant pool) received $2 billion

– Average allocation award of approximately $48,780,000

– Allocation award range from $5 million to $100 million

2005 NMTC Program – Allocatee Characteristics

• Characteristics of the 41 Allocatees:– Non-profit organizations (or subsidiaries):

• 17 of the allocatees (or 41%)• Allocations totaling $891 million

– Certified CDFIs (or subsidiaries):• 11 of the allocatees (or 27%)• Allocations totaling $494 million

– Non-CDFI banks or bank holding companies and publicly traded institutions (or subsidiaries:

• 7 of the allocatees (or 17%)• Allocations totaling $381 million

– Governmentally controlled entities:• 4 of the allocatees (or 10%)• Allocations totaling $160 million

2005 NMTC Program – Investment Locations

• Investment locations:– The 41 allocatees are

• headquartered in 20 different states and DC• anticipate making investments in at least 33 different states, as well as

D.C.

– Service areas• 20 of the allocatees (or 48%) will serve a national or multi-state

service area• 8 of the allocatees (or 20%) will serve a statewide service area• 13 of the allocatees (or 32%) will serve local markets (e.g., a citywide

or countywide area).

– Allocatees indicate that they will invest • ~$1.18 billion (or 59%) in major urban areas• ~$494 million (or 25%) in minor urban areas• ~$326 million (or 16%) in rural areas.

2005 NMTC Program – Additional Distress Criteria

• Commitment to Invest in Areas of More Severe Economic Distress:– CDFI Fund has established areas of more severe economic distress

• Project must located in an area that meets (see next slide):– One of three demographic criteria or– Two of ten programmatic criteria

– Most applicants committed to invest in areas of more severe economic distress

– 37 of 41 allocatees indicated that at least 75% of their activities will be in areas of more severe economic distress

– 21 of 41 allocatees indicated that 100% of their activities will be in such areas of more severe economic distress

Demographic Distress Criteria• Poverty rate (greater than 30%)• Median Income (no greater than 60%)

– if located within a non-Metropolitan Area, median family income does not exceed 60% of statewide median family income or

– if located within a Metropolitan Area, median family income does not exceed 60% of the greater of statewide median family income or Metropolitan median family income

• Unemployment rate (at least 1.5 times the national average)

Programmatic Distress Criteria

• Federally designated Empowerment Zones, Enterprise Communities or Renewal communities

• SBA-designated HUB Zones, to the extent that QLICIs will support businesses that obtain HUB Zone certification

• Federally designated Brownfields redevelopment areas• Encompassed by a HOPE VI redevelopment plan• Federally designated as Native American or Alaskan Native areas, Hawaiian

Homelands, or redevelopment areas by Tribal or other authority• Areas designated as distressed by the Appalachian Regional Commission or

Delta Regional Authority• Colonias areas as designated by HUD• Federally designated medically underserved areas, to the extent that QLICI

activities will support health related services• Located in a Hot Zone designated by the CDFI Fund• State or local tax-increment financing districts, enterprise zones programs, or

other similar state / local programs targeted towards particularly economically distressed communities

2005 Planned Investment Types

– Loans to or equity investments in businesses • ~$486 million (24%) of NMTC proceeds

• Allocatees strategies range from microenterprise lending to multi-million dollar venture capital investments

– Loans to or equity investments in real estate projects• ~$1.21 billion (61%) of NMTC proceeds

• Allocatees intend to make investments in commercial, retail, industrial, mixed-use and homeownership projects, as well as in community facilities such as daycare centers, healthcare centers, and charter schools

– Capitalization of other CDEs. • ~$292 million (15%) of NTMC proceeds

NMTC Financing Activities

• Most Common– Commercial Real Estate, including

• Community facilities

• Mixed-use residential / commercial

• Historic tax credit equity

– Business Financing Secured by Real Estate

• Less Common– Venture Capital

– Small Business Financing

– Homeownership

– Working Capital

NMTC Product Types

• Clearly Defined Products– Most Common

• First mortgage loans with below-market rate

– Often with a 7-year term

• Enhanced historic tax credit equity

• Subordinate Loans with terms less than 7 years

– Less Common

• “Cash-on-cash” equity

NMTC Product Types

• Customized Products– A / B Loans, in which the “A” loan mimics a

conventional loan and the “B” loan mimics a historic tax credit equity contribution that may be cancelled after seven-years

– Enhanced historic tax credit equity with / or without an accompanying “A” loan that mimics a conventional loan

– Estimated to represent two-thirds of transactions

What to Expect from Different NMTC Allocatees

• Clearly Defined Products– Allocatee characteristics

• Somewhat more likely to be a financial institution or

• Nonprofit loan fund

– Often this takes the form of

• Interest rate reductions of 200 – 300 BP below market

• historic tax credit equity contributions increased by 20%

– May not require the QALICB to understand the financial interplay between NMTC investors, CDEs, and QALICB

• QALICB knowledge of NMTC Program may be limited to issues relating to satisfying & maintaining QALICB requirements

What to Expect from Different NMTC Allocatees

• Customized Products - Leveraging– Generally employ a “leveraged” structure in which loans are made

to an Investment Fund

• Loans may include financing that would have been provided directly to the project, including:

– Commercial financing

– Concessionary loans from governmental or philanthropic sources

– Developer equity or grants loaned to the investment fund

– Loans to the Investment Fund “generate” NMTC equity

• NMTC equity can equal up to 1/3 of the amount of the loans to the Investment Fund

• NMTC equity can be provided as a “B Loan” that:

– Bears a low rate of interest and can be cancelled after 7 years

What to Expect from Different NMTC Allocatees

• Customized Products – QALICB Involvement– QALICB may be more likely to have some level of

involvement in structuring the “leveraged” financing where:

• Sponsor / developer are making loans to the Investment Fund

• Some portion of the “B Loan” will be cancelled

What NMTC Allocatees Want to Know

• Business & Programmatic Information:– Venture type

• Business

• Real Estate

– Venture location

• NMTC eligible

• Meets distress criteria

– Anticipated community impact

• Square footage of commercial real estate

• Housing units

• Jobs

• Number of people receiving community services

What NMTC Allocatees Want to Know

• Financial & Timing Information:– Type of advantageous NMTC financing sought

• Construction v. permanent

• Lower interest rate v. additional capital

– Impact of advantageous NMTC financing on venture

• Need for advantageous NMTC Financing

• Financial feasiblity of venture with advantageous NMTC financing

– Financing timeline

• Real estate issues (e.g., site control, permits, environmental review)

• Status of non-NMTC financing

2005 NMTC Award Information

• Finding NMTC Allocations– CDFI Fund website

• 2005 NMTC Program – Allocations Highlights

http://cdfifund.gov/awardees/2005/2005NMTC-FAQs.pdf

• 2005 NMTC Program – Allocation List– Name of Allocatee– Headquarters– Service Area– Predominant Market– Allocated Amount– Predominant Financing Activity

http://cdfifund.gov/awardees/2005/2005NMTCallocatees.pdf

Obtaining Assistance• Allocatees

– May provide information on transaction parameters

– Limited ability to structure transactions

• Brokers

– Receive a fee if they obtain NMTC financing

• Financial Modelers

– Will structure a transaction to generate NMTC returns for an investor

• Attorneys

– Can answer eligibility and technical structuring questions

LISC’s NMTC Program• LISC was awarded $65 million in investment authority in

March of 2003 & $90 million May of 2005• LISC conducts its NMTC activities through an affiliate, the

New Markets Support Company, LLC (NMSC)• LISC’s NMTC activities build on its core competency in real

estate financing for commercial space and community facilities

• NMSC finances ventures that advance the community development strategies of LISC’s local programs, National Rural Program, & other national programs and affiliates

• Generally using $4-$15 million in NMTC financing per transaction

Economic Development Activity

• NMSC is using NMTCs to support real estate development, such as:– Office space– Supermarkets or other retail projects– Industrial facilities– Community facilities, including

• Childcare facilities• Charter schools• Health-care facilities

• NMSC may also use NMTCs to support:– Business Financing– Home ownership real estate developments– Working capital financings

Local Initiatives Support Corporation

Albers Mill

LaSalle

Sheraton Grand

Plaza Verde

Global Market

Summit Place

S&S Cycle

Martineau

Mexicantown

Odd Fellows

Asbury Church

Shops at Park Village

Bridgeport Mixed-Use

The Plant

Tangerine Plaza

Local Initiatives Support Corporation

USE OF LISC NMTC AWARDS Project Description Amount LISC Program

Albers Mill Residential & Commercial Historic Rehabilitation $10,855,085 WA State

Plaza Verde Office & Retail Historic Rehabilitation 4,236,753 Twin Cities, MN

S&S Cycle Business Expansion 5,500,000 Rural

Martineau Division Oakes Residential & Commercial Historic Rehabilitation 7,774,000 MI Statewide

Summit Place Industrial to Office Space Adaptive Reuse 7,500,000 Milwaukee, WI

Asbury Delaware Church Office & Art Space Historic Rehabilitation 9,403,921 Buffalo, NY

Mexicantown Welcome Center, Mercado & Public Plaza 5,000,000 Detroit, MI

Midtown Global Market Historic Rehabilitation 8,900,000 Twin Cities, MN

Bridgeport Residential & Commercial Historic Rehabilitation 4,942,906 CT Statewide

Odd Fellows Hall Commercial Historic Rehabilitation 5,245,680 Detroit, MI

La Salle Senior Community Center & Commercial Space Development 4,067,026 WA State

Sheraton Grand Hotel 16,500,000 Duluth, MN

Tangerine Plaza Shopping Center Development 9,150,484 Tampa Bay, FL

Shops at Park Village Shopping Center Development 18,500,000 Washington, D.C.

The Plant Historic Mixed-Use Rehabilitation (Olneyville) 9,500,000 Rhode Island

TOTAL $127,075,855

• Bob’s Advanced

NMTC Financing Example #1

• Project Objective:Develop a facility to provide:• community to space to non-profit service providers and • office space to other non-profit tenants

• Total Project Costs: $10.5 million• Net Operating Income:

– Projected at $885,000 per year

• Financing Sources:– $500,000 in owner equity from grants– Conventional loan of $8.0 million at 7.0% amortizing over 25 years based

on:• Debt coverage ratio of 1.2 to 1• Loan to value of 80%

• Financing Gap of $2.0 million• Can the use of NMTCs fill this gap?

Customized Products A / B Example

Commercial Lender Equity Investor100% Owner

Loan Proceeds Loan Payments Equity Capital Tax Credits8,020,707$ ??

99.99% Owner

?? ??QEI NMTCs

Fees

0.01% Owner Sub-AllocateNMTC Investment Authority

Loan A Proceeds Loan Payments Loan B Proceeds Loan Payments8,020,707$ ??

Fund Manager NMSC CDE

QALICB

INVESTMENT FUND

NMSC

Rough Calculation of NMTC Equity

• Total NMTC Financing Sought: $10 million• Investor Pricing: $0.70 per $1.00 of NMTC

• Gross NMTC Equity comfortably exceeds Financing Gap

• Fees & expenses must be included in order to calculate:– Net NMTC equity (i.e. “B” Loan)– Interest rate on “B” Loan

Gross NMTC Equity = Total NMTC x NMTC x InvestorFinancing Value Pricing

Gross NMTC Equity = $10 million x 0.39 x $0.70

Gross NMTC Equity = $2.73 million

NMTC Fees & Expenses

• Upfront Fees– May range from 3.0% to 10.0% of QEI

• Syndication fees (at investment level)

• Origination fees (at project level)

• Transaction Expenses– May range from $40,000 to $300,000

– Professional Fees

• Financial Modeling, Legal Work. Etc.

• Ongoing Asset Management Fees & Expenses– Fee may range from 0.0% to 1.0% of QEI per year

– Expenses may range from $5,000 to $30,000

NMTC Calculation Assumptions

• Upfront Fees– 5.0% of QEI as syndication fee (at investment level)

– 2.0% of QEI as origination fees (at project level)

• Loan Loss Reserve– 1.0% of QEI

• Transaction Expenses– $150,000

• Ongoing Asset Management Fees & Expenses– 0.35% of QEI as asset management fee

– $20,000 annual CDE expenses

QEI CalculationProject (QALICB) Level

Total Total Owner NMTC NMTCNMTC = Development – Equity + Origination + Transaction

Financing Costs Fee Expenses

TotalNMTC = $10.5 million – .5 million + (0.02 x QEI) + $150,000

Financing

TotalNMTC = $10.15 million + (0.02 x QEI)

Financing

QEI CalculationInvestment Fund Level

Total Syndication LoanQEI = NMTC + Fee + Loss

Financing Reserve

QEI = ($10.15 million + (0.02 x QEI)) + (0.05 x QEI) + (0.01 x QEI)

QEI = $10.15 million + (0.08 x QEI)

(0.92 x QEI) = $10.15 million

QEI = $11,032,609

Syndication = $551,630Fee

Loan LossReserve = $110,326

Total NMTC Financing Calculation

Total Total Owner NMTC NMTCNMTC = Development – Equity + Origination + Transaction

Financing Costs Fee Expenses

TotalNMTC = $10.5 million – 0.5 million + (0.02 x QEI) + $150,000

Financing

TotalNMTC = $10.15 million + (0.02 x QEI)

Financing

QEI = $11,032,609

TotalNMTC = $10.15 million + (0.02 x $11.03 million)

Financing

TotalNMTC = $10.15 million + $220,652

Financing

TotalNMTC = $10,370,652

Financing

Net NMTC Equity Calculation

Net Gross Syndication LoanLoan B = NMTC = NMTC – Fee – Loss

Equity Equity Reserve

Gross NMTC InvestorNMTC Equity = QEI x Value x Pricing

(from previous slide 27)

GrossNMTC Equity = $11,032,609 x 0.39 x $0.70

Gross NMTC Equity = $3,011,902

Net NMTC Equity Calculation (Cont’d)

NetLoan B = NMTC = 3,011,902$ – $551,630 – $110,326

Equity

Loan B = Net NMTC Equity = $2,349,946

Loan A = Total NMTC Financing – Loan B

Loan A = $10,370,652 – $2,349,946

Loan A = $8,020,706

Loan B Interest Rate Calculation

Ongoing AssetLoan B Interest Rate = (Management Fees + Expenses) ÷ Loan B

Loan B Interest Rate = ($38,614 + $20,000) ÷ $2,349,946

Loan B Interest Rate = 2.49%

Customized Products A / B Example

• Structure DiagramCommercial Lender Equity Investor100% Owner

Loan Proceeds Loan Payments Equity Capital Tax Credits8,020,707$ 3,011,902$

99.99% Owner

11,032,609$ 4,302,717$ QEI NMTCs

Fees

0.01% Owner Sub-AllocateNMTC Investment Authority

Loan A Proceeds Loan Payments Loan B Proceeds Loan Payments8,020,707$ 2,349,946$

Fund Manager NMSC CDE

QALICB

INVESTMENT FUND

NMSC

Customized Products A / B Example

Equity Qualified Equity Investment (QEI) 11,032,609$

Investor Equity 3,011,902$

Loan(s)Commercial Loan 8,020,707$ TOTAL SOURCES 11,032,609$ TOTAL USES 11,032,609$

Qualified Equity Investment (QEI) 11,032,609$ NMTC Loan #1 8,020,707$ NMTC Loan #2 (Soft Loan) 2,349,946 Syndication Fees & Expenses 551,630 Reserves 110,326

TOTAL SOURCES 11,032,609$ TOTAL USES 11,032,609$

NMTC Loan #1 8,020,707$ Total Project Cost 10,000,000$ NMTC Loan #2 (Soft Loan) 2,349,946 Developer/Owner Equity 500,000 Developer/Owner Equity 500,000 NMTC Origination Fees 220,652

NMTC Professional Fees 150,000 TOTAL SOURCES 10,870,652$ TOTAL USES 10,870,652$

SOURCES USES

QALICBSOURCES USES

INVESTMENT FUNDSOURCES USES

NMSC CDE

Customized Products – A / B Example

• Key Terms for the QALICB/Borrower

– Loan A: $8,020,707• Interest-only for 7 years

• 7.0% interest rate (current market rate)

• Sinking fund payments (calculated on a 30-year schedule)

• Full principal repayment

– Loan B: $ 2,349,946 • Interest-only for 7 years

• 2.49% interest rate

• Amount of debt cancellation to be negotiated

NMTC Financing Example #2

• Project Objective:– Historic rehabilitation of a facility to provide:

• community to space to non-profit service providers and • office space to other non-profit tenants

• Total Project Costs: $10.0 million• Net Operating Income: ~ $610,000 per year• Financing Sources:

– $2.7 million in grants and public sources of financing– $1.2 million in historic tax credit equity– Conventional loan of $4.1 million at 7.0% amortizing over 25

years – Financing Gap of $2.0 million

• Can the use of NMTCs fill this gap?

Historic Tax Credit Calculation

• The following example assumes that:– Two-thirds of the total development cost are

Qualified Rehabilitation Expenses– Historic Tax Credits are purchased at a price of

$0.90

Qualified HTC InvestorHTC Equity = Rehabilitation x Value x Pricing

Expenses

HTC Equity = $6.67 million x 0.2 x $0.90

HTC Equity = $1.2 million

Customized Products – A / B Historic Example

• Structure DiagramEquity Investor Concessionary Lender Commercial Lender100% Owner

Equity Capital Tax Credits Loan Proceeds Loan Payments Loan Proceeds Loan Payments4,211,902$ 2,728,283$ 4,092,424$

99.99% Owner

11,032,609$ 4,302,717$ QEI NMTCs plus HTCs

Fees

0.01% Owner Sub-AllocateNMTC Investment Authority

Equity Proceeds Preferred3,549,946$ HTC Return

Master Tenant0.00% Owner 49.00% Owner

Loan Proceeds Loan PaymentsMaster Equity Proceeds Preferred 4,092,424$ Lease 3,549,946$ HTC Return 2,728,283$ Payments

51.00% OwnerQALICB

INVESTMENT FUND

NMSC

TBDNon-Member Manager

TBDMember Manager

Project Tenants

Fund Manager NMSC CDE

Customized Products – A / B Historic Example

Equity Qualified Equity Investment (QEI) 11,032,609$ HTC Equity 1,200,000$ NMTC Equity 3,011,902

Loan(s)Commercial Loan 4,092,424$ Concessionary Loan 2,728,283 TOTAL SOURCES 11,032,609$ TOTAL USES 11,032,609$

Qualified Equity Investment (QEI) 11,032,609$ NMTC Loan #1 4,092,424$ NMTC Loan #2 2,728,283 HTC/NMTC Equity 3,549,946 Syndication Fees & Expenses 551,630 Reserves 110,326

TOTAL SOURCES 11,032,609$ TOTAL USES 11,032,609$

NMTC Loan #1 4,092,424$ Total Project Cost 10,000,000$ NMTC Loan #2 2,728,283 NMTC Origination Fees 220,652 HTC/NMTC Equity 3,549,946 NMTC Professional Fees 150,000 TOTAL SOURCES 10,370,652$ TOTAL USES 10,370,652$

INVESTMENT FUNDSOURCES USES

NMSC CDESOURCES USES

QALICBSOURCES USES

Customized Products – A / B Historic Example

• Key Terms for the QALICB/Borrower

– Loan A: $4,092,424• Interest-only for 7 years

• 7.0% interest rate (current market rate)

• Sinking fund payments (calculated on a 30-year schedule)

• Full principal repayment

– Loan B: $ 2,728,283 • Interest-only for 7 years

• 3.15% interest rate

• Amount of debt cancellation to be negotiated

Pricing

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

May-90 Sep-91 Jan-93 Jun-94 Oct-95 Mar-97 Jul-98 Dec-99 Apr-01

Date

Yield

Low Income Housing Tax Credit Yields

Treasury Yields

NMTC Resources

• CDFI Fund website: www.cdfifund.gov/programs/nmtc/index.asp

• NMTC Coalition website: www.newmarketstaxcreditcoalition.org/