Mixed-Use and Economic Development Financing Structures and …media.straffordpub.com/products/mixed-use-and-economic... · 2014-12-09 · MIXED-USE AND ECONOMIC DEVELOPMENT FINANCING

Mixed-Use and Economic Development

Financing Structures and Options Leveraging Construction and Mezzanine Loans, Preferred Equity,

Tax Increment and EB-5 Financing, Tax Credit Funds

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

WEDNESDAY, DECEMBER 10, 2014

Presenting a live 90-minute webinar with interactive Q&A

John R. Orrick, Jr., Partner, Linowes and Blocher, Bethesda, Md.

Debbie A. Klis, Of Counsel, Ballard Spahr, Bethesda, Md.

Daniel J. Kolodner, Partner, Klein Hornig, Boston

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-328-9525 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

For CLE purposes, please let us know how many people are listening at your

location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the word balloon button to send

FOR LIVE EVENT ONLY

MIXED-USE AND ECONOMIC DEVELOPMENT FINANCING STRUCTURES AND OPTIONS

STRAFFORD PUBLICATIONS WEBINAR

DECEMBER 10, 2014

John R. Orrick Jr.

Linowes and Blocher LLP

7200 Wisconsin Avenue, Suite 800

Bethesda, Maryland 20814

(301) 961-5213 / [email protected]

John R. Orrick, Jr. Linowes and Blocher LLP

7200 Wisconsin Avenue, Suite 800 Bethesda, Maryland 20902-4842

(301) 961-5213 [email protected]

Mr. Orrick specializes in commercial and real estate finance. He has represented numerous clients in diverse transactions including joint ventures, mezzanine loan transactions and other commercial financings. Mr. Orrick has also represented developer groups in TIF/development district municipal bond financings in Maryland.

5

mailto:[email protected]



SECURED COMMERCIAL LOANS

PREFERRED EQUITY

MEZZANINE LOANS

6

THE “CAPITAL STACK”

7

Equity

Mezzanine or Performing Debt

Debt

20% to 60% of project costs. Pays return based on performance.

Gap financing to cover costs not supported by debt or equity. Usually

paid through performance.

40% to 80% of project costs. Pays interest, secured by lien.

CHARACTERISTICS OF SECURED DEBT

8

Secured by Mortgage or Deed of Trust on Real Property Plus Security Interest in Personal Property

Promissory Note With Stated Rate of Interest (Variable or Fixed) and Stated Maturity Date

Covenant Protection to Lender – Affirmative and Negative – Including SPE Covenants

Priority Repayment in Insolvency Proceedings

Often Limited by Loan-to-Value and Debt Service Coverage Criteria

SECURITY FOR SECURED DEBT

9

Property Value – Typically Amount of Loan will not exceed 70-75% of appraised value of Land and Cost of Construction

Recourse to Borrower Assets Other Than Real Estate (Unless Loan is a Nonrecourse Loan)

Guarantees by Parent, Manager, Sponsor and/or Individuals Who Comprise Sponsor Group

Expected Cash Flow Derived from Borrower – Debt Service Coverage

Pre-Sales and Pre-Lease Commitments

Subordination, Non-Disturbance and Attornment (SNDA) Agreement (if Existing Tenants)

SECURED DEBT – PERFECTION AND PRIORITY

10

Mortgage Recorded in Land Records - First in Time, First in Priority

Subordination Agreements Between Creditors

Assignment of Leases and Rents, Construction Agreements and Plans and Specs

Security Agreement and UCC Filings

SOURCES OF SECURED DEBT

11

Single Lender (Whole Loan)

Loan Participation (Multiple Lenders)

Pooled Loan Structure - CMBS

SIMPLE JOINT VENTURE WITH ONE LENDER AND DEVELOPER/INVESTOR

12

75% Debt (Whole Loan)

25% Equity

Real

Estate Investor

Venture /

Property Owner

LENDER (Whole Loan)

Mortgage Loan

Operating Partner/

Developer

TWO LOANS WITH DEVELOPER/INVESTOR JOINT VENTURE

13

75% Senior Loan

15% Junior Loan

Real

Estate Investor

Venture/ Property

Owner

SENIOR LENDER Senior Loan

10% Equity

JUNIOR LENDER

Jun

ior

Loan

Operating Partner/

Developer

EQUITY LEGAL STRUCTURE FOR BORROWERS

Limited Partnership

Limited Liability Company (LLC)

Real Estate Investment Trust

Business or Statutory Trust

Corporation (S or C)

14

CHARACTERIZATION OF PREFERRED EQUITY

Equity in Borrower Entitled to a Preference in Timing or Amount of Payment Above Common Equity (Sponsor)

Not Secured by Any Pledge of Assets – Subordinate to Debt in Insolvency Proceedings

Within Governing Instruments of Borrower, Preferred Equity May Exert Complete or Restricted Control Over Borrower:

Control Over Major Decisions

Right to Remove Manager

Redemption Rights / Buy-Sell Provisions

May be on Disproportionate Basis to Invested Capital

Carried Interests or “Promote” Payments Are a Form of Preferred Equity – Granted for Services

15

BORROWER STRUCTURE – REVENUE DISTRIBUTION AMONG PARTIES

Waterfall for Distributions – Pro rata / Preferred returns / promotional returns (may distinguish operating from capital events)

Clawbacks based on other deals / events

Provision for Fees for Services

Tax Distributions

Repayment of Member Loans

Provisions for Dissolution – Liquidation Payments and Distribution of Hard Assets

16

OTHER PREFERRED EQUITY ISSUES

Decision Making - Fiduciary Duties if Management Rights Exercised

Waiver or Limitation Within Governing Document

Characterization as Debt vs. Equity

Tax Treatment – Single Level of Taxes; Capital Gains vs. Ordinary Income Tax on Distributions

Potential Dilution if Additional Capital Needed

17

MEZZANINE DEBT CHARACTERISTICS

Loan to Equity Owner of Borrower – Not Debt of Borrower

Secured by Pledge of Ownership Interests of Borrower

Structured as Debt, but Often With Profit Participation Features

Structured Subordination to Senior Debt, But Generally Possessing Rights to Control Borrower and Receive Preference on Distributions, so Senior to Equity

18

DOCUMENTATION FOR MEZZANINE LOAN TRANSACTION

Loan Agreement – Addresses use of funds, borrowing period, conditions for advances, draw schedule, negative and affirma-tive covenants of borrower, representations and warranties, events of default, and remedies to lender upon events of default

Promissory Note – States terms for repayment of principal and interest

Pledge Agreement – Pledge of member interests in partner/ member of property owner

Guaranty Documents

UCC Financing Statement

19

DOCUMENTATION FOR MEZZANINE LOAN TRANSACTION (CONT.)

Amendment to Property Owner Operating Agreement to enforce remedies of removal of General Partner, foreclosure of interests in membership/partnership interests, Article 8 opt-in

Warrants / Equity Conversion Right

Inter-Creditor Agreement with Senior Lender (Cure Rights, Rights to Substitute Management; Rights to Foreclose and Replacement of Borrower Guarantees)

Certificates for Membership Interests

20

OPTIONAL FEATURES IN MEZZANINE LOAN TRANSACTIONS

Equity Kicker/Warrants – Option to obtain direct interest in joint venture entity

Convertibility Features – Allow conversion of all or a portion of principal investment into equity

Prepayment/Redemption Penalties

UCC Insurance

21

MEZZANINE LENDING – OTHER ISSUES

Inter-Creditor Agreements and Standstill Provisions

Method of Perfection – Article 8 / Article 9 of Uniform Commercial Code

Transfer Taxes

Limitations on Foreclosure of Interest – Charging Orders Remedy for Partnerships / LLCs

Article 9 Requirements for Foreclosure – Notice provisions, commercial reasonableness, rights to deficiency

Fraudulent Conveyance / Preference Issues

22

PRIMARY LENDER WITH DEVELOPER, INVESTOR, AND MEZZANINE JOINT VENTURE

23

75% Senior Loan

15% Mezzanine Loan

Mezzanine Borrower

Property Owner

MORTGAGE LENDER

Mortgage Loan

10% Equity

INVESTOR/LENDER

Mezzanine Loan

Pledge of Ownership Interests in Property Owner

Operating Partner/ Developer

Intercreditor Agreement

PRIMARY LENDER WITH DEVELOPER, INVESTOR, EQUITY FUND AND MEZZANINE JOINT VENTURE

24

75% Senior Loan

15% Mezzanine Loan

Private Equity Fund

Mezzanine Borrower

MORTGAGE LENDER Mortgage Loan

9% Equity from Private Equity Fund

Property Owner

MEZZANINE LENDER

Mezzanine Loan

Pledge of Ownership Interests in Mortgage Borrower

90% Owner

Operating Partner /

Developer

10% Owner

1% Equity From Local Real Estate Investor

www.kleinhornig.com

Strafford Teleconference: December 10, 2014

Daniel Kolodner, Klein Hornig LLP

Mixed-Use and Economic Development

Financing: Structures and Options

(Historic Tax Credits, New Markets Tax Credits,

and Low Income Housing Tax Credits)

25

Key Federal and State Tax IncentivES

Federal and State Tax Credits are available to:

• Build affordable housing (the “low income housing tax credit” or LIHTC) (IRC Section 42).

• Rehabilitate historic structures (the “historic tax credit” or HTC)(IRC Section 47).

• Develop commercial projects in low-income areas, or to employ low-income people (the “new markets tax credit” or NMTC) (IRC Section 45D).

• Develop energy from renewable sources (the “renewable energy tax credit”, which has both an “investment tax credit” or ITC, and a “production tax credit” or PTC)

• There are also various associated State Tax Credits

www.kleinhornig.com 26

Rehabilitation (Historic)

Tax Credits


There are Two Types of Federal HTC:

10% & 20% Credit

10% Credit 20% Credit

Qualification Building older than

1936 and neither

listed on National

Register of Historic

Places nor located in Historic District and

contributing

Listed on National

Register of Historic

Places or located in

Historic District and

recognized as contributing to district

Permitted Use Commercial, may not

have residential

rental

Commercial, may

have residential

rental

Requirements Must exceed $5,000

of qualified rehab

expenditure, or

building basis,

whichever is greater

Same


The 20% Rehabilitation Tax Credit

Fundamentals

• Preservation aspects jointly administered by NPS and State Historic Pres. Offices (SHPOs).

• Tax Aspects Administered by the IRS.

• Tax Credits = dollar for dollar reduction in tax liability (contrast with deduction).

• RTC is the most important (in dollar volume) federal preservation program.


The NPS Rules: Parts 1, 2, and 3

• Historic Preservation Certification

Application

Part 1 - Evaluation of Significance

Part 2 - Description of Rehabilitation

Part 3 - Request for Certification of Completed Work


What Types of Buildings Qualify?

The NPS Rules: Certified Historic Structure Requirement

Part 1: Option #1

Building is listed in the National Register of

Historic Places

Part 1: Option #2

Building is located in a registered historic

district and certified by the National Park

Service as being of historic significance to

the historic district.



The NPS Rules (cont’d)

Historic Preservation Certification Application Part 1 – Evaluation of Significance

Part 1 is used to establish that a building:

Does or does not contribute to significance of a

district; Has preliminarily been determined to be eligible for

National Register listing; and Contributes to proposed historic district.


What Types of Rehabilitations Qualify?


Historic Preservation Certification Application Part 2 – Description of Rehabilitation

• Must be preceded or accompanied by Part 1.

• Part 2 is submitted to SHPO. SHPO forwards to NPS.

• Description of proposed rehabilitation.

• Processing Fee of $500 to $2,500 (depending on size).




Historic Preservation Certification Application Part 3 – Request for Certification of

Completed Work

• Must be preceded or accompanied by Part 2.

• Part 3 is submitted to SHPO. SHPO forwards to NPS.

• Part 3 must generally be received prior to the date that

is 30 months after the date of the tax return upon which

HTCs are claimed (the “30 Month Rule”) unless a

statement is filed with IRS prior to such date extending

the 3 year statute of limitations.



The IRS Rules: Depreciable Building

Requirement

• Must be a “building”. Building is defined as a

structure or edifice enclosing a space within its wall

and usually covered by a roof

• Building must be depreciable. Depreciable buildings

are generally those used for nonresidential (i.e.

commercial) or residential rental purposes. (See

Section 168(e))


What Kinds of Buildings Qualify?

• Almost Anything But a Personal Residence

Apartments

Hotels

Office Buildings

Warehouses

Distribution Facilities

Back-Office Support/Computer/Call Centers

Sports Facilities

Mixed Use of Any of the Above



The IRS Rules:

Substantial Rehabilitation Requirement

• The QREs incurred during any 24-month period** selected by the taxpayer and ending in the taxable year in which the building is placed in service must exceed the greater of:

$5,000, or The adjusted basis of the building. **A 60-month period may be used where written plans completed

before the rehab begins show that the rehab is expected to take place

in phases and is reasonably expected to take more than 24 months.



Definition of QREs

• “Qualified Rehabilitation Expenditures” (QREs) is the

tax term given to those development costs on which

rehabilitation tax credits can be claimed.

• QREs are any amounts chargeable to a capital

account made in connection with the renovation,

restoration or reconstruction of a qualified

rehabilitated building (including its structural

components), except as provided by law.



Definition of QREs

• QREs include costs related to:

• walls, partitions, floors,

ceilings;

• permanent coverings such as

paneling or tiling;

• windows and doors;

• air conditioning or heating

systems, plumbing and

plumbing fixtures;

• chimneys, stairs, elevators,

sprinkling systems, fire

escapes;



Definition of QREs (cont’d)

• QREs include costs related to:

• construction period interest and taxes;

• architect fees, engineering fees, construction

management costs;

• reasonable developer fees*

• The “Safe Harbor” Revenue Procedure highlights the concept of

“reasonable” developer fees. It is now important to get third party

back-up of all cash-flow based fees, including deferred developer

fees



What is Not a QRE?

• Land & Interest Carry on Land

• Building Acquisition & Interest Carry on Acquisition

• Acquisition-Related Costs

• Site Improvements & Landscaping

• Enlargements & Demolition

• Personal Property

• Tax Exempt Use Property



Calculating the Allowable Credit

Credit equals 20% of all QREs incurred:

Prior to the start of the 24-month period selected (so

long as they were incurred “in connection with” the

rehab process that resulted in the substantial

rehabilitation of the building);

During the 24-month period; and

After the last day of the 24-month period but before

the last day of the tax year in which the measuring

period ends.



When is the Credit Allowed?

• Credit is generally allowed in the year in which the

building is placed in service (provided substantial

rehabilitation test has been met).

• “Placement in Service” means that the all or

identifiable portions of the building is placed in a

condition or state of readiness and availability for a

specifically assigned function.

• If you plan on monetizing the Credit, it is very

important to plan ahead and bring in any

partners/investors prior to the Placement in Service

date.



Who Can Claim the Credit?

• The Credits belong to the taxpayer(s) that owns title

to the property when the QREs are placed in service.

• A landlord that incurs QREs can elect to pass the

credit to its long-term tenants.

• When property owner is a pass through entity, the

Credits are allocated in accordance with taxable

profits.


Tax-Exempts and Historic Tax

Credits:

• Be aware of tax exempt use issues with Historic Tax

Credits

• Section 47 of the Code provides that QRE’s eligible

for Historic Credits do not include expenditures

allocable to the portion of the property which is (or

may reasonably be expected to be) “tax exempt use

property”.

• A tax exempt entity as an owner of or tenant in a

historic building can cause a loss of Historic Tax

Credits so careful structuring of any tax exempt

entity participation is required.

• Grants/donations to the owner of a historic building

can also cause tax issues and potential reduction of

Historic Tax Credits if not handled appropriately.


Tax-Exempts and Historic Tax Credits:

• Tax Exempt Ownership:

─ Who is a Tax Exempt entity?*

•Governmental/State entities

•Any organization exempt from income taxes

(such as a 501(c)(3))

•Any foreign person or entity

•Any Indian tribal government

─ Can the Tax Exempt (or its sub-entity) make a

168(h) election to be taxed as a for-profit entity?

─ Will the same Tax Exempt be the end-user of the

Building?

*IRC Section 168(h)(2)(A)


Tax-Exempts and Historic Tax Credits:

• Tax Exempt Use:

─ Specific limitations on Tax Exempt Use by end-

user tenants

─ 50% limitation (up from 35%)

What counts towards the limitation?

─ Qualified vs. Disqualified Leases to Tax Exempt

Entities

•Did the tax exempt participate in the financing?

• Is there a fixed purchase price/option to buy

under the Lease?

• Is the Lease term in excess of 20 years?

•Has there been a “sale/leaseback” with the Tax

Exempt



Recapture

• Credit previously allowed is recaptured if any portion

of the project which includes QREs is disposed of

prior to the fifth anniversary of placement in service.

• Amount subject to recapture decreases by 20%

during each year of the five year period.

• Disposition includes any sale, exchange, transfer, gift

or casualty. Subsequent rehabs that do not comply

with the Secretary’s Standards can trigger recapture.


Recapture Risks

Recapture Risks:

Building ceases to be investment credit property

Subsequent rehabilitation of the building that does

not meet National Park Service standards;

Building is otherwise converted to an improper

use, such as personal use or goes out of service

Over 50% of the Building is leased to a tax-exempt

entity


Recapture Risks

Recapture Risks:

Change of Ownership of owner/lessee

If the Investor sells more than 1/3 of its investment

in the entity claiming the credit (owner or lessee)

If the owner is claiming the credit and the building

is foreclosed on or sold, resulting in a change in

ownership of the building. For example, where the

tenants go dark and the general partner/developer

does not have funds to support the owner’s debt

service payments.

If the lessee is claiming the credit in a lease pass-

through, and the master lease is terminated.,

including where the tenants go dark as above.

Too much nonqualified non-recourse financing


Recapture Mitigants

Recapture Risk Mitigants:

The historic property owner contractually agrees to:

not alter the appearance of the building or convert it to an

improper use,

not take any actions or inactions that would cause recapture,

not alter the ownership structure of the property, or, if

applicable, terminate the master lease

BUT under the recent safe harbor, not able to guarantee

“structure risk”.

Historic consultant or architect monitor the rehabilitation, and

certify regarding the rehabilitation meeting NPS standards

Non-disturbance agreements are entered into by the lender so that

the lender is allowed to foreclose but must not interrupt the master

lease (unless in default).

Casualty insurance, including HTC insurance, alleviates liability for

destruction of the historic property.

Underwriting of tenants to assure rent payments and guarantees of

creditworthy developer or general partner.


Common Investment Structures

• Single Entity Structure.

• Master Lease/Credit Pass-Through Structure.


Single Entity Structure

Tenants

Rental

Payments

Tax Credit Investor

LLC

Construction/

Perm Lender

Managing Member

(Developer Affiliate)

Historic

Tax Credit Equity

99% Credits,

Profits & Losses and Cash Flow

Loan

Proceeds

Debt

Service Payments

Tax Credit, LLC

(Property Owner)

Tax Credit Investor

1% Credits, Profits &

Losses, Fees and Cash Flow

Developer

Equity

Developer Dev.

Fee


Historic Tax Credit Syndication

The Credit Pass-Through Structure

• Landlord LLC owns fee simple, undertakes rehab,

enters into Dev. Agreement, and earns the Historic

Tax Credit.

• Master Tenant, LLC leases the entire project from the

Landlord LLC for a fixed annual

rental payment.


Historic Tax Credit Syndication

The Credit Pass-Through Structure

• Master Tenant, LLC operates the property, subleases

to end users and enters into the Property

Management Contract.

• Landlord makes special tax election to pass

the Historic Tax Credit through to the Master

Tenant LLC.


Master Lease/Credit Pass-Through

Structure

Sub-Tenants/

End Users

Rental

Payments

Tax Credit Investor

LLC

Construction/

Perm Lender

Managing Member


Historic

Tax Credit Equity

99% Credits,

Profits & Losses, and Cash Flow

Loan

Proceeds

Debt

Service Payments

1% Credits, Profits &


Developer

Equity

Master Tenant, LLC

(Master Tenant)

Landlord, LLC

(Property Owner/Lessor)

90% Profits &


Pass-through of Historic

Tax Credits & Share of Residual Lease Payment &

Equity Investment 10% Profits, Losses,

and Cash Flow


Recent Developments: Case Law

Virginia Historic Tax Credit Fund 2001 LP v. CIR (3/2011)

Tax Treatment of state tax credits

Fourth Circuit decision reverses Tax Court (12/2009)

Having major impact on state tax credit structuring

Consolidated Edison Company Inc. of New York v. United States, No. 2012-5040,(Fed. Cir. January 9, 2013)

While not a historic tax credit case, the case changes how

put options are evaluated

Historic Boardwalk Hall, LLC v. Commissioner, No. 11-1832 (3rd

Cir., August 27, 2012)

Case appealed to 3rd Circuit, and 3rd Circuit reversed the Tax

Court


Historic Boardwalk Hall: Conclusions

• The appeals court decision was primarily decided on the investor not being a partner in the transaction

• The decision did NOT provide any “bright line” guidance to restructure transactions, nor did it spell out any actions that could be taken by an investor to be deemed a partner

• It is possible to draw some preliminary conclusions and/or recommendations based on the decision, but the tax credit industry is still in flux months later

• Post HBH, historic tax credit deal structuring is being changed to maximize the potential for the investor being a partner in the transaction with a focus on downside risk and upside potential.

• IRS Guidance (Revenue Procedure 2014-12) released in early 2014

• Most deals now are being structured to comply with the safe harbor featured in the Revenue Procedure


Revenue Procedure 2014-12

• Establishes a “safe harbor” for structuring transactions

• Does not address other tax credits

• By following the terms of the Guidance, developers can be certain that the HTC generated by an investment will be allocated to the Investor and that Investor will be respected as a Partner

• No minimum amount of cash needs to be distributed to the Investor (and recent discussions with Treasury confirm this approach), therefore economic substance issues are now less important

• Investor must receive reasonably anticipated value, exclusive of tax benefits, commensurate with the Investor’s percentage interest in the Partnership



• “Commensurate” being interpreted to mean that cash flow and

residual distributions in accordance with the % interest of the

Investor (99% interest then 99% distributions)

• But a “Flip” of interests is allowed after year 5

• At least a 5% interest must be maintained, but possible to “flip”

the investor from a 99% interest to a 5% interest

• BUT economic value of the Investor’s Interest must not be reduced

through fees, lease terms or other arrangements that are

“unreasonable” compared to non-HTC projects

• This will require additional underwriting and review

• Subleases are directly challenged

• Developer Fees and Incentive Management Fees are also at issue if they are cash flow based fees

• Investor preferred returns are permitted, but they can’t be guaranteed



Downside Risk

• At least 20% of investor equity must be contributed prior to placement in service

• At least 75% of the Investor’s total expected capital contributions must be fixed before placement in service

• But this 75% portion may be subject to conditions such as placement

in service, stabilization or receipt of Part 3 approval

• Guaranties:

• Funded guaranties not allowed (including minimum net worth)

• Impermissible guaranties include:

• Guaranty of partnership distributions or economic returns

• Tax structure risk or other disallowance or recapture events not

due to an act or omission of the Developer

• Can’t pay costs of audit

• 100% structure risk now on the Investor (likely to create an

incentive for investors to meet the guidance)



• The Investor may hold an option to put its interest to the developer at an amount not to exceed FMV

• Developer may not have a call right at FMV, but because of the ability to structure a “flip” in interests after the compliance period, there is some ability to structure around this issue

• The Investor is now going to receive additional cash flow during the compliance period, and the exit will be less certain.

• Guidance effective as of December 30, 2013. Should deals that have closed but not yet placed in service restructure?


New Markets Tax Credits


Introduction to New Markets Tax Credits -- NMTC

• Unlike the other credits discussed herein, the “New Markets Tax Credit” (or “NMTC”) is not based on the cost of the facility.

• Instead, it is based on the amount of money

invested in a “community development entity” (or “CDE”) which, in turn, makes an investment in worthy projects in poor areas, which may include renewable energy projects

• There are many differences between NMTCs

and other tax credits, and they can often be combined to “turbocharge” the NMTC benefit.


New Markets Tax Credits Introduction cont.

• Adopted in 2000, the New Markets Tax Credit (or “NMTC”) is in Section 45D of the Internal Revenue Code

• The program is administered through the CDFI Fund (or “Community Development Financial Institutions Fund”, a department of the U.S. Treasury).

• The fundamental purpose of the NMTC is to encourage investment in poorer communities by giving the investor tax credits to improve its return on relatively riskier investments


NMTC Program – Overview

• The New Markets Tax Credit (or “NMTC”) is a 39% federal tax credit available to those that provide qualified equity investments (QEIs) to certain certified community development entities (CDEs) that in turn lend or invest (QLICIs) in qualified businesses (QALICBs) located in low-income communities (LICs)

• NMTCs generated by financing raised and invested

• NOT project-based financing (e.g., HTCs)

• Administered by Community Development Financial Institutions Fund (“CDFI Fund”) which allocates NMTC allocation authority and oversees compliance with NMTC Program rules


The NMTC Steps

Step 1: Entities form Community Development Entities (“CDEs”)

whose mission is to make loans in poorer communities

Step 2: CDEs each describe their proposed activities to the CDFI

in an application for an allocation of NMTCs

Step 3: The CDFI Fund competitively selects CDEs to

receive NMTC allocations

Step 4: CDEs use these allocations to offer NMTCs to investors

in exchange for their “qualified equity investments” (or “QEIs”)

Step 5: CDEs use these investments to make Qualified Low-Income

Community Investments (“QLICIs”) at low interest rates to

Qualified Active Low-Income Community Businesses

(“QALICBs”)

located in Low-Income Communities (“LICs”).

Step 6: The QALICBs build projects that employ people and/or bring

business to the LICs.


NMTC Program – Does My Project Qualify?

NMTC financing can be available to a project that MUST meet the following:

• Is physically located in a “low-income community”

• Needs an additional source of low-cost financing to

fill a gap

• Will be undertaking commercial activities (mixed-use ok)

• Does not include certain “sin businesses” as tenants (e.g., golf

courses, race tracks, gambling facilities, certain farming

businesses, stores with principal business of alcoholic sales for

consumption off premises)


NMTC Program – Does My Project Qualify?

And to a project that SHOULD meet some of the following:

• Is in a “highly distressed” census tract

• Will provide jobs and/or goods and services to local low-income

community

• Has total development costs in the $10-30MM range

• Has all other sources of financing lined up


NMTC Program –

What’s a Low-Income Community?

Census tracts where:

• Poverty rate equals or exceeds 20%, OR

• Median income is below 80% of the greater of:

Statewide median income or

Metropolitan area median income

Special rules for “Targeted Populations,” low population areas, high migration rural counties and GO Zone

• List of Census tracts can be found at:

http://www.cdfifund.gov/what_we_do/census.asp


http://www.cdfifund.gov/what_we_do/census.asp

NMTC Program – What’s a QALICB?

• Any corporation or partnership (including nonprofits) engaged in the active conduct of a qualified business; must meet certain requirements regarding gross income, tangible property, services performed, collectibles, and nonqualified financial property

• In HTC master lease transaction, the Landlord can qualify as a

QALICB


NMTC Program – Finding Allocation

NMTCs are a scarce resource

• Federal program is allocated annually and is vastly oversubscribed; may

sunset after this year

• CDEs specialize in certain geographic areas and types of businesses

Reach out to CDEs that

• Specialize in financing historic rehabilitation

• Target allocation to your geographical area (city/state or urban/rural)

• Prefer your tenant mix (retail, community facilities, etc.)

• Will have allocation available on your timeline

• Already know you or your partners


NMTC Program – Finding Allocation

The CDFI website

has a wealth of

information

http://cdfifund.gov


http://cdfifund.gov/

LENDER $30 equity

$70 loan

$100 QEI

$39 NMTCs

CDE

(Allocatee) Sub-allocation of

Tax Credit Authority

QLICI (>85% of QEI)

Tax Credit Investor

CDE

(Subsidiary)

QALICB

Leverage

Fund

NMTC Program – Basic NMTC Structure

Low Income Community


NMTC Program – NMTC Structure

w/ Master Lease

Sub-Tenants/

End Users

Rental

Payments

Construction/

Perm Lender

Managing Member


100% Credits,

Profits & Losses, and Cash Flow

Loan

Proceeds

Debt

Service Payments

.01% Credits,

Profits & Losses, Fees and

Cash Flow

Developer

Equity Historic

Tax Credit Equity

99.99% Credits,

Profits & Losses, Fees and Cash Flow

Pass-through of Historic Tax

Credits & Share of Residual

Lease Payment &

Equity Investment

CDE

QLICI

Master Tenant

Single Member LLC (Disregarded Entity)

Non-Member Manager

QALICB/Landlord

QLICI

Tax Credit

Investor

QEI


NMTC Program – Twinning with HTCs - Key

Business Issues

Pricing

• Equity Pay-In Schedule (same or faster)

• Increase Equity by 20-30%

• Cash Flow, Fees, Tax Priority Payments and other items that reduce the net economics to the developer

• Different Compliance Periods (5 vs. 7 years)

• Exit Strategy (unwind may be delayed 2 or 3 years)

• Additional Guarantees (expanded-negotiable)

• Operational Limitations (subtenant mix, mixed-use)

• Fill Gaps/Favorable Interest Only Financing


Low Income Housing Tax Credits


LIHTC Background

• Part of 1986 Tax Reform to encourage the construction and rehabilitation of affordable rental housing

• Limited credit allocated to states – based on population, with floor for low population states

• Administered by the Treasury Department and allocated by State Agencies under Qualified Allocation Plans

• Section 42 of the Tax Code (Section 142 governs tax-exempt bonds)

• Credit is a dollar-for-dollar tax reduction

• Credit amount based on cost of constructing or acquiring and rehabilitating housing developments


State LIHTC Allocation Limit

• Credits per state are limited

• In 2000, Congress raised cap from $1.25 to $1.50 in 2001, $1.75 in 2002, and thereafter adjusted for inflation

• In 2008, Congress raised cap from $2.00 to $2.20 (2008/2009 only)

• $2.30 per person for 2014

• $2,590,000 per-state minimum in 2014

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

'00'01'02'03'04'05'06'07'08'09'10'11'12'13'14


Credit Allocation Rules

Amount allocated is one year credit amount

»Taxpayer receives this amount annually for 10 years

10% Nonprofit Set-Aside

Private Activity Tax-Exempt Bonds subject to bond volume cap; no credit allocation needed, provided 50% test met (> 50% land/building costs paid with bond proceeds)

»Bond volume cap also based on population subject to floor

»2014: greater of $100 multiplied by the state population or $296,825,000

»2013: greater of $95 multiplied by the state population or $291,875,000.


Who Can Use Credits?

• C corporations can use credits and losses against ordinary income and taxes

• Passive losses may be disallowed for “closely-held” corporations (< 5 individuals hold > 50% of stock value)

» Exception (a) if > 50% of gross receipts are derived from real property trade/business in which materially participates or (b) as a deduction against net active income

• Individuals limited under passive loss rules to approximately $9,900/year at the 39.6% rate


Key Business Terms

Projects owned by limited partnership or limited liability company

Limited partner generally receives 99.99% of tax credits, depreciation, losses and profits

»In some cases, cash flow/proceeds of capital transaction may be divided differently

Limited partner makes capital contributions in multiple installments (generally 3 to 5), based on negotiated development, financing and performance benchmarks

General partner guarantees completion/stabilization, amount and timing of credits, and funding of deficits

Investor protections (removal/repurchase/adjusters)


Example: Ownership Structure

General Partner – 0.01% interest

0.01% share in profits, losses, credits

Controls day-to-day decision-making,

subject to LP veto over major decisions

Share in cash flow, capital proceeds

Limited Partner – 99.99% ownership interest

99.99% share in profits, losses, credits

Does not control day-to-day decision-making

Typically, veto power over major decisions

Share in cash flow, capital proceeds

Limited liability for project debts, liabilities


Credit Overview

• Annual credit for a 10-year credit period

• Basic concept (layman’s terms): (Eligible Basis) x (Low Income Percentage) x (Credit Percentage) x 10 = Total Credits

• Key LIHTC terms:

»Applicable percentage

»Qualified Basis »Qualified Low-Income Building »Applicable Fraction

»Low-Income Units


Credit Overview: LIHTC Terminology

Credit = “Applicable Percentage” x “Qualified Basis” of each “Qualified Low-Income Building” (IRC §42(a))

» “Qualified Basis” = “Applicable Fraction” x “Eligible Basis”

› “Eligible Basis” includes special LIHTC adjustments

› “Applicable Fraction” = ratio of “Low-Income Units” to total units (based on unit count or floor area)

› Qualified Basis determined building by building

»“Applicable Percentage” ~4% or ~9% depending on type of activity (acquisition vs. new construction/ substantial rehab), whether tax-exempt bond financed


Eligible Basis ”

Credit = “Qualified Basis” x “Applicable Percentage” of “Qualified Low-Income Building”

“Qualified Basis” = “Applicable Fraction” x “Eligible Basis

New construction = adjusted basis (generally, development cost less land)

Acquisition = acquisition cost of building

Substantial rehabilitation = capitalized rehabilitation expenditures (24-month rule)

Must subtract federal grants

» But not loans made from proceeds of federal grants

130% “boost” in qualified census tracts (“QCTs”) and difficult development areas (“DDAs”)

Excludes commercial space but includes common areas


Applicable Fraction; Low-Income Unit;

Qualified Low-Income Building

”

Credit = “Qualified Basis” x “Applicable Percentage” of “Qualified Low-Income Building” “Qualified Basis” = “Applicable Fraction” x “Eligible Basis

“Applicable Fraction” = smaller of:

» “unit fraction” (ratio of number of “low income units” to number total units)

» “floor space fraction (ratio of floor space of “low income units” to floor space of total units)

“Low Income Unit” = a unit that is both rent restricted and income restricted

“Qualified Low-Income Building” = a building that is part of a project meeting minimum set-aside test (20/50 or 40/60) throughout the 15 year tax credit compliance period


Minimum Set-Aside Test

• To qualify as a “Qualified Low-Income Building,” must meet Minimum Set-Aside test.

• Owner may elect either of two tests: »20% of Units at 50% of Area Median Income

(“AMI”), or »40% of Units at 60% of AMI

»Test based on both income restriction and rent restriction

• Election upon placement in service »In practice, typically made earlier

• Must meet minimum set-aside (based on actual occupancy) by end of first credit year


Income Restrictions

Either 50% or 60% of AMI, depending on minimum set-aside test selected

Owner may commit to deeper affordability either in tax credit application or for other funding programs

HUD publishes area income figures annually

Income restrictions are based on actual household income of household occupying unit

»AMI adjusted for household size

»Varies widely depending on location even within a state

›Boston, MA: 2014 50% AMI for family of 4 = $47,050

›New Bedford, MA: 2014 50% AMI for family of 4 = $26,850


Rent Restrictions

• Gross rent (Including utility allowance) cannot exceed 30% of qualifying income for assumed family size; based on bedrooms per unit, not actual family composition

• Rent limits change annually with publication of new area median incomes

• Permitted gross rent will not decrease below original floor (elected at allocation or placement in service)

• Gross rent (i.e., total amount payable by household for rent plus utility allowance) does not include section 8 (or similar rental subsidies)

• Rent payable to owner reduced by allowance for tenant-paid utilities


Applicable Percentage

Two Credit Rates:

» “4% Credit” = 3.25% for June 2014 (Floating)

» “9% Credit” = 7.58% for June 2014 (Floating)

» “Not Less Than 9.00%” for Buildings Placed in Service

After 7/30/08 and Before 12/31/13 (or with binding

commitment prior to 12/31/13 of 2014 credits)

» Calculation for floating credit rates: % which will yield over 10-year period total credit with present value = 30% or 70%, as applicable, of qualified basis

Owner elects to set applicable percentage either (i) when receiving a binding commitment from the state (or when tax-exempt bonds are issued), or (ii) when building is placed in service


Applicable Percentage: Tied to

Financing and Construction Methods

New

Construction

Acquisition/

Rehabilitation

Non-Federally

Subsidized

(Competitive Credits)

“9%” credits Acq – “4%”

Rehab – “9%”

Federally

Subsidized

(Tax Exempt bonds)

“4%” credits Acq – “4%”

Rehab – “4%”

Fin

anci

ng M

eth

od

Construction Method


Applicable Percentage: When “4%”

vs. “9%” Credit Rate Will Apply

Qualifying for the “4% Credit”

»Acquisition of building

»New construction/substantial rehab if project financed with tax-exempt bond financing

Qualifying for the “9% Credit”

»New construction/rehabilitation if not “federally subsidized” (which now means financed by tax-exempt bonds)

»New rule: “below market federal loans” no longer disqualify building from 9% credit


4% Credit for Acquisition

• Based on the acquisition cost of an existing building

• Purchase from an unrelated party • 50% related party rule

• Ten-year rule • Not placed in service within 10 years prior to purchase

• Certain placements in service ignored

» Acquired from decedent

» Placement in service by governmental unit or nonprofit entity

» Acquired through foreclosure by insured depository institutions

» Property in dilapidated condition not available for use

» Buildings assisted, financed or operated under HUD- or Rural Housing-administered programs or similar State law.


Substantial Rehabilitation Requirement

• To be eligible for acquisition credit, must fulfill

substantial rehabilitation requirement

• Expenditures during a 24-month period selected by

the taxpayer must equal the greater of:

» $6,000 per low-income unit (as adjusted for

inflation – in 2014, $6,300), or

» 20% of adjusted basis

• Rehab expenditures treated as separate new

building

• 4% (tax-exempt bond financed costs, acquisition

costs) or 9% credit on expenditures

» Will have different credit rates for acquisition

and rehabilitation if not tax-exempt bond

financed


“9% Credit” for New Construction or Substantial

Rehabilitation

• For Buildings Placed in Service After

7/30/08:

» Tax-exempt bond-financed ineligible

» Federal grants must be excluded from

eligible basis to qualify for “9% credit”

› But loans of Federal grant proceeds may

be included in eligible basis

• Properties receiving 9% credits with below-

market HOME loans now eligible for 130%

boost if located in a QCT/DDA

» Prior to statutory amendments, were

ineligible for basis boost


Credit Period

• Credit is an annual credit for a 10-year credit period

» May extend into 11th year if partial first

credit year

• Credit period begins when a building is placed in service unless the taxpayer

elects to defer the start of the credit period

to the next taxable year

• First year credit reduced to reflect qualified

occupancy during first credit year


Example of Tax Credit Calculation (New Construction, No

Tax-Exempt Bonds)

• 100 Unit Project/70 Low-Income Units

• Total Development Costs (Including Land) =

$10,000,000

• Land Cost = $1,000,000

• Eligible Basis = $9,000,000

• Qualified Basis = $6,300,000 ($9,000,000 X

70%)

• Applicable Percentage = 7.58% (“9% credit)

• Annual Credit = $477,540 ($6,300,000 X 7.58%)

• 10-Year Credits = $4,775,400


Example of Tax Credit Calculation (Acquisition/ Substantial

Rehabilitation, No Tax-Exempt Bonds)



$10,000,000

» Land Cost = $1,000,000

» Building Acquisition Cost = $4,000,000

» Other Development Costs = $5,000,000 (assume

gut rehab)

• Eligible Basis = $9,000,000; Qualified Basis =

$6,300,000

• Applicable Percentage = 7.58% for rehab, 3.25% for

acq.

• Annual Credit = [$91,000 ($4,000,000 x 70% x 3.25%) +

$265,300 ($5,000,000 x 70% x 7.58%)] = $356,300

• 10-Year Credits = $3,563,000 www.kleinhornig.com 99

Example of Tax Credit Calculation (Acq/Rehab Or New

Construction,Tax-Exempt Bonds)



$10,000,000

» Land Cost = $1,000,000

» Building Construction or Acquisition/Rehabilitation

Cost = $9,000,000

• Eligible Basis = $9,000,000; Qualified Basis =

$6,300,000

• Applicable Percentage = 3.25% (tax-exempt bonds)

• Annual Credit = $6,300,000 x 3.25% = $204,750

• 10-Year Credits = $2,047,500


Equity Calculation

• Pricing typically based on total credits available to

investor (and timing of delivery) and market

conditions

• Expressed as “cents per tax credit dollar”

• In first example above, if investor will invest $0.85

per tax credit dollar, equity = $4,058,684

» $4,775,700 total credits X 99.99% x 0.85

• Equity generally paid in several installments (often 3

to 5 installments) based upon negotiated

benchmarks

• If bond-financed 4% deal, equity = $1,740,201

» $2,047,500 total credits x 99.99% x 0.85


Affordability Commitment

• 30-Year Minimum Affordability Commitment

» 15-Year Tax Credit Compliance Period

» 15-Year Extended Use Period

• Extended Use Agreement

• Early Termination of 30-year Affordability

Commitment

» Foreclosure (or Instrument in Lieu of

Foreclosure)

» Qualified Contract Process

• Owner may commit to longer affordability to gain

points under QAP


Recapture

• Recapture on Non-Compliance:

» Accelerated portion of credit recaptured (1/3 of

credit first 10 years, decreasing through year 15)

» If minimum set-aside fails, all accelerated credits

recaptured

» Otherwise, unit-by-unit (extent of decrease in

qualified basis due to unit failing to meet income

and rent restrictions)

• Full Recapture on Transfer of Project or Interest

Therein

» De minimis (1/3 ownership) exception


Thank You

Daniel J. Kolodner, Esq.

Klein Hornig LLP

101 Arch Street

Boston, MA 02110

617-224-0617

[email protected]


Exploring the Advantages

of EB-5 Program Financing

Debbie A. Klis, Esq.

[email protected]

Financing Mixed Use Developments CLE Webinar

December 10, 2014

106

Agenda

• Overview of the EB-5 Investment Visa Program and its Requirements

• Types of EB-5 Projects and Ways to Use the EB-5 Program

• The Regional Center and Job Creation

• EB-5 Successes

• Criterion for EB-5 Real Estate Projects

• The Benefits of the EB-5 Program

107

The EB-5 Investment Visa

• The EB-5 Visa for Immigrant Investors is a U.S. employment-based (EB) visa created by the Immigration Act of 1990 to stimulate economic activity and job growth, while allowing eligible aliens to become permanent residents.

• The EB-5 Program provides a method of obtaining a Green Card for foreign nationals who invest money in the United States.

• This Program enables a foreign national to obtain permanent residence status more expeditiously than would most other options.

• The EB-5 Program has evolved into a low-cost source of alternative financing for U.S.-based projects.

- To obtain the visa, individuals must invest at least $1,000,000 creating at least 10 jobs full-time (35 hours) for qualified employees.

- By investing in certain qualified investments or regional centers with high unemployment rates (i.e., "Targeted Employment Areas”), the required investment amount is $500,000.

108

EB-5 Investment Requirements

• Investment Amount

- The investor is required to invest $1,000,000 (or a reduced amount of $500,000, if the investment is within a Targeted Employment Area (TEA), i.e., 150% of the national average unemployment statistic).

• Job Creation Requirements

- Each investor must create 10 full-time U.S.-based jobs from their investment.

- Job creation can be through both direct and indirect jobs.

• Source of Investment Funds

- Investor must demonstrate the EB-5 Visa investment capital is from a legal source, acquired, directly or indirectly, by lawful means (e.g., no criminal acts).

- Investor must document the path of the funds with bank statements plus supporting documents to establish the source.

- Investor can demonstrate a valid "pattern of income" such as through income tax records and savings records to prove funds were accumulated over time .

109

Types of U.S. Projects Using EB-5 Funds

Private Equity Investments

• Originally, EB-5 project money was used for loans to businesses that demonstrate a new commercial enterprise or a troubled business, in industries as diverse as:

- manufacturing plants, fishing businesses and dairy farms and IT technology firms

- medical device companies, hospitals, and architectural firms

- major motion picture films and television studios

- other business seeking working capital with job creation to support the loan

Real Estate Investments

• Many EB-5 projects pursued by Regional Centers involve real estate development projects, including:

- office and retail buildings

- shopping centers

- hotels, conference centers, and resorts

- casinos and shipyards

- big box stores and sports stadiums

- apartments and condos

- other commercial/residential mixed-use projects

110

Key Ways to Use the EB-5 Program

• Form your own Regional Center

- Loan to your own project(s)

- Loan to third-party projects

• Procure a loan from an USCIS-approved Regional Center

- Confirm the RC’s approval in the project’s geographical area

- As of 5/30 Policy Memo, pre-approved labor codes not required

• “Rent” a USCIS-approved Regional Center

- Per a rental agreement for a fee or a % of a project’s revenues

- Actual partner in a joint venture proposed by an outside party

• Direct Investment by an EB-5 investor directly in a project

111

The Regional Center

• Most EB-5 investment occurs through a Regional Center, which is –

- An economic entity, public or private, involved with the promotion of economic growth, regional productivity, job creation, and increased capital investment.

- An entity that has received “Regional Center” designation from the USCIS following the submission of documents supported by an economic report, showing:

• How the regional center will promote economic growth in a region,

• How, in verifiable detail (using economic models), it will create jobs directly and indirectly through capital investments, and

• The amount and source of capital committed to the regional center.

• These Regional Centers act as matchmakers between foreign capital and local developers in need of funds. More and more, the developers are launching their own Regional Center to cut out the middle man.

112

Job Creation is a Key Factor

• Direct Jobs

- Identifiable jobs within a new commercial enterprise

- Permanent full-time jobs defined as a minimum of 35 hours per week over the course of that project

- Construction jobs exceeding 24 months

• Indirect/Induced Jobs

- Jobs shown to be created collaterally, or

- Jobs shown to have resulted from the investment in the new commercial enterprise

- To include the indirect/induced jobs, the project must be funded through a regional center

113

Regional Center Basics

• Investor must invest 100% of the $1,000,000 ($500,000 in a TEA plus an admin fee) before I-526 can be filed.

• Money can go:

To project immediately

To escrow and released when investor’s I-526 is approved

To escrow and released upon a certain benchmark

• Regional Center – administers the EB-5 projects

• New Commercial Enterprise – investors subscribe to this entity

• Job Creating Entity – recipient of the EB-5 funds that creates the actual jobs

114

Pros & Cons of Using an Existing Regional Center

The benefits to the developer of using an existing Regional Center:

- Avoidance of the time and expense associated with setting up a Regional Center

- Developer’s only responsibility is to negotiate the loan for the project from the Regional Center or structure rental or joint venture of a Regional Center.

- The Regional Center is responsible for locating foreign investors.

The downsides to the developer of using an existing Regional Center:

- Regional Center might reject the project or might require unfavorable terms and high fees, high interest rate, and a percentage of the profit.

- Regional Center would receive the profit spread between the 1-3% pref to the EB-5 investors and the 5-7% (or more) interest on loan to developer, which developer would enjoy with its own regional center.

- Developer is missing the opportunity to have a Regional Center in place to fund a pipeline of real estate projects.

115

Advantages of Creating a Regional Center

• Regional Center certification provides legitimacy for the project, which may help in marketing to foreign investors.

• Regional Center designation is a one-time designation allowing future projects to be marketed without incurring delays.

• A project may be pre-approved by USCIS.

• In addition to funding their own projects, Regional Centers can profit by funding projects developed by others.

• Remove the middle man for lower costs of financing.

• May count indirect and induced jobs plus direct jobs, in meeting the 10-jobs-per-investor requirement.

116

Disadvantages of Creating a Regional Center

• Regional Center certification takes between 9 and 12 months.

- Regional Center certification is not the same as approval of any particular Regional Center project unless the application included an “actual” project vs. an exemplar project.

- Regional Center certification is no longer a small, privileged group. Nearly 400 regional centers have been certified.

• Newer Regional Centers find it difficult to compete in their marketing efforts with long-existing regional centers with a track record of many immigration approvals

• The costs of locating investors have increased in recent years

• Regional Centers have ongoing administrative and filing requirements with the USCIS to avoid de-certification

117

Summary of EB-5 Program Successes

• The U.S. issued 3,463 EB-5 visas in 2011 and 7,641 EB-5 visas in 2012;

- Most investors are from China, South Korea, and other Asian countries.

- Mexican and Russian visa seekers are now on the rise.

• The Program brought in $1 billion during the last fiscal year.

• In 2012, the USCIS approved 3,677 I-526 applications from EB-5 investors.

• The U.S. Presidential Council on Jobs and Competitiveness has called for the program to be “radically” expanded over the next few years.

• The USCIS Office of Performance and Quality reports that in recent years:

- The approval rate for initial investor petitions (I-526) has ranged from approval of 53% of all I-526 applicants in FY 2005 to approval of 79% in FY 2012.

- Petitions to remove conditions on residence (I-829) have been approved at a rate of 62% of all I-829 petitioners (FY 2005) to 94% of all I-829 petitioners in 2012.

- This recent trend of increased approval rates is a direct result of the USCIS’s greater confidence in its ability to regulate regional centers.

118

Criterion for EB-5 Real Estate Projects (1 of 2)

Is your real estate development project appropriate for EB-5 funding?

• Real estate development projects with a tight timeline are preferred as job creation is dependent on the completion of the project.

• Best to avoid real estate developments with too many contingencies.

• Infrastructure phases can be separated into separate EB-5 projects.

• Projects with public/private financing are preferred but not mandatory.

• Projects with “new” job creation are preferred by the USCIS as compared to remodeling of an existing building with increase in size.

• Residential projects work especially when construction periods exceed two years, and the geographic area has a high indirect job multiplier.

• Projects in perimeter states seem easier to sell than in Middle America.

119

Criterion for EB-5 Real Estate Projects (2 of 2)

• It is preferable but not required that before raising EB-5 funds:

- Horizontal development is completed.

- Loan commitment from bank is obtained for some of the total project costs.

- Anchor office and retail tenants have committed to leasing the spaces and area vacancies in comparable surrounding buildings are low.

• Construction jobs count if the construction period ≥ two years.

• If the project’s completion is protracted because of approvals and other non-construction delays, best to bring in EB-5 money later in the project.

• The USCIS does not approve “indirect” job creation for remodels of existing structures.

• New structures are most favorable for both direct and indirect job creation.

120

Residential EB-5 Projects

• Residential EB-5 projects are growing in popularity

• Assuming no or very few direct jobs on the premises of the apartments, condos or housing development, job creation numbers for residential projects rely on:

- Two year construction period to make use of the construction jobs in the job count

• If one project’s construction period is less than two years, considering bundling one or more projects as one project (must have the same developer)

• Still doable even with less than a two-year construction period

- Approved hard and soft costs to benefit from the indirect and induced jobs created in the regional center

121

EB-5 Program Benefits to the Project

• The EB-5 Program can be used as an alternative funding source –

- In today's challenging economic times when traditional forms of capital are coming up short, developers seek to close the gap between the development costs and available sources of funds.

- The EB-5 Program provides much-needed investment capital to projects that otherwise lack capital sufficient for completion.

• Investors are promised a low preferred return (0.5% to 2.75% lately), which makes this investment a low-cost source of funding. By creating a Regional Center, middle man fees are cut out.

• Investors pay an upfront administrative fee ranging between $45,000 and $60,000 each to cover the program promoter's broker costs.

• Marketers and finders are available in the foreign countries to assist with marketing the project and finding eligible investors seeking sound investments.

© Ballard Spahr LLP 2013

Debbie A. Klis

Ballard Spahr LLP

301-664-6211

[email protected]

Crowdfunding and the JOBS Act: a Primer for the Financing Mixed Use

Developments CLE Webinar

December 10, 2014

123

History of Crowdsourcing

• Early case of US Crowdsourcing – The Statue of Liberty

A gift from France for the U.S.’s centennial in 1876 to celebrate friendship between the countries and the American democracy which the French financed with public fees, a lottery and entertainment; no money remained to build a base.

In 1885, Joseph Pulitzer and his newspaper, The World, raised the rest in a six month campaign.

$102,000 was given by more than 120,000 donors ($2.3 mil today)

much of it came in amounts of one dollar or less

Fundraising activities included prize fights, art exhibitions, theatre and a celebrated donation of a poem by Emma Lazurus “The New Colossus” written in 1883, which appears in bronze on the pedestal, and which was auctioned for funds.

124

• Modern Day Crowdsourcing

An individual reaching a goal by receiving and leveraging small contributions from many parties.

A variety of participants, including people or organizations that propose the ideas and/or projects to be funded, and the crowd of people who support the proposals and the organization (the "platform") which brings together the project initiator and the crowd.

US based company ArtistShare (2000/2001) is documented as being the first crowdfunding website for music followed later by sites such as Pledgie (2006), Sellaband (2006), IndieGoGo (2008), Kickstarter (2009), GoFundMe (2010), Appsplit (2010) and Microventures (2010).

As of 2012, IndieGoGo has hosted more than 100,000 funding campaigns in areas such as music, charity, small business and film

History of Crowdsourcing (continued)

125

Jumpstart Our Business Startups (JOBS) Act

• Crowdfunding for companies who promise a return on investment violated the Securities and Exchange Commission’s prohibition on the general solicitation rules.

• The JOBS Act to the rescue -- a bipartisan bill passed by Congress on March 27, 2012 and signed into law by President Obama on April 5, 2012.

• The goals of the JOBS Act are to help companies:

raise capital privately;

remain private longer; and

for those companies that choose to go public, to do so more easily.

126

Overview of the JOBS Act

• Creates a new class of issuers, subject to reduced public company disclosure obligations, called an emerging growth company (EGC), which is a company with less than $1 bil in gross revenue during its most recent fiscal year

• Eliminates the prohibition on general solicitation in private placements pursuant to Rules 506 and 144A of the Securities Act of 1933, provided that all purchasers are either accredited investors or qualified institutional buyers

• Increases the registration thresholds under Section 12(g) of the Exchange Act of 1934 to either (a) 2,000 holders of record or (b) 500 persons who are not “accredited investors”

• Increases the dollar amount of securities that may be sold in registered offerings from $5 million to $50 million (Regulation A+)

127

What is Crowdfunding?

• The JOBS Act adds a new exempt transaction to Section 4 of the Securities Act of 1933 for U.S. private company offerings.

• An eligible company can raise up to $1 million over a rolling 12-month period.

• Companies must conduct transactions through an intermediary – a registered broker or funding portal.

• The crowdfunding provisions of the JOBS Act impose new disclosure requirements for companies and intermediaries.

128

Company Requirements

• Companies must provide disclosures to investors, intermediaries, and file the same with the SEC:

Corporate information

Names of directors, officers, and 20-percent shareholders

Description of business and business plan

Financial information or financial statements

Use of proceeds

Target offering amount and deadline to reach target amount

Description of ownership and capital structure of the issuer

Disclosure of reasonable opportunity for investors to rescind investment commitments

129

Company Requirements (continued)

• Companies are required to provide to investors, and file with the SEC, annual reports detailing results of operations and financial statements.

• Companies raising more than $500,000 must provide audited financial statements.

• Companies are prohibited from advertising terms of crowdfunding offerings.

• Companies are subject to liability for material misstatements in, and omissions from, disclosure materials and annual reports.

130

Intermediary Requirements

• Intermediaries are required to:

Register with the SEC as a broker or funding portal

Register with any applicable self-regulatory organization (SRO)

Provide investors with disclosures related to risks and investor education materials

Ensure investors understand risk and illiquidity in connection with investment

Ensure no investor exceeds its aggregate investment limit

Prohibit its officers, directors, or partners from having a financial interest in any company using the intermediary’s services

Ensure target offering amount has been met and provide investors an opportunity to rescind investment commitment

Make the disclosures available to investors and the SEC at least 21 days prior to the offering

131

Intermediary Requirements (continued)

• A funding portal is exempt from registration as a broker or dealer if the funding portal:

Remains subject to examination, enforcement, and authority of the SEC;

Is a member of a national securities association registered under Section 15A of the Exchange Act; and

Is subject to such other requirements as the SEC determines appropriate

• Creates new private placement exemptions permitting crowd-funding, under which U.S. private companies are permitted to raise up to $1 million over a 12-month period from large pools of small investments subject to individual investment limits

132

Individual Limitations

• If an investor’s annual income or net worth is less than $100,000, the aggregate amount sold to the investor cannot exceed the lesser of $2,000 or 5 percent of the investor’s net worth or annual income.

• If an investor’s annual income or net worth is $100,000 or more, the aggregate amount sold to the investor cannot exceed the lesser of $100,000 or 10 percent of the investor’s net worth or annual income.

• Investors who purchase securities in a crowdfunding transaction are restricted from transferring those securities for one year, subject to certain exceptions, including transfers:

- (i) to the issuer,

- (ii) to an accredited investor,

- (iii) pursuant to an offering registered with the SEC, or

- (iv) to the investor’s family members.

133

Entrepreneurs Celebrate

• First round of capital, seed money, can make or break a company.

Often too small to attract the interest of angel investors

Founders are forced to turn to friends and family for startup funds.

• New crowdfunding rules enable companies to engage in limited fundraising without the fear of becoming public and subject to extensive SEC and SRO rules.

No restrictions or qualifications on who can invest.

Small growing companies can look beyond their Rolodex of “accredited investors”.

Greater access to capital.

134

The Benefits of a Crowdfunding Campaign

• Crowdfunding is changing the financial and fundraising landscape; it enables businesses to start a campaign to raise a set amount of money

• Even if not successful, the principals will learn a great deal in the process

• Your business will connect with your audience and will elevate your brand recognition

• You may find a large investor in the process as well as advisers

• The nature of crowdfunding allows businesses to spread the word and be social with potential backers

• Crowdfunding is a piece of marketing collateral you create – cultivate the way you talk about your business, develop your brand voice, gauge demand, and connect with your audience -- this is a living, breathing piece of internet property

135

Recent Developments

• FINRA raised its concerns about advancing capital-raising objectives of the Acts while ensuring investor protection.

• In January 2013, FINRA adopted a voluntary interim form that crowdfunding portals may use to provide information about their crowdfunding businesses. Until the SEC finalizes rules FINRA will not finalize the application. SEC rules expected this fall.

• New in 2013, a pair of online platforms, Upstart and Pave, are offering a twist on the usual crowdfunding model for small businesses.

• Entrepreneurs can post their vitals, their business ideas and how much cash they need—and then solicit donations from interested backers.

• The twist is in what backers receive in return. The entrepreneurs agree to give backers a small percentage of their earnings each month for a certain period. In effect, they're selling a temporary equity stake in themselves to receive breathing room, such as outstanding school debt.

136

For Questions and Additional Information

Debbie A. Klis, Esq.

Ballard Spahr, LLP

4800 Montgomery Lane, 7th Floor

Bethesda, MD 20814

301.664.6211

[email protected]

Atlanta | Baltimore | Bethesda | Denver | Las Vegas | Los Angeles | New Jersey | New York

Philadelphia | Phoenix | Salt Lake City | San Diego | Washington, DC | Wilmington | www.ballardspahr.com

TAX INCREMENT FINANCING

John R. Orrick Jr.

[email protected]

Don’t tax you, don’t tax me.

Tax that fellow behind the tree.

Russell B. Long

138

OVERVIEW OF SPECIAL TAXING DISTRICTS

Additional tax or assessment layered on top of existing tax base

Tax increment – dedication of a portion of the increase over the tax base at date of formation

Generally supported by real estate taxes, but may be authorized for sales taxes, hotel and amusement taxes and other local taxes

A form of public-private partnership that utilizes taxing power of government to finance projects that offer public benefits

139

USES OF TAX INCREMENT FINANCING

Governed by Local Law – Need to Review Local Enabling Legislation

Typically, public infrastructure, including roads, water and sewer systems, public parking facilities, government buildings, and parks and recreational facilities

May also include public facilities such as stadiums, convention centers and low income housing

140

TAX INCREMENT FINANCING DISTRICTS

Local government adopts authorizing resolutions or ordinance to create – public process

Defined geographic boundary – may be single project or redevelopment area

“But For” test

Increment of existing tax levy above a fixed floor utilized for paying debt service on municipal bonds or other government obligations which fund permitted infrastructure

141

BOND FINANCING PROCEDURES

County/municipality hires bond counsel to opine on legal authorization, federal income tax exemption and municipal securities disclosure obligations relating to municipality

Underwriter engaged to market and sell bonds – may be issued together with jurisdiction’s general obligation bonds or separate revenue bond offering

Financial projections and tax methodology prepared

In cases where private developers have initiated process, they may also be requested to provide disclosure, legal opinions with respect to status of project and authority of developer to enter into agreements with municipality, and indemnification to local government issuer

142

BOND FINANCING PROCEDURES (cont.)

Preparation of disclosure document for bond investors – official statement or limited offering memorandum

Bond Purchase Agreement between issuer and underwriter governing obligations of underwriter to purchase bonds, indemnifications and legal risk allocation

Continuing Disclosure Agreement whereby issuer (and potentially, private developer) covenant to provide on-going disclosure of status of project and material events affecting bonds to bond rating agencies

Where feasible, submission to bond rating services

143

BOND FINANCING PROCEDURES (cont.)

Development/Funding Agreement with private developer (where infrastructure is being completed by private developer)

Trust Indenture with bank disbursing bond proceeds to multiple bond holders

144

OTHER CONSIDERATIONS INVOLVING BOND FINANCING

Federal tax considerations – tax-exempt vs. taxable bonds

Municipal debt underwriting criteria – bond rating agency guidelines

Rating agency considerations for issuer – overlapping debt

Political concerns with diversion of taxes, competitive analysis

145

BENEFITS OF TAXING DISTRICTS Off Balance Sheet Financing for Developer

Assurance of a dedicated funding stream for public infrastructure / public services

One of the “public-private partnership” vehicles which may attract private enterprise

Municipal financing rates historically have been lower than many other sources of financing

Built-in means for collection and enforcement of collection through property tax sale procedures

Reduce reliance on developer proffers / development impact taxes

Lien of taxes primes other consensual or judgment liens

146

DISADVANTAGES OF SPECIAL TAXING DISTRICTS

Process can often take a long time

Municipal bond financing is often not as efficient as private financing

Resistance of impacted property owners (special tax)

Additional administrative duties in setting rates, prepared bills, collections

147

Thank You

John R. Orrick, Jr. Linowes and Blocher LLP

7200 Wisconsin Avenue, Suite 800 Bethesda, Maryland 20902-4842

(301) 961-5213, [email protected]


