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New Market Tax Credit Investment

New Market Tax Credit Investment. By the Michigan Magnet Fund Prepared by Albert A. Bogdan Tuesday, June 10, 2014. Ted Rozeboom *, Chair, MSHDA Mark McDaniel *, Vice Chair, Great Lakes Capital Fund Mark Morante*, Sec’y/Treasurer MEDC David Blaszkiewicz*, Exec. Comm.

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New Market Tax Credit Investment

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  1. New Market Tax CreditInvestment By the Michigan Magnet FundPrepared by Albert A. Bogdan Tuesday, June 10, 2014

  2. Ted Rozeboom *, Chair, MSHDA Mark McDaniel *, Vice Chair, Great Lakes Capital Fund Mark Morante*, Sec’y/Treasurer MEDC David Blaszkiewicz*, Exec. Comm. Detroit Investment Fund Tony Lentych*, Exec. Comm., CEDAM Richard M. Buss*, National City Bank JoAnn Crary, Saginaw Future, Inc. William D. Johnston*, The Greenleaf Companies Donna Kelce, Key Bank Tony McGhee*, Cornerstone Alliance Greg Nicholas, Flint Genesee Econ. GrowthAlliance Dan Oegema, City of Grand Rapids K. Michael Skytta Wells Fargo Bank Michigan, N.A. Donna Badgett*, Charter One Bank Dennis J. West*, Northern Initiatives Annette Williams, Fifth Third Bank CDC James Bernacki, Comerica Bank Dick Tresize, EDC of Lansing Investment Committee Ted Rozeboom Chair * = Investment Comm. members MMF Board of Directors Prepared by Albert A. Bogdan

  3. NMTC History • Bill Signed 12/21/2000 • Purpose - Attract $15 Billion in Investment to Low-Income Communities • $2.5 Billion Allocated for 2001 and 2002 • $3.5 Billion Allocated for 2003 and 2004 • One In Michigan ($27 Million - Wayne County – Detroit CDE Inc.) • Value of Total Investment Targeted to Michigan • MI – 4 for $157.5 Million • $2.0 Billion Targeted for 2005 • Michigan Magnet Fund Gets $60 Million Allocation Prepared by Albert A. Bogdan

  4. NMTC - How it Works • 39% Investment Tax Credits to Investor for Over 7 Years • First Three Years = 5%/Year • Next Four Years = 6%/Year • Total = 39% • Funds Used to Invest Almost Any Businesses Located in a Low Income Census Tract • Tax Credits Allocated to a Community Development Entity (CDE) by US Treasury • Cash Flows to CDE as Qualified Equity Investment • Must Stay in Deal For 7 Years • Flows In as Equity, Flows Out as Equity, Loan or Loan Purchase • Deals May Be Pooled or Pass-Through Investments • Tax Credit Goes to Investor Regardless of Investment Success or Failure Prepared by Albert A. Bogdan

  5. New Market Tax Credit Flow Chart Prepared by Albert A. Bogdan

  6. Criteria for Eligible Location • Census Tract with • Poverty Rate > 20% or • Greater of the Following Two: • Median Family Income < 80% of MSA Median Income or • Median Family Income < 80% of Statewide Median Family Income • 95% of Financing Must Have Additional Levels of Distress, Poverty Rate > 30%, Median Family Income < 70%, Brownfield, Urban Renewal Area, Enterprise Zone, etc. Go to AABDS.com / Michigan Magnet Fund to Verify Census Tract Prepared by Albert A. Bogdan

  7. Almost Any Business Units Located In Low To Moderate Income Areas Can Qualify Definition Of Business Unit May Be Branch Or Division Investment Must Be Traced To The Facility Typical Businesses Shopping Center, LLC Small Technology Firm Hotel Manufacturer Retail Store Micro Entrepreneur Single Family Home Developer No Liquor Stores No Gambling Establishments No Golf Courses No Collectibles No Rental Residential – However, Residential Defined as Project Where More Than 80% of Income Comes from Residential Portion What Type of Business Can Receive NMTC Financing? Prepared by Albert A. Bogdan

  8. MMF Investment Guidelines Finance Projects That • Real Estate Projects In Targeted Cities & Rural Areas • Create Job Opportunities in Low-income Communities, • Are Located In Traditional Downtowns And/Or Significant Development “Nodes”, • Are Needed To Support Low-income Community & Neighborhood Development Initiatives • Support GLCF and MSHDA Development Initiatives Prepared by Albert A. Bogdan

  9. MMF Investment Guidelines • Must Have Sufficient Financing Commitments Acceptable To MMF. • Must Have Site Control • An Acceptable Environmental Remediation Plan. • Minimum MMF Financing is $2 Million. Maximum is $10 Million. • Other NMTC Allocatees May Be Invited To Partner • A Long-term, Comprehensive Economic Develop. Strategy in Place. • Demonstrate Construction to Begin Within 6 Mos. of Commitment. • The Project Must Meet One of The Following “But For” Tests: • Costs Exceeding Value (Residuals putted to Owner); • Insufficient Equity (Residuals Loaned to Owner @ Zero interest); • Inadequate Cash Flow To Debt Service Coverage; • Need Low Income Community Vs. Non-low Income Community Location Incentive. • Preference Given To Financial Institutions And Investors Committed To Invest In The MMF As Evidenced In Its NMTC Application. • All Other NMTC Program Requirements Must Be Met. Prepared by Albert A. Bogdan

  10. MMF Contract Requirements MMF Subsidiaries Must Invest: • 100% of Its Investment In Real Estate Projects. • New Building For A Business Is Not Considered As A Real Estate Project, i.e., Factory For A Manufacturer, BuildingFor Nonprofit To Conduct Its Own Business. • 100% of Its Aggregate Investment In Unrelated Entities • 60% of Its Qualified Equity Investment Invested By 9/30/08. • 95% As Flexible, Non-conventional, Or Non-conforming To Standard Practice In The Marketplace. • 90% of the MMF Investments Must Be Made In Targeted Distressed Areas Which Have More Than Just 20% Poverty Or 80% Median Family Income, • i.e., Brownfield, Redevelopment Area, 30% Poverty, 70% Median Family Income, HOPE VI Area, Empowerment Zone, etc. Prepared by Albert A. Bogdan

  11. The Procedures • Developers Invited to Submit Pre-application • Need Interest Letter from Investor • Investment Committee Reviews • Based on Its Guidelines • Best Projects Invited to Submit Full Application • Need Commitment Letter from Investor • $5,000 Fee Charged • MMF Makes Firm Offer • Deal Closed Prepared by Albert A. Bogdan

  12. MMF Fee Structure • Origination Fee = 2.5% • Annual Service Fee = 50 Basis Points (0.4%) • Exit Fee = Zero • Total Fees = 6.0% • Plus Transactional Cost • Legal, • Accounting, & • Consulting Costs • Typical $150,000 to $300,000 Prepared by Albert A. Bogdan

  13. Leveraged Real Estate Investment Prepared by Albert A. Bogdan

  14. Doing the DealNo Repayment for 7 Years • Assumptions • Lender Lends $7,000,000 to “Investment LLC” • 7 Years • Interest only • CDE Provides Tax Credit Allocation to ILLC • ILLC Sells Tax Credit for $3,000,000 • CDE Invests $9.6 Million in Firm • 20 Year Amortization • Balloon Repayment in Year 8 • Results • FirmRepays CDE $9,600,000 • No National Consistency in Product – Each CDE Can Do Own Thing • The Tax Credit Portion is Easiest Part of the Deal Prepared by Albert A. Bogdan

  15. Leveraged Real Estate Investment • Commodity Market for NMTC Slowly Taking Shape • Tax Credit May Not Go to Principal Funder • Have Used HUD 108, HOME Funds as Debt – Can Use Pension Funds • CDE is Facilitator –Need Debt & Equity – Price & Deal Negotiable – Tax Credit Value Can Vary $100,000/Million Prepared by Albert A. Bogdan

  16. Who Can be an Eligible Equity Investor? • Any Taxable Investor • Individual • Company • Investment Fund • Debt Investor Can Be Anyone – HUD, Bank, Pension Fund • Debt Investor Receives No Collateral – Nonrecourse Loan • MMF Investors are: • James Bernacki, Comerica Bank • Richard M. Buss, National City Bank • William D. Johnston, The Greenleaf Companies • Donna Kelce, Key CDC • K. Michael Skytta, Wells Fargo Bank Michigan, N.A. • Vince Tilford, Charter One CDC • Annette Williams, Fifth Third Bank CDC • Ashley Zwick, Standard Federal Bank • Janet Oller, Irwin Union Bank • Don Davis, First Independence National Bank • Joseph P. Molnar The Huntington Bank CDC Prepared by Albert A. Bogdan

  17. Negotiating the Deal Points of Negotiation • Terms & Conditions of Debt to Investment LLC • No Collateral • Size of Interest Only (7 Year Balloon) • Internal Rate of Return for Tax Credit to Equity Investor • Term & Conditions of Qualified Equity Investment • No Collateral • 7 year Balloon Principal Repayment • Fees & Professional Charges • Try to Keep it Simple – Costs Add Up Quickly • MMF are Real Estate Deals – Prepare Application – Complete It • MMF Loan – Must Cover Above Commitments • Collateral • Interest on $9.6 Million Loan = Interest on $7.0 Million Loan + 50 Basis Pts • 7 Year Balloon Principal Repayment • May Include Up to 15% Principal Repayment (20+ Year Amortization) • Negotiate Residuals – Based on “But for” Need • Example - Principal Balloon Repayment Range = $9.6 Million to $7.0 Million Prepared by Albert A. Bogdan

  18. Contact Info • Mr.. Albert A. Bogdan • Michigan Magnet Fund • 300 North Washington Square • Lansing, MI 48913 • Phone (313) 445-1843 • E-Mail bogdanaa@aabds.com • Web page: http://www.aabds.com Prepared by Albert A. Bogdan

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