Combining NMTCs with LIHTCs NH&RA 2008 Summer Institute
The Myth NMTCs and LIHTCs are mutually exclusive tax credits.
Questions to Consider What are the statutory or regulatory prohibitions regarding low-income housing? Restrictions on use with LIHTCs. Does the business the CDE will be lending to or investing in qualify as a QALICB? Restrictions on residential rental property.
Project Type: Mixed-Use Developments QALICBs must be engaged in the active conduct of a qualified business. Rental of real estate qualifies only if the property is not depreciable as residential real property and there are substantial improvements on the property. Residential rental property is defined in Section 168(e)(2)(A) of the IRC as any building or structure if 80 percent or more of the gross rental income from such building or structure is rental income from dwelling units.
Mixed-Use (cont d) Mixed-Use must have less than 80% of income from rental housing plus 20% or more of income from: Office space Retail Other commercial space
Can Mixed Use Projects Combine NMTCs and LIHTCs? Generally speaking, not allowed CDE s loan/investment will not be a QLICI to the extent it finances building s eligible basis under Section 42(d) Solutions Use condominium structure Finance non eligible basis items
Condo Structure: NMTCs and LIHTCs NMTC Investor CDE LIHTC Investor Loan or Equity Partnership One Partnership Two Owns Commercial Condominium Owns Residential Condominium Mixed Use Building
NMTCs and LIHTC: Eligible Basis NMTCs cannot finance eligible basis items Can finance Land Infrastructure/sitework Commercial portion of building Importance of tracing funds, no cross-collateralizing, no crossdefaults
More Information? Gregory N. Doran, Esq. 401 9 th Street, NW Suite 900 Washington, DC 20004 202.585.8266 gdoran@nixonpeabody.com
THE BETHANY SQUARE PROJECT Leveraging NMTC for Land Acquisition & Predevelopment Costs NATIONAL HOUSING & REHABILITATION ASSOCIATION SUMMER INSTITUTE Santa Fe, New Mexico July 24, 2008
AGENDA 1. WHO WE ARE 2. WHAT WE DO 3. EXPERIENCE 4. TOOLS WE USE 5. THE BETHANY SQUARE PROJECT Problem statement and possible solutions
THE URBAN GROUP OF COMPANIES The Urban Group of Companies is a full service real estate development, management, investment banking and finance group focused on opportunities in the urban core.
COMPANIES Urban Development & Finance, LLC Urban Holdings, LLC Urban-Eco Housing LLC Urban Housing (Property Management) Urban Construction Urban Consulting Urban Seminars Urban Protective Services
NORRIS LOZANO CEO & President, Urban Development & Finance, LLC More than 25 years experience in large commercial and business finance, venture capital and banking law Founded United Fund Advisors, Portland Family of Funds - $1.1 billion in NMTC-related deals in 4 years 25 Green Building Leaders in the NW - Sustainable Industries NW Magazine Semi-finalist, Innovations in American Government Award Harvard U Board of Directors, ecoamerica Board of Directors, Hayward Corporation Juris Doctorate, Southern Methodist University School of Law Bachelor of Arts in Political Science from the University of Texas
WHAT WE DO Urban Group: Analyze market opportunities Acquire, master plan, develop, finance and manage and operate single purpose and mixed-use real estate projects in the urban core Manage real estate investment funds Source debt and traditional and tax credit equity Structure and close transactions Analyze and report community impacts Provide investor reporting services
PROJECT TYPES: Historic Rehabilitation Section 8 LIHTC including rehab New Markets Tax Credits Senior affordable housing Workforce housing - family Commercial Retail Faith-based Light industrial
ACCOMPLISHMENTS Principals have closed 20 NMTC transactions (total project cost: $1.2 billion) since 2004 $150 million invested and syndicated directly $650 million in green buildings financed Consulted on $645 million in NMTC utilized allocations Public/Private partnerships Numerous historic projects Own/manage over 40 buildings and 1,000 units of affordable housing Los Angeles, Chicago, New York City, Portland, New Orleans, North Carolina, Texas.
ECONOMIC IMPACTS Jobs created Fiscal impacts Total economic impacts ~8,000 ~$528.8 million ~$3.8 billion IMPLAN estimate of direct, indirect and induced impacts of Construction and first 10 years of Operations.
TRIPLE BOTTOM LINE RETURNS- PEOPLE-PLANET-PROFIT Financial provide market yield returns to investors Social new commercial and retail services, jobs, wages, cultural and community benefits Environmental LEED construction, Transitoriented Developments, education, green housekeeping plans, tenant recycling plans, healthier built environment
REPRESENTATIVE URBAN PROJECTS Some of the Projects structured and closed by Urban principals during the past five years (* indicates project was structured and closed as CEO of previous firm)
CAHUENGA Los Angeles Workforce housing over retail in 1925 Hollywood hotel historic rehabilitation nearing compeltion $10.5 mm project Goals: Preserve historic character 104 units of affordable housing Energize street with 8,100 SF of active, ground floor retail
CARONDELET Historic rehabilitation - Architectural gem restored near McArthur Park Los Angeles $3.0 mm project Components: Historic Rehabilitation Office Community social space Movie and television set location
1848 N. GRAMERCY Historic Restoration 1929 Hollywood multifamily affordable apartment building $4.1 mm project Goals: Restore historic luster 34,000 SF; 5 floors Studios and 1BR
THE CIVIC* Blighted apartment becomes retail, green housing and condo Portland, Oregon $97.5 mm project Components: Affordable Housing Condos Retail Community open space Underground parking
THE NORMANDIE Affordable housing in historic 1926 Los Feliz (Los Angeles) $3.2 mm historic rehabilitation Goals: High quality historic restoration Preserve 1920 s character 30 new housing units
12W* NMTC allocation New office, retail and housing in West End $137.8 mm project Goals: Job retention Creative services Workforce housing New retail and jobs Carve-out for Head Start
FEATURED PROJECT: BETHANY SQUARE South Central LA 4 acre land assembly 1 mile from epicenter of 1992 Civil Unrest Assembled over 15 years Strong community and political support
FOUR CHALLENGES 1 Development Challenges year 2004 2 Predevelopment Financing - year 2006 3 What to build in an uncertain market year 2008 4 How to use LHTC,NMTC, ITC and Gap funding together in the project and meet new LA Green Building Standards Final Problem Statement How to
CHALLENGE #1 DEVELOPMENT CHALLENGES 2003-2005 South Central LA 1 mile from epicenter of 1992 Civil Unrest Few mixed-use developments in the area in 2 generations Few amenities, groceries, schools, services A neighborhood in need of a pioneer GETTING TAX CREDITS - application filed for NMTC in 2004 with an option to acquire the land
DEVELOPMENT PLAN Senior Affordable Workforce housing Retail + commercial LEED target Community + political support $80+ mm project ~$5 mm needed for acquisition
NEW MARKETS TAX CREDITS $11 million NMTC award (2005) to Bethany Square, LLC to provide a debt investment in a highly distressed inner-city area in South Central Los Angeles to support a 3.7-acre mixed-use development...
BETHANY SQUARE NMTC STRUCTURE
POST-ACQUISITION NMTC funds function exactly as intended, allowing a project in deeply underserved area to move forward used acquisition financing for leverage which provided almost $2 million for pre development Urban funds some predevelopment costs - $1 million Needs additional predevelopment funds to continue strategic considerations WE ARE NOT COMPLETED IN PREDEVELOPMENT STILL DECISIONS TO
CHALLENGE #2: PREDEVELOPMENT FINANCING -2006-2008 Predevelopment activities required for permits and construction financing NMTC derived capital funds initial activities: Market Feasibility and appraisals Design development drawings and environmental and LEED considerations Entitlement LIHTC AND GAP FUNDING APPLICATION COSTS are next
CHALLENGE #3: IN UNCERTAIN MARKET OF 2008, WHAT TYPE OF HOUSING TO BUILD? How do we approach LEED standards in LA? In 2004, Bethany Square was conceived as mixeduse with workforce condos over commercial and retail and LHTC Senior Housing. In 2008 market constraints forced reconsideration of workforce program leaving 100 units of senior affordable, 35% - 60% MFI and commercial for a total development of 137,648 square feet
2008 MULTIFAMILY MARKET RESEARCH as a result of foreclosures on the single-family side, we are seeing an increase in the renter pool from 30.9 percent to 32.2 percent. That's 1.5 million new renters looking for an apartment. Some of the forecasting at NMHC indicates that by 2011 we might even be facing rental shortages." -Ric Campo, CEO Camden Property Trust, Houston, in Multifamily Executive Magazine
RESEARCH With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced momentum as the guiding force for housing prices" -NY Times, July 19, 2008
MULTIFAMILY STRATEGY Demographic trends indicate senior and multifamily, coming online in 2009/10, are well-timed California markets fundamentally sound Strong rent growth Low vacancy rates Moderate growth but large base Generation-Y and Baby Boomers huge potential
CHALLENGE #4: WHY USE NMTC AND LIHTC IN ONE PROJECT IN UNCERTAIN TIMES? Tightened credit means multiple sources needed to finance large-scale projects Lenders in their own swim lanes Mixed-use addresses multiple needs and spreads risks Mixed-use is the seed of community NMTC + LIHTC can be utilized together in condo structure
DEMOGRAPHIC DEFINITIONS Largest Demos are Boomers (age 43-62 today) and Gen-Y (8-27 today)
% OF RENTERS, BY AGE OF HOUSEHOLD Source: US Census Bureau
PROJECTED POPULATION GROWTH RATE 2008-2018 Apartments and Condos: Singles, Roommates; Entry Level & First Move Up Condos Apartments & Condos: Move Down, Down sizing, Lifestyle ALL QUALIFY FOR SENIOR HOUSING (55+) Source: US Census Bureau
OIL PRICES FORCING LONG-TERM CHANGES TYPICAL HOUSEHOLD BUDGET IN 2006 HOUSING: 29% TRANSPORTATION: 14% 2006 2008 EFFECTS GAS PRICES +30% INCREASED GAS AND FOOD COSTS EQUIVALENT TO 7% OF HOUSING BUDGET FOOD & BEV: 11% FOOD PRICES + 20% MOVE CLOSER TO WORK MOVE CLOSER TO TRANSIT DOWNSIZE
THE URBAN GROUP S GREEN BUILDING IMPERATIVE LEED or beyond Create productive, healthy places to live, work and play Transit-oriented development Improve air and water quality Reduce solid waste Conserve natural resources
ECONOMIC BENEFITS - OWNERS INCREASE PROPERTY VALUATION Efficient systems more valuable Healthy, i.e. productive indoor environment residents, workers, visitors, shoppers Enhanced rental margins, especially NNN MARKETING/RESALE Lease up faster Decrease vacancy Improve retention Improve occupant performance Higher visitor traffic Improved sales
BENEFITS RESIDENTS AND PROPERTY MANAGEMENT $$ SAVINGS Utilities cost savings energy, water 20% - 50% HEALTH Low VOC: improved indoor air quality Daylighting: productivity, well being Natural ventilation: more comfortable Increased density: more interaction
ENERGY EFFICIENCY OPPORTUNITIES SOLAR POWER Southern California location Silicon Valley intensely focused on quality, output Bethany: Rooftop or Sky Bridge PV arrays Can be economically neutral, depending on structure
ADDITIONAL FUNDING RESOURCES ENERGY TAX CREDITS Businesses are eligible for tax credits for buying hybrid vehicles, for building energy- efficient buildings, and for improving the energy efficiency of commercial buildings (as outlined in the Energy Policy Act of 2005). US Department of Energy
ADDITIONAL FUNDING RESOURCES ENERGY CREDITS - EXTENSIONS By a vote of 25-12 the House Ways and Means Committee today approved H.R. 6049, the Energy and Tax Extenders Act of 2008. The bill includes a six-year extension of the investment tax credit (ITC) for solar energy; three-year extensions of the production tax credit (PTC) for energy derived from biomass, geothermal, hydropower, landfill gas and solid waste; and a one-year extension of the PTC for energy derived from wind. Novogradac & Company
ADDITIONAL FUNDING RESOURCES ENERGY CREDITS MAINTAINING BASIS In PLR 200820011, the IRS ruled that no reduction in investment credit basis was required for solar equipment placed in a tax-exempt bond-financed affordable housing project where: bond loan documentation prohibited the use of bond loan proceeds to finance the solar equipment; the bond proceeds were not actually used to finance the solar equipment; and the solar equipment did not serve as collateral for the bond loan. Novogradac & Company
ANSWER TO CHALLENGES # 3 and 4 What to build and how to finance it Seek additional gap financing resources to build LHTC Senior housing and commercial/retail built hitting LEED Standards for efficiency and to meet new City of Los Angels standards TAX CREDITS TO UTILIZE New Markets Tax Credits LIHTC (4% credits) and Bonds or (9%) Energy ITC
ADDITIONAL FUNDING RESOURCES LOW-INTEREST LOANS - CALIFORNIA LA/Community Redevelopment Agency HCD - Transit-Oriented Development HCD Infill Grant Program HCD -Multifamily Housing Program Los Angeles Housing Department -AHTF City of Industry Funds
ADDITIONAL FUNDING RESOURCES MISCELLANEOUS Infill Infrastructure Grant Local Utility Equipment and Conservation funds Federal Modified Accelerated Cost-Recovery System (MACRS) (accelerated depreciation for solar equipment) State of California: numerous programs Utilities: numerous low-interest loans, rebates and credits for energy efficient equipment and solar products
FINAL CHALLENGE- STRUCTURING ADDITIONAL NMTC, LHTC, GRANTS, ENERGY (ITC) AND GAP FINANCING INTO EXISTING STRUCTURE- ADDITIONAL PREDEVELOPMENT TO CONSTURCTION -Herb Stevens and Greg Doran
BETHANY SQUARE NMTC STRUCTUREadding the new resources- Herb Stevens and Greg Doran on structure
URBAN DEVELOPMENT & FINANCE, LLC CONTACT: Norris Lozano, CEO & President 2719 Wilshire, Suite 200 Santa Monica, CA 90403 norris@urbandf.com (310) 315-7226 office (310) 740-7011 cell
Combining New Markets and Solar Tax Credits Herb Stevens July, 2008
Overview of ETCs Energy Tax Credits are generally 30% of facility cost (e.g., transmission lines and substations are not eligible for the ITC) Includes Photovoltaic (PV) Concentrated Solar Power (CSP) & fuel cells Must generate electricity, heating, cooling, hot water, or fiber-optic lighting. Sale of elec. is not required
Placed in Service When is a facility placed in service? Usually when completed, with licenses and after pre-operational testing Daily operation can matter Acquired property must be delivered and ready to use; mere purchase is not enough
The Tax Benefits and Timing 30% ETC is usually taken in the year the facility is placed in service Mostly 5-year MACRS depreciation, but new rules permit 50% depreciation in first year (PIS in 2008). Possible recapture for 5 years (100% in first year, 80% in second year, etc.)
Other Subsidies Bonds and subsidized energy financing generally reduce federal credits. (Full reduction) State programs usually don t reduce solar credit, but may be taxable, e.g., state grants)
Technical Rules Almost all investors are corporations because of At Risk and Passive Loss Rules Basis reduction of 50% of ITC, meaning less depreciation Profit motive -- But compare Rev. Proc. 2007-65 (for wind) with Reg. 1.42-4 (for LIHTC)
Solar/New Markets Lease Pass Through Structure Lender $3.5 million Loan Developer 51% Equity Project Owner Loan and 49% Equity Lease Credit Pass Through NMTC and Solar/Investor Credit $6 million CDE Master Tenant Equity Solar $4.2 million NMTC $1.8 million $6 million allocation Power Purchase Agreement or Sublease Energy User Solar Project $10 million cost Credit Equity $6.0 million Debt $3.5 million Need $.5 million REC or Rebate
Solar/New Markets Single Equity Structure Leverage Lender $3.5 million Loan NMTC Investor Equity $1.5 million Allocation of $5 million NMTCs Fund Equity $5million CDE Loan and Equity Developer.01% Project Owner Solar Credit Investor Equity 99.99% $4.2 million Power Purchase Agreement or Lease Energy User NMTC 5.0 million Solar 4.2 million Need.8 million Solar Project $10 million cost
Thank you Herb Stevens